[GRAPHIC OMITTED]






                                 PHSB Financial
                                   Corporation


                                      2002
                                     ANNUAL
                                     REPORT


<PAGE>

                                 PHSB FINANCIAL
                                   CORPORATION
                               2002 ANNUAL REPORT


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


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

Selected Financial and Other Data............................................. 2

Corporate Profile and Stock Market Information.................................4

Management's Discussion and Analysis of
  Financial Condition and Results of Operations................................5

Report of Independent Auditors................................................13

Consolidated Balance Sheet....................................................14

Consolidated Statement of Income..............................................15

Consolidated Statement of Changes in Stockholders' Equity.....................16

Consolidated Statement of Cash Flows..........................................17

Notes to Consolidated Financial Statements....................................18

Office Locations and Other Corporate Information..............................48


<PAGE>

                           PHSB FINANCIAL CORPORATION


To Our Stockholders:

         On behalf of the Board of  Directors,  Officers  and  Employees of PHSB
Financial  Corporation  and its wholly  owned  subsidiary,  Peoples Home Savings
Bank,  it is my  privilege  to  present  our annual  report for the year  ending
December 31, 2002.

         In a year that offered significant challenges for the banking industry,
PHSB Financial enjoyed a solid earnings performance.  Record earnings as well as
solid  loan  and   deposit   growth  were  all  a  vital  part  of  this  year's
accomplishments.  During 2002, we undertook  measures to enhance your investment
in us including the repurchase of  approximately  471,000  treasury  shares.  In
2002, we earned $2,625,000 or $.87 per basic share and $.85 per diluted share as
compared to $2,221,000,  or $.70 per basic and diluted share for 2001. Net loans
outstanding grew by 20.9% to $165.7 million,  reflecting  strong  performance by
our loan production  staff and branch staff.  Asset quality  remains  excellent.
Additionally, deposits grew by 10.7% to $232.4 million.

         As the company  enters 2003,  we maintain our mission of providing  the
highest level of personal service to our customers.  In order for us to continue
to grow the company,  we are constantly  seeking to meet our customers  needs by
offering competitive products and services.

         We will continue with our primary business of serving the banking needs
of the people in our local communities.

         Our  management  and Board of  Directors  are  dedicated  to  enhancing
shareholder  value,  serving our  communities,  and providing a challenging  and
rewarding work environment for our staff.

         We would like to  express  our  appreciation  to our  shareholders  and
customers for your continued confidence and trust in PHSB Financial  Corporation
and Peoples Home Savings Bank.


                                         Very truly yours,




                                         /s/James P. Wetzel, Jr.
                                         -----------------------
                                         James P. Wetzel, Jr.
                                         President and Chief Executive Officer


<PAGE>

                           PHSB FINANCIAL CORPORATION
                        SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>



Selected Financial Data
---------------------------------------------------------------------------------------------------------------------------------
At December 31,                                              2002            2001            2000            1999          1998
---------------------------------------------------------------------------------------------------------------------------------

                                                                                     (in thousands)

<S>                                                      <C>             <C>             <C>            <C>           <C>
Assets...............................................       $345,537        $315,382        $265,330       $268,640      $244,253
Loans, net...........................................        165,668         137,001         129,017        118,745        99,914
Mortgage-backed securities held to maturity..........         70,346          30,180          38,780         44,141        48,287
Mortgage-backed securities available
  for sale...........................................         44,137          54,604          38,415         37,426        32,878
Investment securities held to maturity...............         19,275          26,260          17,776         15,540        18,146
Investment securities available for sale.............         27,233          22,902          24,814         27,595        25,197
Interest-bearing deposits with other institutions....          1,284          28,195           5,094         11,417         9,332
Federal Home Loan Bank stock.........................          3,620           2,615           2,615          2,615         1,545
Deposits.............................................        232,367         210,015         198,242        189,345       181,113
Other borrowings.....................................              -              28              75            120         1,388
Advances from Federal Home Loan Bank.................         61,008          50,325          36,195         50,295        30,895
Stockholders' equity(1)..............................         49,360          52,835          28,850         26,751        29,184


Selected Consolidated Operating Data
---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                      2002            2001            2000            1999          1998
---------------------------------------------------------------------------------------------------------------------------------

                                                                                     (in thousands)

Interest income......................................       $ 19,856        $ 19,316        $ 19,035        $17,511       $16,112

Interest expense.....................................          9,800          10,537          10,448          9,284         8,523
                                                            --------        --------        --------       --------      --------
  Net interest income................................         10,056           8,779           8,587          8,227         7,589
Provision for loan losses............................            735             520             555            410           365
                                                            --------        --------        --------       --------      --------
  Net interest income after provision
    for loan losses..................................          9,321           8,259           8,032          7,817         7,224
Total non-interest income............................          1,170           1,008             854            764           914
Total non-interest expense...........................          7,176           6,294           6,000          6,094         6,245
                                                            --------        --------        --------       --------      --------
Income before income taxes...........................          3,315           2,973           2,886          2,487         1,893
Income taxes.........................................            690             752             714            629           391
                                                            --------        --------        --------       --------      --------
  Net income.........................................       $  2,625        $  2,221        $  2,172       $  1,858      $  1,502
                                                            ========        ========        ========       ========      ========

</TABLE>

                          (footnotes on following page)

                                        2

<PAGE>
<TABLE>
<CAPTION>

Other Selected Data
---------------------------------------------------------------------------------------------------------------------------------
At or for the Year Ended December 31,                       2002          2001           2000           1999          1998
---------------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>          <C>            <C>            <C>           <C>
Return on average assets (net income
  divided by average total assets)....................      0.78%         0.78%          0.81%          0.73%         0.65%
Return on average equity (net income
  divided by average equity assets)...................      5.15%         7.31%          7.95%          6.68%         5.24%
Dividend payout ratio                                      39.60%        44.65%         42.02%         40.03%        46.34%
Average equity to average assets .....................     15.23%        10.69%         10.22%         10.86%        12.50%
Net interest rate spread (2)..........................      2.94%         3.10%          3.18%          3.15%         3.21%
Per Share Information:
  Diluted earnings per share(1).......................     $ 0.85        $ 0.70          $0.67          $0.56         $0.44
  Tangible book value per share(1)....................     $16.31        $15.11          $8.81          $7.92         $8.25
Non-performing assets to total assets.................      0.13%         0.19%          0.25%          0.19%         0.22%
Non-performing loans to total loans...................      0.25%         0.43%          0.51%          0.42%         0.52%
Allowance for loan losses to total loans..............      1.01%         1.08%          1.12%          1.14%         1.28%

</TABLE>
---------------------

(1)  On December  20,  2001,  PHSB  Financial  Corporation  completed  its stock
     offering in connection  with the conversion and  reorganization  of Peoples
     Home Savings 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)  Interest  income is shown on a tax equivalent  basis assuming a 34% federal
     income tax rate.




                                        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 of the Bank 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 shares of PHS
Bancorp, Inc.'s 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.

         Peoples Home Savings Bank  conducts  business  through ten full service
offices and an  administrative  office  located  throughout  Beaver and Lawrence
Counties,  Pennsylvania. We offer a broad range of deposits and loan products to
individuals,  families and small businesses. At December 31, 2002, we had assets
of $345.5 million, net loans of $165.7 million,  deposits of $232.4 million, and
stockholder's equity of $49.4 million.

Stock Market Information

         The  Company's  common  stock is traded on the Nasdaq  National  Market
under the symbol  "PHSB." The  following  table  reflects the high and low stock
price as published by the Nasdaq National Market and the dividends  declared for
each  quarter  during  the  last  two  fiscal  years.  The  quotations   reflect
inter-dealer prices, without retail mark-up,  mark-down, or commission,  and may
not represent  actual  transactions.  On December 31, 2002, the Company's common
stock closed at $15.65.
                                                           DIVIDENDS
                                                            DECLARED
QUARTER ENDED                 HIGH (1)         LOW (1)     PER SHARE (1)
-------------                 --------         -------     -------------

December 31, 2002              $15.74          $14.71         $0.09
September 30, 2002              15.00           14.16          0.09
June 30, 2002                   14.50           13.40          0.08
March 31, 2002                  14.50           11.85          0.08
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

(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.

                                        4

<PAGE>

         The number of  stockholders  of record of common stock as of the record
date on March 7, 2003, was  approximately  815. This does not reflect the number
of persons or  entities  who held stock in  nominee  or  "street"  name  through
various  brokerage  firms.  At  March  7,  2003,  there  were  2,930,749  shares
outstanding.

         The Company's  ability to pay dividends to  stockholders  is subject to
the requirements of Pennsylvania law.  Additionally,  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 2001 conversion
from the mutual holding company form of organization to a full stock company, 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  Reform 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. The Company and the Bank undertake no obligation to
publicly  release  the  results  of  any  revisions  to  those  forward  looking
statements which may be made to reflect events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.

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

Financial Condition

         Total  assets at December  31, 2002 of $345.5  million  represented  an
increase of $30.1  million or 9.5% from  December  31, 2001.  This  increase was
primarily due to an increase in loans,  net of allowance for loan loss, of $28.7
million along with an increase in investment and  mortgage-backed  securities of
$27.1  million,  partially  offset by a  decrease  in cash and  interest-bearing
deposits of $26.0 million.

         Loans receivable at December 31, 2002, of $165.7 million represented an
increase of $28.7 or 20.9% from $137.0  million at December 31, 2001.  Mortgage,
commercial and consumer loans increased by $2.0 million,  $18.2 million and $7.1
million,  respectively.  The increase in  commercial  loans was due to increased
loans to local  municipalities  and school  districts  as a result of the Bank's
increased  focus on serving  the  financial  needs of local  municipalities  and
school districts.  The increase in consumer loans was primarily due to increases
in automobile loans due to strong demand for automobile lending during the year.
The majority of the consumer loan  portfolio  consists of auto loans  originated
through local dealers.

         Investment and  mortgage-backed  securities  increased $27.1 million to
$161.0  million at December 31, 2002,  from $133.9 million at December 31, 2001.
This increase was primarily the result of purchases of $111.7 million which were
funded  by  sales  of $9.8  million,  maturities  of  $41.6  million,  principal
repayments of $35.2 million along with increased Federal Home Loan Bank advances
of $10.7 million.

                                        5

<PAGE>

The  purchases  funded by advances from the Federal Home Loan Bank of Pittsburgh
were part of Peoples Home Savings' leverage strategy.

         Total deposits at December 31, 2002, were $232.4  million,  an increase
of $22.4  million or 10.7% from  $210.0  million at  December  31,  2001.  Total
deposits  increased  $16.5 million net of interest  credited of $5.9 million for
the year ended December 31, 2002.

         Advances from the Federal Home Loan Bank of Pittsburgh  increased $10.7
million to $61.0  million at December 31, 2002,  from $50.3  million at December
31,  2001.  This  increase  was the  result  of  additional  borrowings  to fund
securities purchases as discussed above.

         Stockholders' equity decreased $3.5 million for the year ended December
31, 2002.  This decrease was primarily due to stock  repurchases of $7.0 million
along with cash dividends paid of $1.0 million. These decreases to stockholders'
equity  were  partially  offset by net  income  of $2.6  million  along  with an
increase in accumulated  other  comprehensive  income of $1.3 million along with
decreases in unallocated ESOP and RSP shares of $252,000 and $57,000.

                                        6

<PAGE>

Average Balance Sheet and Interest Analysis

         The  following  table sets 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. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived primarily from daily balances.
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                               -----------------------------------------------------------------------------------

                                                            2002                         2001                        2000
                                               ---------------------------      ------------------------    -----------------------
                                               Average               Yield/     Average            Yield/   Average           Yield/
                                               Balance    Interest    Cost      Balance   Interest  Cost    Balance  Interest  Cost
                                               -------    --------    ----      -------   --------  ----    -------  --------  ----
<S>                                          <C>         <C>       <C>     <C>        <C>      <C>      <C>        <C>     <C>
ASSETS                                                                                     (Dollars in Thousands)
Interest-earning assets:
  Loans(1) (4)................................ $154,349    $11,758     7.62%  $131,878   $10,821   8.21%   $125,964 $10,299    8.18%
  Mortgage-backed securities..................   42,630      2,364     5.55     34,718     2,237   6.44      41,755   2,785    6.67
  Investment securities(2) (4)................   39,337      1,356     3.45     30,573     1,583   5.18      25,858   1,572    6.08
  Securities available for sale (4)...........   87,146      5,299     6.08     75,962     5,258   6.92      65,843   4,988    7.58
                                               --------     ------            --------    ------           --------  ------
  Total interest-earning assets..............   323,462     20,777     6.42    273,131    19,899   7.29     259,420  19,644    7.57
                                                            ------                        ------                     ------
Noninterest-earning assets...................    11,208                         11,012                        7,887
                                               --------                       --------                     --------
  Total assets...............................  $334,670                       $284,143                     $267,307
                                               ========                       ========                     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Savings(3).................................  $ 32,624        373     1.14%  $ 29,589       542   1.83%   $ 29,710     576    1.94%
  NOW and money markets......................    67,490        562     0.83     62,895     1,150   1.83      57,161   1,352    2.37
  Time deposits..............................   123,412      5,766     4.67    111,485     6,210   5.57     109,158   6,109    5.60
  Advances from FHLB.........................    57,862      3,098     5.35     47,592     2,632   5.53      41,692   2,407    5.77
  Other borrowings...........................         9          0     0.00         54         3   5.56         100       5    5.00
                                                -------     ------             -------    ------            -------  ------
  Total interest-bearing liabilities.........   281,397      9,799     3.48    251,615    10,537   4.19     237,821  10,449    4.39
                                                            ------                        ------                     ------
Non-interest bearing liabilities.............     2,292                          2,157                        2,176
                                                -------                       --------                     --------
  Total liabilities..........................   283,689                        253,772                      239,997
Stockholders' equity.........................    50,981                         30,371                       27,310
                                               --------                       --------                     --------
  Total liabilities and retained earnings..... $334,670                       $284,143                     $267,307
                                               ========                       ========                     ========
Net interest income, interest rate spread(4).              $10,978     2.94%             $ 9,362   3.10%            $ 9,195    3.18%
                                                           =======     ====              =======   ====             =======    ====
Net yield on interest-earning assets.........                          3.39%                       3.43%                       3.54%
                                                                       ====                        ====                        ====
Ratio of average interest-earning assets
  to average interest-bearing liabilities.....                       114.95%                     108.55%                     109.08%
                                                                     ======                      ======                      ======
</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,
                                          -----------------------------------------------------------------------
                                                   2002 vs. 2001                           2001 vs. 2000
                                          --------------------------------        -------------------------------
                                                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 (1)............................   $1,844     $   (907)       $  937       $   484     $    38      $ 522
  Mortgage-backed securities...........      510         (383)          127          (469)        (79)      (548)
  Investment securities (1)............      454         (681)         (227)          287        (276)        11
  Securities available for sale (1)....      774         (733)           41           767        (497)       270
                                          ------     --------        ------       -------     -------      -----
  Total interest-earning assets.......     3,582       (2,704)          878         1,069        (814)       255
                                          ------     --------        ------       -------     -------      -----

Interest expense:
  Savings.............................        56         (225)         (169)           (2)        (32)       (34)
  NOW and money markets...............        84         (672)         (588)          136        (338)      (202)
  Time deposits.......................       664       (1,108)         (444)          130         (29)       101
  Advances from FHLB..................       568         (102)          466           341        (116)       225
  Other borrowings....................        (3)           0            (3)           (2)          0         (2)
                                          ------     --------        ------       -------     -------      -----
   Total interest-bearing liabilities.     1,369       (2,107)         (738)          603        (515)        88
                                          ------     --------        ------       -------     -------      -----

Net change in net interest income.....    $2,213     $   (597)       $1,616       $   466     $  (299)     $ 167
                                          ======     ========        ======       =======     =======      =====
</TABLE>
----------------
(1)      Income  and  yields  derived  from  state  and  political  subdivisions
         obligations  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, 2002 and 2001

         General.  Net income for the year ended  December 31, 2002 increased by
$404,000 to  $2,625,000,  from  $2,221,000 for the year ended December 31, 2001.
This  increase  was  primarily  due to  increases  in  net  interest  income  of
$1,277,000 and  non-interest  income of $161,000 along with a decrease in income
tax provisions of $62,000.  These increases to net income were partially  offset
by increases in  non-interest  expense and loan loss  provisions of $883,000 and
$215,000, respectively.

         Net Interest Income.  Reported net interest income increased $1,277,000
or 14.5% for the year ended  December  31, 2002.  Net  interest  income on a tax
equivalent  basis increased by $1,616,000 or 17.3% in a period when both average
interest-earning  assets  and  average  interest-bearing  liabilities  increased
(increased  $50.3  million and $29.8  million,  respectively).  The  increase in
average  earning assets of $50.3 million was primarily due to increases of $22.5
million in  average  loans  along with an  increase  in average  investment  and
mortgage-backed securities of $27.8 million. The Company's net interest rate

                                        8

<PAGE>

spread on a tax  equivalent  basis  decreased  16 basis  points  (with 100 basis
points being equal to 1%) to 2.94% for the year ended  December 31, 2002. Due to
the volume of  obligations  of state and political  subdivision in the Company's
loan and  investment  portfolios,  net interest  income and interest  income are
presented  on a tax  equivalent  basis.  See also "- Average  Balance  Sheet and
Interest Analysis."

         Interest  Income.  Interest  income on a tax  equivalent  basis totaled
$20.8 million for the year ended  December 31, 2002, an increase of $0.9 million
or 4.5% over the total of $19.9  million for the year ended  December  31, 2001.
This  increase  was  mainly  due  to  an  increase  in  the  Company's   average
interest-earning  assets of $50.3 million for the year ended  December 31, 2002.
Interest earned on loans  increased  $937,000 or 8.7%, in 2002. The increase was
due to a $22.5 million increase in the average balance of loans partially offset
by a 59 basis point decrease in the yield earned.  Interest earned on investment
and mortgage-backed  securities  (including  securities held for sale) decreased
$59,000 or 0.6%, in 2002.  The decrease was due to a 110 basis point decrease in
the yield earned  partially  offset by a $27.8  million  increase in the average
balance of investment and mortgage-backed securities.

         Interest Expense.  Interest expense decreased  $738,000 to $9.8 million
for the year ended December 31, 2002.  The decrease in interest  expense was due
to a 71 basis point decrease in the average cost of interest-bearing liabilities
partially  offset  by a  $29.8  million  increase  in  the  average  balance  of
interest-bearing liabilities due to increased average deposits and borrowings of
$19.6 million and $10.2 million, respectively.

         Provision for Losses on Loans.  The provision for loan losses increased
by $215,000 to $735,000 for the year ended December 31, 2002,  from $520,000 for
the year ended December 31, 2001. Management  continually evaluates the adequacy
of  the  allowance  for  loan  losses,   which   encompasses  the  overall  risk
characteristics of the various portfolio segments,  past experience with losses,
the impact of economic  conditions on borrowers and other relevant factors which
may come to the  attention  of  management.  The  allowance  for loan  losses is
maintained at a level that  represents  management's  best estimates of probable
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.

         Non-interest  Income.  Total non-interest  income increased $161,000 to
$1.2 million for the year ended  December  31,  2002,  from $1.0 million for the
year ended  December 31, 2001.  This  increase  was  primarily  due to increased
investment  security  gains of $110,000 in 2002 coupled with  increased  service
charges on deposit  accounts  of  $44,000,  due to an  increase in the number of
transaction  accounts.  The investment securities gains were the result of sales
of tax-exempt securities for the purpose of maximizing the tax benefits of these
securities as well as sales of equity securities.

         Non-interest  Expense.  Non-interest expense increased $883,000 to $7.2
million  for the year ended  December  31,  2002 from $6.3  million for the year
ended  December  31,  2001.  This  increase  was  primarily  due to increases in
compensation  and employee  benefits of $611,000 for the year ended December 31,
2002.  This was primarily due to increased  ESOP expense due to additional  ESOP
shares  acquired in connection with the conversion and  reorganization  that was
effective  December 20, 2001 along with increased RSP expense as a result of the
2002 RSP plan which was ratified on December  23, 2002,  as well as normal merit
increases.  Other expenses  increased  $190,000 to $1,630,000 for the year ended
December 31, 2002 from  $1,440,000  for the year ended  December 31, 2001.  This
increase  was the  result  of  several  increases  in other  expenses  including
increases in advertising, postage and telephone expenses.


                                        9

<PAGE>

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 as well as  mortgage-backed  securities  with balloon  payments which
have  shorter  maturities  than  typical  mortgage-backed  securities.  Although
consumer  loans  inherently   generally   possess  a  higher  credit  risk  than
residential mortgage loans, the Company has designed its underwriting  standards
to minimize this risk as much as possible.

         The Company  also makes 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.  The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland,  A/L  Benchmarks to monitor its exposure to interest rate risk,  which
calculates  changes in market value of portfolio equity and net interest income.
Reports generated from assumptions  provided by Olson and 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
under the Federal Deposit Insurance Corporation Improvement Act. 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.

         From  analysis  and  discussion  of the  aforementioned  reports  as of
December 31,  2002,  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  (19.71)%  and  18.35%,  respectively.  Net  interest  income
decreased by $478,000 or 4.3% for

                                       10

<PAGE>

a downward  shift in rates of 200 basis points and decreased by $45,000 or 0.4%,
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 27.86% and 22.14%  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 primary activity of the Company is originating loans and purchasing
investment and mortgage-backed  securities.  During the years ended December 31,
2002, 2001 and 2000 the Company  originated loans in the amounts of $98.0, $67.4
and $58.0  million,  respectively.  The Company also  purchases  investment  and
mortgage-backed  securities to invest excess  liquidity and to supplement  local
loan  demand.  During the years ended  December  31,  2002,  2001 and 2000,  the
Company purchased  investment and  mortgage-backed  securities in the amounts of
$111.7, $55.4 and $10.9 million, respectively.

         The Company has other  sources of  liquidity  if a need for  additional
funds  arises,  such as FHLB  of  Pittsburgh  advances.  Additional  sources  of
liquidity  can be found  in the  Company's  balance  sheet,  such as  investment
securities  and  unencumbered   mortgage-backed   securities  that  are  readily
marketable.  Management believes that the Company has adequate resources to fund
all of its commitments.

         The Bank may not declare or pay a cash  dividend on any of its stock if
the effect thereof would cause the Bank's regulatory capital to be reduced below
(1) the amount  required for the liquidation  account  established in connection
with the Bank's mutual holding company reorganization and stock issuance, or (2)
the regulatory capital requirements imposed by the Department and the FDIC.

         Regulatory Capital  Requirements.  As a condition of deposit insurance,
current FDIC regulations  require that the Bank calculate and maintain a minimum
regulatory  capital level on a quarterly  basis and satisfy such  requirement at
the  calculation  date and  throughout the ensuing  quarter.  See Note 14 to the
Consolidated Financial Statements.

Impact of Inflation and Changing Prices

         Unlike industrial  companies,  nearly all of the assets and liabilities
of a financial  institution are monetary in nature. As a result,  interest rates
have a more  significant  impact on a financial  institution' s performance than
general levels of inflation.  Interest rates do not necessarily move in the same
direction

                                       11

<PAGE>

or in the same  magnitude as the price of goods and  services,  since such goods
and  services  are  affected  by  inflation.   In  the  current   interest  rate
environment,  liquidity and the maturity  structure of the Company's  assets and
liabilities are critical to the maintenance of acceptable performance levels.



                                       12
<PAGE>
{LOGO]
SNODGRASS
Certified Public Accountants and Consultants



                         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, 2002
and  2001,  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, 2002. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of PHSB
Financial  Corporation  and subsidiary as of December 31, 2002 and 2001, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2002 in  conformity  with  accounting  principles
generally accepted in the United States of America.


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


Wexford, PA
January 15, 2003

<TABLE>
<CAPTION>
<S>                                                    <C>
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200 Wexford, PA  15090-8399  Phone: 724-934-0344  Facsimile: 724-934-0345
</TABLE>

                                       13
<PAGE>

                           PHSB FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                       2002               2001
                                                                                 -----------------  -----------------
<S>                                                                           <C>                 <C>
ASSETS
     Cash and amounts due from other institutions                               $       6,938,217   $      5,988,187
     Interest-bearing deposits with other institutions                                  1,283,752         28,195,161
                                                                                 -----------------  -----------------
         Cash and cash equivalents                                                      8,221,969         34,183,348
     Investment securities:
         Available for sale                                                            27,233,227         22,902,366
         Held to maturity (market value $19,611,078
           and $26,516,322)                                                            19,274,753         26,259,684
     Mortgage-backed securities:
         Available for sale                                                            44,137,225         54,603,622
         Held to maturity (market value $71,826,914
           and $30,444,092)                                                            70,346,358         30,179,631
     Loans (net of allowance for loan losses of $1,683,596
       and $1,506,140)                                                                165,668,214        137,000,743
     Accrued interest receivable                                                        1,998,773          1,679,032
     Premises and equipment                                                             4,604,005          5,029,993
     Federal Home Loan Bank stock                                                       3,620,300          2,614,800
     Other assets                                                                         431,881            929,215
                                                                                 -----------------  -----------------
             TOTAL ASSETS                                                        $    345,536,705   $    315,382,434
                                                                                 =================  =================

LIABILITIES
     Deposits                                                                    $    232,366,672   $    210,014,644
     Advances from Federal Home Loan Bank                                              61,007,800         50,324,800
     Accrued interest payable and other liabilities                                     2,802,061          2,208,161
                                                                                 -----------------  -----------------
             TOTAL LIABILITIES                                                        296,176,533        262,547,605
                                                                                 -----------------  -----------------
STOCKHOLDERS' EQUITY
     Preferred stock, no par value; 20,000,000 shares
       authorized; none issued and outstanding                                                  -                  -
     Common stock, par value $.10 per share; 80,000,000
       shares authorized; 3,497,109 issued                                                349,711            349,711
     Additional paid-in capital                                                        32,329,518         32,229,027
     Retained earnings - substantially restricted                                      23,571,132         21,985,576
     Accumulated other comprehensive income                                             2,197,377            856,798
     Unallocated shares held by Employee Stock
       Ownership Plan (ESOP)                                                           (2,276,111)        (2,529,013)
     Unallocated shares held by Restricted Stock Plan (RSP)                                     -            (57,270)
     Treasury stock, at cost (471,357 shares)                                          (6,811,455)                 -
                                                                                 -----------------  -----------------
             TOTAL STOCKHOLDERS' EQUITY                                                49,360,172         52,834,829
                                                                                 -----------------  -----------------
             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $    345,536,705   $    315,382,434
                                                                                 =================  =================
</TABLE>
See accompanying notes to the consolidated financial statements.

                                       14
<PAGE>

                                             PHSB FINANCIAL CORPORATION
                                          CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                      2002                2001               2000
                                                             ------------------  -----------------  -----------------
<S>                                                        <C>                 <C>                <C>
INTEREST INCOME
      Loans:
          Taxable                                            $      10,520,699   $     10,433,463   $     10,024,804
          Exempt from federal income tax                               816,618            255,365            180,789
      Investment securities:
          Taxable                                                    1,580,707          1,673,638          2,072,906
          Exempt from federal income tax                               972,567            875,533          1,002,398
      Mortgage-backed securities                                     5,802,854          5,795,239          5,620,716
      Interest-bearing deposits with other institutions                162,267            282,720            133,703
                                                             ------------------  -----------------  -----------------
               Total interest income                                19,855,712         19,315,958         19,035,316
                                                             ------------------  -----------------  -----------------
INTEREST EXPENSE
      Deposits                                                       6,700,653          7,904,943          8,041,471
      Advances from Federal Home Loan Bank                           3,098,728          2,631,809          2,407,253
                                                             ------------------  -----------------  -----------------
               Total interest expense                                9,799,381         10,536,752         10,448,724
                                                             ------------------  -----------------  -----------------
               Net interest income                                  10,056,331          8,779,206          8,586,592

PROVISION FOR LOAN LOSSES                                              735,000            520,000            555,000
                                                             ------------------  -----------------  -----------------
NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                                    9,321,331          8,259,206          8,031,592
                                                             ------------------  -----------------  -----------------
NONINTEREST INCOME
      Service charges on deposit accounts                              639,283            594,701            540,762
      Investment securities gains, net                                 168,027             58,118              7,315
      Rental income, net                                                92,483             97,808             88,179
      Other income                                                     270,361            257,886            217,729
                                                             ------------------  -----------------  -----------------
               Total noninterest income                              1,170,154          1,008,513            853,985
                                                             ------------------  -----------------  -----------------
NONINTEREST EXPENSE
      Compensation and employee benefits                             3,967,772          3,356,733          3,232,703
      Occupancy and equipment costs                                  1,380,076          1,304,825          1,174,330
      Data processing costs                                            198,566            193,188            319,434
      Other expenses                                                 1,630,165          1,439,539          1,273,140
                                                             ------------------  -----------------  -----------------
               Total noninterest expense                             7,176,579          6,294,285          5,999,607
                                                             ------------------  -----------------  -----------------
Income before income taxes                                           3,314,906          2,973,434          2,885,970
Income taxes                                                           689,731            752,331            714,033
                                                             ------------------  -----------------  -----------------
               NET INCOME                                    $       2,625,175   $      2,221,103   $      2,171,937
                                                             ==================  =================  =================

EARNINGS PER SHARE
      Basic                                                  $            0.87   $           0.70   $           0.67
      Diluted                                                             0.85               0.70               0.67
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                                PHSB FINANCIAL CORPORATION
                                                 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                           Retained    Accumulated  Unallocated   Unallocated
                              Additional    Earnings      Other        Shares       Shares                    Total       Compre-
                     Common    Paid-in   Substantially Comprehensive  Held by       Held by     Treasury   Stockholders'  hensive
                     Stock     Capital     Restricted  Income (Loss)   ESOP         RSP          Stock        Equity      Income
                     ------ ------------  -----------  ------------- -----------  ----------- -----------  ------------  ----------
<S>                 <C>      <C>          <C>           <C>          <C>          <C>         <C>          <C>           <C>
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

Net income                                   2,625,175                                                        2,625,175   $2,625,175
Other comprehensive
income:
  Unrealized gain
    on available
    for sale
    securities,
    net of tax
    of $690,602                                           1,340,579                                           1,340,579    1,340,579
                                                                                                                          ----------
Comprehensive income                                                                                                      $3,965,754
                                                                                                                          ==========
Cash dividends declared
  ($.34 per share)                          (1,039,619)                                                      (1,039,619)
ESOP shares released               86,875                                 252,902                               339,777
Treasury stock
  purchased,
  at cost                                                                                      (7,021,256)   (7,021,256)
Common stock acquired
  by RSP                             (540)                                           (209,261)    209,801             -
RSP shares released                14,156                                             266,531                   280,687
                     -------- -----------  -----------   ----------   -----------  ---------- -----------  ------------
Balance,
  December 31, 2002  $349,711 $32,329,518   $23,571,132   $2,197,377   $(2,276,111) $        -  $(6,811,455)  $49,360,172
                     ======== ===========   ===========   ==========   ===========  ==========  ===========   ===========
</TABLE>



<TABLE>
<CAPTION>
                                                                                             2002       2001         2000
                                                                                         -----------  ---------  -----------
<S>                                                                                    <C>          <C>        <C>
Components of comprehensive income:
  Change in net unrealized gain on investments held for sale                             $1,451,477   $438,188   $1,375,906
  Realized gains included in net income, net of tax of $57,129, $19,760, and $2,487        (110,898)   (38,358)      (4,828)
                                                                                         -----------  ---------  -----------
Total                                                                                    $1,340,579   $399,830   $1,371,078
                                                                                         ===========  =========  ===========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       16
<PAGE>

                                             PHSB FINANCIAL CORPORATION
                                        CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                         2002           2001           2000
                                                                      ---------    -----------    -----------
<S>                                                                  <C>            <C>            <C>
OPERATING ACTIVITIES
Net income                                                           $ 2,625,175    $ 2,221,103    $ 2,171,937
Adjustments to reconcile net income to net
  cash provided by operating activities:
     Provision for loan losses                                           735,000        520,000        555,000
     Provision for depreciation                                          688,004        652,309        594,029
     Amortization of discounts, premiums,
       and loan origination fees                                       1,363,478      1,195,295      1,044,622
     Investment securities gains, net                                   (168,027)       (58,118)        (7,315)
     Deferred income tax                                                (112,244)        29,156         50,008
     Increase in accrued interest receivable                            (319,741)       (53,612)       (87,257)
     Increase (decrease) in accrued interest payable                     761,222         28,896       (108,195)
     Amortization of ESOP unearned compensation                          339,777        131,520         87,475
     Amortization of RSP unearned compensation                           280,687        128,513        128,512
     Other, net                                                         (544,485)      (368,744)      (439,429)
                                                                     -----------    -----------    -----------
              Net cash provided by operating activities                5,648,846      4,426,318      3,989,387
                                                                     -----------    -----------    -----------
INVESTING ACTIVITIES
     Investment and mortgage-backed securities available for sale:
        Proceeds from sales                                            9,762,943      1,862,276      1,337,950
        Proceeds from maturities and principal repayments             30,603,655     24,221,862     10,494,500
        Purchases                                                    (32,199,422)   (39,748,386)    (7,886,766)
     Investment and mortgage-backed securities held to maturity:
        Proceeds from maturities and principal repayments             46,254,615     15,741,702      6,052,587
        Purchases                                                    (79,540,243)   (15,699,383)    (2,963,389)
     Increase in loans, net                                          (30,550,489)    (9,544,876)   (11,834,673)
     Proceeds from sales of repossessed assets                           380,407        412,018        301,221
     Purchase of premises and equipment                                 (262,016)    (1,044,929)      (936,209)
     Purchase of Federal Home Loan Bank stock                         (1,005,500)             -              -
                                                                     -----------    -----------    -----------
              Net cash used for investing activities                 (56,556,050)   (23,799,716)    (5,434,779)
                                                                     -----------    -----------    -----------
FINANCING ACTIVITIES
     Increase in deposits, net                                        22,352,028     11,772,943      8,897,149
     Proceeds from advances from Federal Home Loan Bank               16,000,000     23,130,000     13,500,000
     Repayment of advances from Federal Home Loan Bank                (5,317,000)    (9,000,000)   (27,600,000)
     Repayment of other borrowings                                       (28,328)       (46,987)       (44,724)
     Common stock acquired by ESOP                                             -     (1,760,950)             -
     Proceeds from sale of common stock                                        -     21,226,263              -
     Capital contributed from MHC                                              -      2,955,314              -
     Cash dividends paid                                              (1,039,619)      (991,801)      (912,550)
     Purchase of treasury stock                                       (7,021,256)      (325,197)      (747,555)
                                                                     -----------    -----------    -----------
              Net cash provided by (used for) financing activities    24,945,825     46,959,585     (6,907,680)
                                                                     -----------    -----------    -----------
              Increase (decrease) in cash and cash equivalents       (25,961,379)    27,586,187     (8,353,072)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                   34,183,348      6,597,161     14,950,233
                                                                     -----------    -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                             $ 8,221,969    $34,183,348    $ 6,597,161
                                                                     ===========    ===========    ===========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       17
<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 Corporation, 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 ten 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.

                                       18
<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.  Payments 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 is 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  principally  computed  on the  straight-line  method  over the
estimated useful lives of the related assets,  which range from one to ten years
for  furniture,  fixtures,  and  equipment  and five to fifty  years for  office
buildings.  Leasehold  improvements  are  amortized  over the  shorter  of their
estimated useful lives or their respective lease terms, which range from five to
twenty  years.  Expenditures  for  maintenance  and repairs are charged  against
income as incurred. Costs of major additions and improvements are capitalized.

                                       19
<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.  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.

                                       20
<PAGE>

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Options (Continued)

Had  compensation  expense  for  the  stock  option  plans  been  recognized  in
accordance with the fair value accounting provisions of FAS 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:

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

Net income as reported                      $2,625,175   $2,221,103   $2,171,937

Less pro forma expense related to option       187,360       44,044       40,044
Pro forma net income                         2,437,815    2,177,059    2,131,893
Basic net income per common share:
    As reported                             $     0.87   $     0.70   $     0.67
    Pro forma                                     0.81         0.69         0.66
Diluted net income per common share:
    As reported                             $     0.85   $     0.70   $     0.67
    Pro forma                                     0.79         0.68         0.66

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 2002 and 1998: (1) expected
dividend yield of 1.02 and 1.03 percent; (2) risk-free interest rate of 3.78 and
4.95 percent; (3) expected volatility of 8 and 14 percent.

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 Consolidated  Statement of
Changes in Stockholders' Equity.

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, 2002,  2001,  and 2000,  the Company made cash
payments for interest of $9,038,159, $10,507,856, and $10,556,919, respectively.
The Company also made cash payments for income taxes of $966,520,  $665,000, and
$797,748, respectively, during these same periods.

                                       21
<PAGE>

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In August  2001,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("FAS") 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 FAS No. 144,  Accounting for the Impairment or
Disposal of Long-Lived Assets. FAS No. 144 supercedes FAS No. 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.  FAS No.  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.  FAS No.  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.

In April 2002,  the FASB issued FAS No. 145,  Recission of FASB Statement No. 4,
44 and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections.  FAS
No.  145  rescinds  FAS  No.  4,  which  required  all  gains  and  losses  from
extinguishment  of debt to be  aggregated  and, if  material,  classified  as an
extraordinary  item, net of related income tax effect. As a result, the criteria
in APB Opinion No. 30 will now be used to classify those gains and losses.  This
statement  also amends FAS No. 13 to require  that certain  lease  modifications
that have economic effects similar to  sale-leaseback  transactions be accounted
for in the same manner as sale-leaseback transactions. This statement also makes
technical corrections to existing pronouncements,  which are not substantive but
in some cases may change accounting  practice.  The provisions of this statement
related  to the  rescission  of FAS No.  4 shall  be  applied  in  fiscal  years
beginning after May 15, 2002. Any gain or loss on  extinguishments  of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB Opinion No. 30 for  classification  as an extraordinary
item shall be  reclassified.  Early adoption of the provisions of this statement
related to FAS No. 13 shall be effective for  transactions  occurring  after May
15,  2002.  All  other  provisions  of this  statement  shall be  effective  for
financial  statements issued on or after May 15, 2002. Early application of this
statement  is  encouraged.  The  adoption  of the  effective  portions  of  this
statement did not have an impact on the Company's  financial position of results
of operations.  The adoption of the remaining  portions of this statement is not
expected  to have an impact on the  Company's  financial  position or results of
operations.

In July 2002, the FASB issued FAS No. 146,  Accounting for Costs Associated with
Exit or  Disposal  Activities,  which  requires  companies  to  recognize  costs
associated  with exit or disposal  activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3,  Liability  Recognition  for Certain  Employee  Termination
Benefits and Other Costs to Exit an Activity  (Including  Certain Costs Incurred
in a  Restructuring).  The new statement  will be effective for exit or disposal
activities  initiated  after  December  31,  2002,  the adoption of which is not
expected to have a material effect on the Company's financial statements.

                                       22

<PAGE>

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

On December 31, 2002, the FASB issued FAS No. 148,  Accounting  for  Stock-Based
Compensation - Transition and Disclosure,  which amends FAS No. 123,  Accounting
for Stock-Based Compensation.  FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based  compensation.  Under the provisions
of FAS No. 123,  companies that adopted the preferable,  fair value based method
were required to apply that method  prospectively  for new stock option  awards.
This  contributed to a "ramp-up" effect on stock-based  compensation  expense in
the first few years following  adoption,  which caused concern for companies and
investors  because of the lack of  consistency in reported  results.  To address
that concern,  FAS No. 148 provides two  additional  methods of transition  that
reflect  an  entity's  full  complement  of  stock-based   compensation  expense
immediately upon adoption,  thereby  eliminating the ramp-up effect. FAS No. 148
also  improves the clarity and  prominence  of  disclosures  about the pro forma
effects of using the fair  value  based  method of  accounting  for  stock-based
compensation  for all  companies--regardless  of the accounting  method used--by
requiring  that  the  data  be  presented  more   prominently   and  in  a  more
user-friendly format in the footnotes to the financial statements.  In addition,
the statement  improves the  timeliness of those  disclosures  by requiring that
this information be included in interim as well as annual financial  statements.
The  transition  guidance and annual  disclosure  provisions  of FAS No. 148 are
effective  for fiscal  years  ending  after  December  15,  2002,  with  earlier
application   permitted  in  certain   circumstances.   The  interim  disclosure
provisions are effective for financial reports containing  financial  statements
for interim periods beginning after December 15, 2002.

In November,  2002, the FASB issued Interpretation No.45, Guarantor's Accounting
and Disclosure  requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others. This interpretation  elaborates on the disclosures to be
made by a guarantor  in its interim and annual  financial  statements  about its
obligations  under certain  guarantees that it has issued.  This  interpretation
clarifies  that a  guarantor  is  required  to  disclose  (a) the  nature of the
guarantee,  including the approximate  term of the guarantee,  how the guarantee
arose,  and the events or  circumstances  that would  require the  guarantor  to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee;  (c) the carrying amount of the liability,  if any, for the
guarantor's  obligations  under the guarantee;  and (d) the nature and extent of
any recourse provisions or available  collateral that would enable the guarantor
to recover  the  amounts  paid under the  guarantee.  This  interpretation  also
clarifies  that a guarantor  is required to  recognize,  at the  inception  of a
guarantee,  a liability  for the  obligations  it has  undertaken in issuing the
guarantee,  including its ongoing  obligation to stand ready to perform over the
term of the  guarantee  in the event  that the  specified  triggering  events or
conditions occur. The objective of the initial  measurement of that liability is
the fair value of the guarantee at its inception.  The initial  recognition  and
initial  measurement  provisions  of this  interpretation  are  applicable  on a
prospective  basis to  guarantees  issued or modified  after  December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure  requirements in
this interpretation are effective for financial  statements of interim or annual
periods ending after December 15, 2002.

                                       23
<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>
                                                 2002          2001          2000
                                              ----------    ----------    ----------
<S>                                          <C>           <C>           <C>
Weighted-average common shares
    outstanding                                3,497,109     3,534,910     3,536,195

Average treasury stock shares                   (240,356)     (277,425)     (201,480)

Average unearned ESOP and RSP shares            (230,818)      (83,014)     (109,731)
                                              ----------    ----------    ----------
Weighted-average common shares and
    common stock equivalents used to
    calculate basic earnings per share         3,025,935     3,174,471     3,224,984

Additional common stock equivalents
    (stock options) used to calculate
    diluted earnings per share                    51,307        21,135             -
                                              ----------    ----------    ----------
Weighted-average common shares and
    common stock equivalents used
    to calculate diluted earnings per share    3,077,242     3,195,606     3,224,984
                                              ==========    ==========    ==========
</TABLE>

3.   INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                            2002
                                   ------------------------------------------------------
                                                    Gross         Gross        Estimated
                                    Amortized     Unrealized    Unrealized       Market
                                      Cost          Gains         Losses         Value
                                   -----------   ------------  ------------   -----------
<S>                              <C>           <C>           <C>            <C>
Available for Sale

U.S. Treasury securities           $ 6,978,276   $    21,104   $         -    $ 6,999,380
U.S. Government agency
  securities                           997,142       111,298             -      1,108,440
Obligations of states and
  political subdivisions            12,795,978       862,290             -     13,658,268
Corporate securities                 1,100,000        11,645             -      1,111,645
Real estate mortgage
  investment conduits                   25,221           188             -         25,409
                                   -----------   -----------   -----------    -----------
           Total debt securities    21,896,617     1,006,525             -     22,903,142

Equity securities                    4,152,700       382,491      (205,006)     4,330,185
                                   -----------   -----------   -----------    -----------
          Total                    $26,049,317   $ 1,389,016   $  (205,006)   $27,233,327
                                   ===========   ===========   ===========    ===========
</TABLE>

                                       24
<PAGE>


3.  INVESTMENT SECURITIES (Continued)

<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>
<TABLE>
<CAPTION>
                                                    2002
                            ------------------------------------------------------
                                             Gross         Gross        Estimated
                             Amortized     Unrealized    Unrealized       Market
                               Cost          Gains         Losses         Value
                            -----------   ------------  ------------   -----------
<S>                              <C>           <C>           <C>            <C>
Held to Maturity

U.S. Government agency
  securities                $16,749,897   $   267,491   $         -   $17,017,388
Obligations of states and
  political subdivisions      2,524,856        68,834             -     2,593,690
                            -----------   -----------   -----------   -----------
          Total             $19,274,753   $   336,325   $         -   $19,611,078
                            ===========   ===========   ===========   ===========
</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>

                                       25
<PAGE>

3.  INVESTMENT SECURITIES (Continued)

The amortized cost and estimated market value of debt securities at December 31,
2002, 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        $ 7,578,276   $ 7,608,690   $ 8,270,000   $ 8,277,282
Due after one year through
  five years                     5,044,071     5,443,088     3,648,869     3,818,463
Due after five years through
  ten years                              -             -     4,398,982     4,504,285
Due after ten years              9,274,270     9,851,364     2,956,902     3,011,048
                               -----------   -----------   -----------   -----------
      Total                    $21,896,617   $22,903,142   $19,274,753   $19,611,078
                               ===========   ===========   ===========   ===========
</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:

                                     2002              2001          2000
                                 ----------         ----------   ----------
    Proceeds from sales          $9,762,943         $1,862,276   $1,337,950
    Gross gains                     178,176             58,118       14,461
    Gross losses                     10,149                  -        7,146

Investment  securities  with an amortized cost of $19,728,173 and $6,978,035 and
an estimated  market value of $20,015,528  and $7,214,380 were pledged to secure
public deposits at December 31, 2002 and 2001, respectively.

4.  MORTGAGE-BACKED SECURITIES

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

<TABLE>
<CAPTION>
                                                     2002
                              ------------------------------------------------------
                                                Gross        Gross        Estimated
                                Amortized     Unrealized   Unrealized       Market
                                  Cost          Gains        Losses         Value
                              ------------   -----------   -----------   -----------
<S>                          <C>           <C>           <C>           <C>
Available for Sale

Government National Mortgage
  Association securities       $41,988,207   $ 2,145,098   $         -   $44,133,305
Federal Home Loan Mortgage
  Corporation securities             3,669           251             -         3,920
                               -----------   -----------   -----------   -----------

           Total               $41,991,876   $ 2,145,349   $         -   $44,137,225
                               ===========   ===========   ===========   ===========
</TABLE>

                                       26
<PAGE>

4.  MORTGAGE-BACKED SECURITIES (Continued)

<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>

<TABLE>
<CAPTION>
                                                        2002
                               ------------------------------------------------------
                                               Gross         Gross        Estimated
                               Amortized     Unrealized    Unrealized       Market
                                  Cost         Gains         Losses         Value
                               -----------   -----------   -----------    -----------
<S>                          <C>           <C>           <C>            <C>
Held to Maturity

Government National Mortgage
   Association securities      $17,354,099   $   821,869   $         -    18,175,968
Federal Home Loan Mortgage
   Corporation securities       40,883,062       272,038             -    41,155,100
Federal National Mortgage
   Association securities       12,109,197       386,649             -    12,495,846
                               -----------   -----------   -----------   -----------

           Total               $70,346,358   $ 1,480,556   $         -   $71,826,914
                               ===========   ===========   ===========   ===========
</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>

                                       27
<PAGE>

4.  MORTGAGE-BACKED SECURITIES (Continued)

The amortized cost and estimated market value of  mortgage-backed  securities at
December 31, 2002, 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        $       774   $       786   $         -   $         -
Due after one year through
  five years                        23,835        25,256     9,754,711     9,856,516
Due after five years through
  ten years                        967,517     1,054,154    40,680,394    41,177,584
Due after ten years             40,999,750    43,057,029    19,911,253    20,792,814
                               -----------   -----------   -----------   -----------
      Total                    $41,991,876   $44,137,225   $70,346,358    71,826,914
                               ===========   ===========   ===========   ===========
</TABLE>

Mortgage-backed  securities  with an amortized cost of $7,940,340 and $1,389,232
and an  estimated  market value of  $8,050,029  and  $1,420,852  were pledged to
secure public deposits at December 31, 2002 and 2001, respectively.

5.  LOANS

Loans consist of the following:

                                                2002           2001
                                            ------------   ------------
Mortgage loans:
   Residential                              $ 65,394,863   $ 61,092,961
   Multi-family units                            752,296        723,249
   Construction                                  947,147      3,998,785
   Commercial real estate                      5,900,334      5,224,626
                                            ------------   ------------
                                              72,994,640     71,039,621
                                            ------------   ------------

Commercial loans                               1,347,954      2,227,129
Tax exempt loans                              23,583,632      4,478,944
                                            ------------   ------------
                                              24,931,586      6,706,073
                                            ------------   ------------
Consumer:
   Consumer credit line                        6,865,147      6,217,107
   Automobile                                 54,995,826     49,020,510
   Other                                       6,532,503      6,054,333
                                            ------------    -----------
                                              68,393,476     61,291,950
                                            ------------   ------------
Less:
  Loans in process                               915,425      2,221,437
  Deferred loan costs, net                    (1,947,533)    (1,690,676)
  Allowance for loan losses                    1,683,596      1,506,140
                                            ------------   ------------
                                                 651,488      2,036,901
                                            ------------   ------------

       Total                                $165,668,214   $137,000,743
                                            ============   ============

                                       28
<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.

                                     2002             2001             2000
                                   --------         --------         --------
Principal outstanding              $370,549         $536,792         $581,706
Contractual interest due             29,801           61,121           66,356
Interest income recognized           12,256           24,373           29,705

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

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

Balance, January 1,                       $1,506,140   $1,454,618    1,359,900
    Add:
       Provisions charged to operations      735,000      520,000      555,000
       Loan recoveries                        67,835       29,715       51,016

    Less loans charged off                   625,379      498,193      511,298
                                          ----------   ----------   ----------
Balance, December 31,                     $1,683,596   $1,506,140   $1,454,618
                                          ==========   ==========   ==========

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.  Although the Company has a diversified loan portfolio at December 31,
2002 and 2001,  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:

                                                       2002         2001
                                                    ----------   ----------

Interest-bearing deposits with other institutions   $    1,702   $   31,605
Investment securities                                  338,939      555,886
Mortgage-backed securities                             550,235      489,635
Loans                                                1,107,897      601,906
                                                    ----------   ----------
       Total                                        $1,998,773   $1,679,032
                                                    ==========   ==========

                                       29
<PAGE>

7.  PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

                                                    2002        2001
                                                ----------  ----------

Land                                            $  900,624  $  900,624
Office buildings                                 5,159,608   5,053,484
Furniture, fixtures, and equipment               3,473,976   3,318,084
Leasehold improvements                             403,403     403,403
                                                ----------  ----------
                                                 9,937,611   9,675,595
Less accumulated depreciation and amortization   5,333,606   4,645,602
                                                ----------  ----------

       Total                                    $4,604,005  $5,029,993
                                                ==========  ==========

Depreciation  expense for the years ended December 31, 2002,  2001, and 2000 was
$688,004, $652,309, and $594,029, respectively.

8.  DEPOSITS

Comparative details of deposit accounts follow:

<TABLE>
<CAPTION>
                                                  2002                         2001
                                   -----------------------------  ---------------------------------
                                                      Percent of                       Percent of
                                         Amount       Portfolio       Amount           Portfolio
                                   -----------------------------  ---------------------------------

<S>                              <C>                 <C>       <C>                    <C>
DDA and NOW accounts                $  38,144,708       16.4 %    $  35,811,684          17.1%
Money market
  demand accounts                      28,769,973       12.4         28,537,030          13.6
Savings accounts                       33,741,991       14.5         28,739,934          13.6
                                     ------------      -----     ---------------        -----
                                      100,656,672       43.3         93,088,648          44.3
                                     ------------      -----     ---------------        -----
Time certificates of deposit:
    Less than 2.01%                    17,148,772        7.4          1,246,796           0.6
    2.01%  -  4.00%                    34,798,570       15.0         28,509,483          13.6
    4.01%  -  6.00%                    53,787,347       23.1         56,383,925          26.8
    6.01%  -  8.00%                    25,975,311       11.2         30,785,792          14.7
                                     ------------      -----     ---------------        -----
                                      131,710,000       56.7        116,925,996          55.7
                                     ------------      -----     ---------------        -----
           Total                     $232,366,672      100.0 %   $   210,014,644        100.0%
                                     ============      =====     ===============        =====
</TABLE>

At December 31, 2002,  time deposits of $75,109,473,  $21,704,265,  $10,648,920,
$8,954,074,  $13,834,449,  and  $1,458,819  are scheduled to mature during 2003,
2004, 2005, 2006, 2007, and beyond 2007, respectively.

Time deposits  include  certificates of deposit in  denominations of $100,000 or
more. Such deposits aggregated  $34,092,419 and $14,381,102 at December 31, 2002
and 2001, respectively, with maturities at December 31, 2002 as follows:

    Within three months                                $ 3,985,308
    Beyond three but within six months                  14,998,417
    Beyond six but within twelve months                  8,533,926
    Beyond one year                                      6,574,768
                                                       -----------
           Total                                       $34,092,419
                                                       ===========


                                       30
<PAGE>

8.  DEPOSITS (Continued)

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

                                                2002         2001         2000
                                           -----------   ----------   ----------
Savings accounts                           $   373,010 $    542,724   $  576,060
NOW and money market deposit accounts          561,419    1,150,101    1,352,279
Time certificates of deposit                 5,766,224    6,209,610    6,108,361
                                           -----------   ----------   ----------

           Total                           $ 6,700,653 $  7,902,435   $8,036,700
                                           ===========   ==========   ==========

9.  ADVANCES FROM FEDERAL HOME LOAN BANK

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

                                            2002           2001
                                        -----------    -----------
Balance at year-end                     $61,007,800    $50,324,800
Average  balance outstanding             57,862,000     47,592,334
Maximum month-end balance                66,324,800     51,194,800
Weighted-average rate at year-end              4.93%          5.41%
Weighted-average rate during the year          5.35%          5.53%

The scheduled maturities of advances outstanding are as follows:

<TABLE>
<CAPTION>
                                               2002                           2001
                                   ----------------------------    ---------------------------
             Year Ending                            Weighted-                      Weighted -
            December 31,                Amount     average Rate        Amount     average Rate
    ------------------------------ ----------------------------    ---------------------------
<S>                              <C>                   <C>       <C>                 <C>
                2002               $            -          -%      $  5,317,000        5.41%
                2003                    9,127,800       2.67          2,377,800        5.77
                2004                    4,250,000       5.36          3,500,000        5.77
                2005                    3,000,000       5.09          2,000,000        5.55
         2006 and thereafter           44,630,000       5.34         37,130,000        5.35
                                   --------------                  ------------
                Total              $   61,007,800       4.93%      $ 50,324,800        5.41%
                                   ==============                  ============
</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, 2002, the Bank's maximum  borrowing
capacity with the FHLB was approximately $148 million.

                                       31

<PAGE>

10. INCOME TAXES

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

                                     2002        2001        2000
                                  ---------   ---------   ---------
Currently payable:
    Federal                       $ 615,821   $ 574,481   $ 551,803
    State                           186,154     148,694     112,222
                                  ---------   ---------   ---------
                                    801,975     723,175     664,025
Deferred                           (112,244)     29,156      50,008
                                  ---------   ---------   ---------
           Total                  $ 689,731   $ 752,331   $ 714,033
                                  =========   =========   =========

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:

                                                    2002           2001
                                                -----------    -----------
Deferred tax assets:
     Allowance for loan losses                  $   572,423    $   512,088
     Premises and equipment                          83,183         61,247
     Accrued employee benefits                      315,770        292,981
     Alternative minimum tax credit                  11,089              -
     Other                                            6,154         10,059
                                                -----------    -----------
         Total gross deferred tax assets            988,619        876,375
                                                -----------    -----------
Deferred tax liabilities:
     Net unrealized gain on securities            1,131,982        441,381
                                                -----------    -----------
         Total gross deferred tax liabilities     1,131,982        441,381
                                                -----------    -----------
         Net deferred tax asset (liability)     $  (143,363)   $   434,994
                                                ===========    ===========

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

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>
                                         2002                           2001                         2000
                               --------------------------    -------------------------    -------------------------
                                                 % 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    $1,127,068         34.0%      $1,010,968         34.0%      $981,230          34.0 %
State income tax expense,
  net of federal tax benefit      122,862          3.7           98,138          3.3         74,067           2.7
Tax-exempt interest              (608,323)       (18.4)        (384,505)       (12.9)      (402,284)        (13.9)
Other, net                         48,124          1.5           27,730          0.9         61,020           1.9
                               ----------         ----       ----------         ----       --------          ----
Actual expense and
  effective rate               $  689,731         20.8%      $  752,331         25.3%      $714,033          24.7 %
                               ==========         ====       ==========         ====       ========          ====
</TABLE>

The Bank is subject to the Pennsylvania  Mutual Thrift Institutions Tax which is
calculated at 11.5 percent of earnings.

                                       32
<PAGE>

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:

                                                   2002           2001
                                               -----------    -----------

Plan assets at fair value, beginning of year   $ 4,341,756    $ 3,985,025
Actual return on plan assets                       295,001        276,232
Employer contribution                              173,837        179,232
Benefits paid                                     (102,030)       (98,733)
                                               -----------    -----------
Plan assets at fair value, end of year           4,708,564      4,341,756
                                               -----------    -----------

Benefit obligation, beginning of year            4,578,325      4,172,207
Service cost                                       197,171        185,537
Interest cost                                      329,653        300,732
Actuarial loss (gain)                              492,012         18,582
Benefits paid                                     (102,030)       (98,733)
                                               -----------    -----------
Benefit obligation, end of year                  5,495,131      4,578,325
                                               -----------    -----------

Funded status                                     (786,567)      (236,569)
Transition adjustment                             (138,373)      (159,187)
Unrecognized net loss from past experience
  different from that assumed                      804,211        258,132
                                               -----------    -----------

Accrued pension liability                      $  (120,729)   $  (137,624)
                                               ===========    ===========

The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 2002.

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

                                            2002         2001        2000
                                         ---------    --------    ---------
    Discount rate                           6.50%       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>
                                                   2002         2001         2000
                                                ---------    ---------    ---------
<S>                                           <C>          <C>          <C>
Service cost of the current period              $ 197,171    $ 185,537    $ 189,965
Interest cost on projected benefit obligation     329,653      300,732      281,366
Actual return on plan assets                     (295,001)    (276,232)    (251,452)
Net amortization and deferral                     (74,881)     (65,285)     (56,701)
                                                ---------    ---------    ---------
Net periodic pension cost                       $ 156,942    $ 144,752    $ 163,178
                                                =========    =========    =========
</TABLE>

                                       33
<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

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,  2002,  2001,  and 2000  amounted to $41,250,
$30,000,  and  $24,000,  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, 2002,
2001, and 2000, amounted to $30,000, $54,000, and $29,400, 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, 2002, 2001, and 2000 amounted to
$75,757, $74,479, and $73,582, respectively.

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.  Effective
December 23, 2002, the shareholders  authorized 154,000 additional shares to the
plan. A total of 313,129  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 90,339  shares.  The  recipients  of these stock options vest over a
three or four-year  period of time.  Also,  incentive stock options for officers
and employees were granted for the purchase of 222,790 shares. The recipients of
these stock options vest over a two to five-year period of time.

                                       34

<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

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

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

                                               Weighted-               Weighted-
                                               average                 average
                                               Exercise                Exercise
                                     2002       Price       2001        Price
                                     ----       -----       ----        -----

    Outstanding, beginning          159,129    $  9.22      159,129     $ 9.22
      Granted                       154,000      15.51            -          -
      Exercised                           -          -            -          -
      Forfeited                           -          -            -          -
                                    -------                 -------
    Outstanding, ending             313,129    $ 12.31      159,129     $ 9.22
                                    =======                 =======
    Exercisable at year-end         219,479    $ 10.95      143,216     $ 9.22
                                    =======                 =======


The following table summarizes the  characteristics of stock options at December
31, 2002:

                                     Outstanding                Exercisable
                         ----------------------------       ------------------
                                             Average                 Average
                                   Average  Exercise                 Exercise
    Exercise price        Shares    Life      Price         Shares    Price
    ---------------      ----------------------------      -------------------
            9.22         159,129    5.83       9.22        159,129      9.22
           15.51         154,000    9.97      15.51        60,350      15.51


                                       35

<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

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  percent  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  $339,777,  $131,520,  and
$87,475, for the years ended December 31, 2002, 2001, and 2000, respectively.

The following table presents the components of the ESOP shares:

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

Allocated shares                      60,654       48,354       36,054
Shares released for allocation        23,844       12,300       12,300
Unreleased shares                    214,595      238,439       74,644
                                  ----------   ----------   ----------
Total ESOP shares                    299,093      299,093      122,998
                                  ==========   ==========   ==========
Fair value of unreleased shares   $3,358,412   $2,849,346   $  597,165
                                  ==========   ==========   ==========


                                       36
<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.  On December 23, 2002,  the company
granted a total of 66,000  shares of common  stock of which  16,280  shares were
acquired and became  immediately vested under the plan with the remaining shares
vesting over a two and four year period. A total of 79,932 shares were vested as
of December 31, 2002.

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  $280,687,
$128,513, and $128,512 for the years ended December 31, 2002, 2001, and 2000.

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:

                                              2002          2001
                                        -----------     -----------
Fixed rate commitments                  $ 9,003,490     $12,985,939
Variable rate commitments                16,820,280      16,424,007
                                        -----------     -----------
     Total                              $25,823,770     $29,409,946
                                        ===========     ===========


The range of  interest  rate  residential  mortgage  loan  commitments  was 5.75
percent to 6.50 percent at December 31, 2002, and 6.125 percent to 6.875 percent
at December 31, 2001.

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.

                                       37
<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, 2002 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, 2002 and 2001, 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.

                                       38

<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>
                                            2002                         2001
                                   ----------------------    -------------------------
                                      Amount      Ratio           Amount       Ratio
                                   ----------------------    -------------------------
<S>                             <C>              <C>         <C>              <C>
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual                            $ 48,846,391     30.72 %     $ 53,482,083     38.79%
For Capital Adequacy Purposes       12,718,680      8.00         11,029,603      8.00
To Be Well Capitalized              15,898,350     10.00         13,787,003     10.00

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

Actual                            $ 47,162,795     29.67 %     $ 51,975,943     37.70%
For Capital Adequacy Purposes        6,359,340      4.00          5,514,801      4.00
To Be Well Capitalized               9,539,010      6.00          8,272,202      6.00

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

Actual                            $ 47,162,795     13.56 %     $ 51,975,943     17.48%
For Capital Adequacy Purposes       13,909,085      4.00         11,894,609      4.00
To Be Well Capitalized              17,385,356      5.00         14,868,262      5.00

</TABLE>

                                       39

<PAGE>

14. REGULATORY CAPITAL REQUIREMENTS (Continued)

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

<TABLE>
<CAPTION>
                                            2002                         2001
                                   ----------------------    -------------------------
                                      Amount      Ratio           Amount       Ratio
                                   ----------------------    -------------------------
<S>                             <C>              <C>         <C>              <C>
Total Capital
(to Risk-weighted Assets)
-------------------------

Actual                            $ 42,779,478    27.86 %     $ 41,128,906     30.17%
For Capital Adequacy Purposes       12,282,160     8.00         10,906,800      8.00
To Be Well Capitalized              15,352,700    10.00         13,633,500     10.00

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

Actual                            $ 41,095,882    26.77 %     $ 39,622,766     29.06%
For Capital Adequacy Purposes         6,141,080    4.00          5,453,400      4.00
To Be Well Capitalized                9,211,620    6.00          8,180,100      6.00

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

Actual                            $ 41,095,882    12.21 %     $ 39,622,766     13.39%
For Capital Adequacy Purposes       13,466,538     4.00         11,833,125      4.00
To Be Well Capitalized              16,833,172     5.00         14,791,406      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.

                                       40

<PAGE>

15. FAIR VALUE DISCLOSURE

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

<TABLE>
<CAPTION>
                                            2002                          2001
                                 ---------------------------   ---------------------------
                                   Carrying         Fair         Carrying        Fair
                                    Value           Value          Value        Value
                                 ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>
Financial assets:
  Cash and amounts due
    from other institutions      $  6,938,217   $  6,938,217   $  5,988,187   $  5,988,187
  Interest-bearing deposits
    with other institutions         1,283,752      1,283,752     28,195,161     28,195,161
  Investment securities:
    Available for sale             27,233,227     27,233,227     22,902,366     22,902,366
    Held to maturity               19,274,753     19,611,078     26,259,684     26,516,322
  Mortgage-backed securities:
    Available for sale             44,137,225     44,137,225     54,603,622     54,603,622
    Held to maturity               70,346,358     71,826,914     30,179,631     30,444,092
  Loans, net                      165,668,214    173,219,214    137,000,743    142,370,743
  Federal Home Loan Bank stock      3,620,300      3,620,300      2,614,800      2,614,800
  Accrued interest receivable       1,998,773      1,998,773      1,679,032      1,679,032
                                 ------------   ------------   ------------   ------------
      Total                      $340,500,819   $349,868,700   $309,423,226   $315,314,325
                                 ============   ============   ============   ============

Financial liabilities:
  Deposits                       $232,366,672   $237,027,672   $210,014,644   $213,948,644
  Advances from Federal
    Home Loan Bank                 61,007,800     64,276,800     50,324,800     52,034,800
  Advances from borrowers
    for taxes and insurance           548,924        548,924        586,795        586,795
  Accrued interest payable          1,179,721      1,179,721        418,499        418,499
                                 ------------   ------------   ------------   ------------
      Total                      $295,103,117   $303,033,117   $261,344,738   $266,988,738
                                 ============   ============   ============   ============
</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.

                                       41

<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 Other  Institutions,  Interest-bearing  Deposits  with
Other  Institutions,  Accrued  Interest  Receivable,  Advance from 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.

                                       42
<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.,  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


                                                      2002          2001
                                                  -----------   -----------
ASSETS
     Cash and due from banks                      $   816,390   $10,903,242
     Investment securities - available for sale     5,441,730     1,522,665
     Investment in subsidiary bank                 40,838,046    37,959,948
     Loans receivable - ESOP                        2,330,388     2,521,705
     Other assets                                      28,923        12,367
                                                  -----------   -----------
TOTAL ASSETS                                      $49,455,477   $52,919,927
                                                  ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                            $    95,305   $    85,096
     Stockholders' equity                          49,360,172    52,834,831
                                                  -----------   -----------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                            $49,455,477   $52,919,927
                                                  ===========   ===========


                                       43
<PAGE>

17.  PARENT COMPANY (Continued)

              CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                    For the Year Ended December 31,
                                                     2002         2001         2000
                                                 ----------   ----------   ----------
<S>                                            <C>          <C>          <C>
INCOME
      Dividends from subsidiary bank             $1,000,000   $1,380,000   $1,158,100
      Interest income                               295,373       77,983       92,005
                                                 ----------   ----------   ----------
                                                  1,295,373    1,457,983    1,250,105

EXPENSES                                            143,314       62,439       73,981
                                                 ----------   ----------   ----------

Income before equity in undistributed
  earnings of subsidiary                          1,152,059    1,395,544    1,176,124

Equity in undistributed earnings of subsidiary    1,473,116      825,559      995,813
                                                 ----------   ----------   ----------

NET INCOME                                       $2,625,175   $2,221,103   $2,171,937
                                                 ==========   ==========   ==========
</TABLE>

                                       44

<PAGE>

17.  PARENT COMPANY (Continued)

                        CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 For the Year Ended December 31,
                                                                2002           2001           2000
                                                            -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
OPERATING ACTIVITIES
     Net income                                             $ 2,625,175    $ 2,221,103    $ 2,171,937
     Adjustments to reconcile net income to net cash
        provided by operating activities:
           Equity in undistributed earnings of subsidiary    (1,473,116)      (825,559)      (995,813)
           Other, net                                           254,354        152,856        105,160
                                                            -----------    -----------    -----------
                Net cash provided by operating activities     1,406,413      1,548,400      1,281,284
                                                            -----------    -----------    -----------
INVESTING ACTIVITIES
     Purchases of investment securities                      (6,108,447)    (1,525,828)      (107,298)
     Sale of investment securities                              484,740        107,298              -
     Maturity of investment securities                        2,000,000              -              -
     Additional investment in subsidiary                              -     (8,845,744)             -
     Decrease (increase) in loan to ESOP, net                   191,317     (1,618,170)       150,087
                                                            -----------    -----------    -----------
                Net cash provided by (used for)
                   investing activities                      (3,432,390)   (11,882,444)        42,789
                                                            -----------    -----------    -----------
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              -
      Cash dividends paid                                    (1,039,619)      (991,801)      (912,550)
      Purchase of treasury stock                             (7,021,256)      (325,197)      (747,555)
                                                            -----------    -----------    -----------
                Net cash provided by (used for)
                   investing activities                      (8,060,875)    21,103,629     (1,660,105)
                                                            -----------    -----------    -----------
                Increase (decrease) in cash                 (10,086,852)    10,769,585       (336,032)

CASH AT BEGINNING OF YEAR                                    10,903,242        133,657        469,689
                                                            -----------    -----------    -----------

CASH AT END OF YEAR                                        $    816,390    $10,903,242    $   133,657
                                                           ============    ===========    ===========
</TABLE>

                                       45
<PAGE>

18.  SELECTED QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                      -------------------------------------------------
                                          March        June     September     December
                                          2002         2002         2002         2002
                                      ----------   ----------   ----------   ----------
<S>                                 <C>          <C>          <C>          <C>
Total interest income                 $4,902,684   $4,980,254   $5,067,251   $4,905,523
Total interest expense                 2,370,405    2,384,602    2,555,064    2,489,310
                                      ----------   ----------   ----------   ----------

Net interest income                    2,532,279    2,595,652    2,512,187    2,416,213
Provision for loan losses                180,000      180,000      195,000      180,000
                                      ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses            2,352,279    2,415,652    2,317,187    2,236,213

Investment securities gains, net           5,399       44,561       98,178       19,889
Total noninterest income                 227,110      242,513      256,649      275,855
Total noninterest expense              1,688,720    1,734,700    1,751,021    2,002,138
                                      ----------   ----------   ----------   ----------

Income before income taxes               896,068      968,026      920,993      529,819
Income taxes                             234,000      243,000      176,765       35,966
                                      ----------   ----------   ----------   ----------
Net income                            $  662,068   $  725,026   $  744,228   $  493,853
                                      ==========   ==========   ==========   ==========
Per share data:
Net income
     Basic                            $     0.20   $     0.23   $     0.26   $     0.18
     Diluted                                0.20         0.23         0.25         0.17
Weighted-average shares outstanding
     Basic                             3,254,892    3,130,855    2,912,386    2,811,725
     Diluted                           3,298,347    3,180,441    2,965,714    2,875,557
</TABLE>

                                       46

<PAGE>

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

<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>

                                       47

<PAGE>

                           PHSB FINANCIAL CORPORATION
                                OFFICE LOCATIONS

                      Administrative Office and Loan Center
                                744 Shenango Road
                        Beaver Falls, Pennsylvania 15010
                                 (724) 846-7300
                           www.peopleshomesavings.com



                              [MAP OMITTED]




















                                       48


<PAGE>
<TABLE>
<CAPTION>

<S>                                                          <C>
          Board of Directors                                   Executive Officers
          Joseph D. Belas                                      James P. Wetzel, Jr.
          Douglas K. Brooks                                        President and Chief Executive Officer
          Emlyn Charles                                        Richard E. Canonge
          John C. Kelly                                            Vice President Finance, Chief Financial
          Howard B. Lenox                                            Officer and Treasurer
          John M. Rowse                                        John M. Rowse
          James P. Wetzel, Jr.                                        Secretary
                                                                   David E. Ault
                                                                    Vice President-Community Banking and
          Dividend Reinvestment Plan:                                 Assistant Secretary
          For information on the PHSB Financial                 Paul W. Jewell
          Corporation Dividend Reinvestment Plan,                   Vice President-Human Resources and
          including optional cash purchases of                        Business Development
          additional shares with no brokerage fees,             Joseph R. Pollock III
          please contact Registrar and Transfer                     Vice President-Lending
          Company at (800) 368-5948

          Corporate Counsel:                                   Independent Auditors:
          George A. Verlihay                                   S.R. Snodgrass, A.C.
          2521 Darlington Road                                 1000 Stonewood Drive
          Beaver Falls, Pennsylvania  15010                    Suite 200
                                                               Wexford, Pennsylvania  15090

          Special Counsel:                                     Transfer Agent and Registrar:
          Malizia Spidi & Fisch, PC                            Registrar and Transfer Company
          1100 New York Avenue, N.W.                           70 Commerce Drive
          Suite 340 West                                       Cranford, New Jersey 07016-3572
          Washington, D.C.  20005                              (800) 368-5948


</TABLE>

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The Company's  Annual Report for the Year Ended December 31, 2002 filed with the
Securities  Exchange  Commission  on Form 10-KSB  without  exhibits is available
without charge upon written request.  For a copy of the Form 10-KSB or any other
investor information,  please write the Secretary of the Company at 744 Shenango
Road, Beaver Falls, Pennsylvania 15010.

The Annual Meeting of  Stockholders  will be held on April 24, 2003 at 9:00 a.m.
at the Chippewa Township Municipal Building, Chippewa Township, Beaver Falls, PA
15010.



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