SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934

For the fiscal year ended                    December 31, 2001
                          ------------------------------------------------

                                     - or -

[_]  Transition  report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

For the transition period from                    to
                               ------------------    ---------------------

Commission File Number 0-33419

                           PHSB Financial Corporation
           ------------------------------ ---------------------------
           (Name of Small Business Issuer as specified in its Charter)

             Pennsylvania                                       25-1894708
---------------------------------------------                -------------------
(State or other jurisdiction of incorporation                (I.R.S. Employer
or organization)                                             Identification No.)

744 Shenango Road, Beaver Falls, Pennsylvania                      15010
----------------------------------------------               -------------------
(Address of Principal Executive Offices)                          Zip Code

Registrant's telephone number, including area code:     (724) 846-7300
                                                     -------------------

Securities registered pursuant to Section 12(b) of the Exchange Act:     None
                                                                      ----------

Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $.10 per share
                     ---------------------------------------
                                (Title of class)

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter  period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES  X    NO
    ---      ---

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X}

         State issuer's revenues for its most recent fiscal year.  $20,324,471

         The aggregate  market value of the voting and non-voting  stock held by
non-affiliates of the Registrant, based on the closing price of the Registrant's
Common  Stock as quoted on the Nasdaq  National  Market,  on March 1, 2002,  was
$47.1 million.

         As of March 1, 2002 there were 3,497,110  shares issued and outstanding
of the Registrant's Common Stock.

         Transition Small Business Disclosure Format (check one): YES     NO  X
                                                                      ---    ---

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     December 31, 2001. (Part II)
2.   Portions of the Proxy Statement for the Annual Meeting of Stockholders  for
     the Fiscal Year ended December 31, 2001. (Part III)

<PAGE>

Forward-Looking Statements

         PHSB Financial  Corporation  (the "Company") may from time to time make
written or oral "forward-looking statements",  including statements contained in
the Company's  filings with the  Securities and Exchange  Commission  (including
this annual report on Form 10-KSB and the exhibits  thereto),  in its reports to
stockholders and in other communications by the Company,  which are made in good
faith by the Company  pursuant to the "safe  harbor"  provisions  of the Private
Securities Litigation Reform Act of 1995.

         These forward-looking statements involve risks and uncertainties,  such
as statements of the Company's plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes,  acquisitions;  changes in consumer spending
and saving habits; and the success of the Company at managing these risks.

         The  Company  cautions  that  this  list of  important  factors  is not
exclusive.  The  Company  does  not  undertake  to  update  any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

                                     PART I

Item 1.  Description of Business

General

         On July 9,  1997,  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 of its
depositors  and to PHS Bancorp,  M.H.C.  Additionally,  on November 9, 1998, the
Bank  reorganized  into a stock holding company and formed PHS Bancorp,  Inc. As
part of this  reorganization,  the Bank's public  shareholders  and PHS Bancorp,
M.H.C.  exchanged  their shares of common stock for PHS Bancorp,  Inc. shares of
common stock.

         On December  20,  2001,  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
<PAGE>

2,201,191  new shares to the public and the shares held by  stockholders  of PHS
Bancorp, Inc. were exchanged for 1,295,918 shares of the Company.

         The  Company  conducts  no  significant  business of its own other than
holding all the outstanding stock of the Bank. The Company principally  operates
through its main  office,  nine  branch  offices  and an  administrative  office
located  throughout Beaver and Lawrence Counties,  Pennsylvania.  The Company is
primarily engaged in the business of attracting deposits from the general public
and offering traditional  mortgage loan products,  commercial loans and consumer
loans,  which primarily consist of automobile loans. As a result,  references to
the Company throughout this document generally refers to the consolidated entity
which  includes  the main  operating  company,  the  Bank,  unless  the  context
indicates otherwise.

Competition

         The Company is one of the many  financial  institutions  servicing  its
market area which  consists of the counties of Beaver,  Lawrence,  Allegheny and
Butler,  Pennsylvania.  The  competition  for deposit  products comes from other
insured financial  institutions such as commercial banks,  thrift  institutions,
credit unions,  and  multi-state  regional  banks in the Company's  market area.
Deposit  competition also includes a number of insurance  products sold by local
agents and investment products such as mutual funds and other securities sold by
local and  regional  brokers.  Loan  competition  varies  depending  upon market
conditions  and  comes  from  other  insured  financial   institutions  such  as
commercial  banks,  thrift  institutions,  credit unions,  multi-state  regional
banks, and mortgage bankers.

                                       3
<PAGE>

Lending Activities

         Analysis of Loan Portfolio.  The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the total loan portfolio as of the dates indicated.

<TABLE>
<CAPTION>
                                                                          At December 31,
                                 --------------------------------------------------------------------------------------------------
                                        2001                  2000               1999                1998                1997
                                 ------------------   -----------------  -------------------- ------------------  -----------------
                                     $          %        $          %        $           %        $         %        $          %
                                 ---------   ------   --------    -----  --------     ------- ---------   ------  --------   ------
                                                                           (In thousands)
<S>                              <C>       <C>       <C>       <C>      <C>          <C>      <C>       <C>      <C>       <C>
Mortgage loans:
  One-to-four family (1)            61,093    43.94     57,999    44.58    53,184       44.62    49,084    48.88    45,108    44.94
  Multi-family                         232     0.17        308      .24       388         .33       554      .55       217      .22
  Construction                       3,999     2.88      1,778     1.37     1,614        1.36       326      .32       304      .30
  Commercial                           850     0.61        481      .37       541         .45       941      .94     1,378     1.37
                                 ---------   ------   --------    -----  --------     ------- ---------   ------  --------   ------

Total Mortgage loans                66,174    47.60     60,566    46.56    55,727       46.76    50,905    50.69    47,007    46.83
Commercial loans                    11,571     8.32      9,815     7.54     4,728        3.97     3,617     3.60     2,464     2.46
Consumer loans:
  Automobile                        49,021    35.26     48,361    37.18    48,026       40.29    36,618    36.47    39,569    39.42
  Consumer credit line               6,217     4.47      6,130     4.71     5,547        4.65     5,288     5.27     5,468     5.45
  Other(2)                           6,054     4.35      5,216     4.01     5,161        4.33     3,990     3.97     5,859     5.84
                                 ---------   ------   --------    -----  --------     ------- ---------   ------  --------   ------
Total Consumer loans                61,292    44.08     59,707    45.90    58,734       49.27    45,896    45.71    50,896    50.71

  Total loans                      139,037   100.00%   130,088   100.00%  119,189      100.00%  100,418   100.00%  100,367   100.00%
                                             ======              ======                ======             ======             ======
Less:
  Loans in process                   2,221               1,204                707                   219                370
  Deferred loan fees               (1,691)              (1,588)            (1,623)               (1,002)            (1,088)
  Allowance for losses on loans      1,506               1,455              1,360                 1,287              1,394
                                  --------            --------           --------               -------            -------
    Total loans, net              $137,001            $129,017           $118,745               $99,914            $99,691
                                  ========            ========           ========               =======            =======
</TABLE>

---------------
(1)  Includes home equity and junior lien mortgage loans.
(2)  Consists primarily of student loans held for sale and secured and unsecured
     personal loans.

                                       4
<PAGE>

         Loan Maturity  Tables.  The following  table sets forth the maturity of
the Company's  loan  portfolio at December 31, 2001.  The table does not include
prepayments  or  scheduled  principal  repayments.   Prepayments  and  scheduled
principal repayments on loans totalled $57.8 million for the year ended December
31,  2001.  Adjustable-rate  mortgage  loans  are  shown  as  maturing  based on
contractual maturities.

                                   Due        Due after
                                  within      1 through    Due after
                                  1 year       5 years      5 years       Total
                                 --------     --------     --------     --------
                                                 (In thousands)
One-to-four family .........     $    442     $  7,826     $ 56,824     $ 65,092
Other mortgage loans .......            -          419          663        1,082
Commercial .................          464        5,490        5,617       11,571
Consumer ...................        7,573       43,427       10,292       61,292
                                 --------     --------     --------     --------
Total ......................     $  8,479     $ 57,162     $ 73,396     $139,037
                                 ========     ========     ========     ========

         The  following  table sets forth as of December  31,  2001,  the dollar
amount of all loans due after  December  31,  2002,  based upon  fixed  rates of
interest or floating or adjustable interest rates.

                                                        Floating or
                                                        Adjustable
                                       Fixed Rates         Rates         Total
                                       -----------         -----         -----
                                                      (In thousands)

One-to-four family ................       $ 63,449       $  1,201       $ 64,650
Other mortgage loans ..............          1,082              -          1,082
Commercial ........................          8,255          2,852         11,107
Consumer ..........................         50,441          3,278         53,719
                                          --------       --------       --------
    Total .........................       $123,227       $  7,331       $130,558
                                          ========       ========       ========

         One-to-Four  Family Loans. The Company  originates  one-to-four  family
loans with fixed rates of interest for terms of 15 to 30 years and also offers a
one-year  adjustable  rate loan with an interest  rate  indexed to the  one-year
Treasury,  with a cap on interest rate  increases of 2% per year and 6% over the
life of the loan. The original  contractual loan repayment period on residential
mortgage loans generally average 20 years.  However, the average life based upon
the Company's experience has been approximately 10 to 12 years.

         Pursuant to underwriting  guidelines  adopted by the Board of Directors
the Company's  maximum loan to value ratio is 95% of the lower of sales price or
appraised value.  Private mortgage insurance must be obtained on all residential
loans for which loan-to-value ratios exceed 80%. Property appraisals on the real
estate and improvements securing  single-family  residential loans are made by a
qualified independent

                                       5
<PAGE>

appraisers  approved by the Board of  Directors.  Appraisals  are  performed  in
accordance with applicable  regulations and policies.  The Company obtains title
insurance policies on all first mortgage real estate loans originated.

         The majority of the Company's one- to-four family residential loans are
underwritten  in  accordance  with  Freddie  Mac or  Fannie  Mae  guidelines  to
facilitate  their sale in the secondary  market  (although  the Company  usually
retains residential mortgages for portfolio). Substantially all of the Company's
residential mortgages include "due on sale" clauses, which are provisions giving
the  Company  the right to declare a loan  immediately  payable if the  borrower
sells or otherwise transfers an interest in the property to a third party.

         Included in the Company's  one- to- four family loan portfolio are home
equity loans and second  mortgage  loans.  Home equity and second mortgage loans
are  generally  fixed rate with interest  rates based on market  rates.  In most
instances,  the Company holds the first lien on a second  mortgage.  At December
31,  2001,  such loans  totaled $8.6  million,  or 14.1% of the  Company's  one-
to-four family portfolio.

         Multi-Family  Residential  Real Estate.  Multi-family  residential real
estate loans are  permanent  loans  primarily  secured by  apartment  buildings.
Multi-family  residential  real estate loans can be  originated in amounts up to
75% of the  appraised  value of the mortgaged  property.  The Company makes both
adjustable  and  fixed-rate  multi-family  residential  real estate  loans.  The
adjustable rate loans have terms of up to 15 years, the rate of interest is tied
to the Wall Street Journal prime rate.

         Construction.  The Company will occasionally originate loans to finance
the  construction  of  one-  to  four-family  residences.   Constructions  loans
typically are originated directly to the owners of pre-sold single-family houses
that are being built, and generally  convert to a permanent loan upon completion
of construction.  Construction loans require payment of interest only during the
construction period and are offered at rates comparable to the Company's one- to
four-family permanent mortgage loan rates.

         Commercial  Real Estate.  Commercial  real estate  loans are  permanent
loans secured by improved property such as office buildings,  retail stores, and
other  non-residential  buildings.  Essentially  all originated  commercial real
estate loans are within the Bank's market area. Commercial real estate loans can
be  originated  in amounts  up to 75% of the  appraised  value of the  mortgaged
property.  The Company makes both  adjustable  and  fixed-rate  commercial  real
estate loans.  Commercial real estate loans are primarily  adjustable rate loans
with  terms of up to 15  years,  with the rate tied to the Wall  Street  Journal
prime rate.

         Commercial  Loans.  Commercial  loans  generally  are  deemed to entail
significantly greater risk than that which is involved with real estate lending.
The  repayment of  commercial  loans  typically  is dependent on the  successful
operations  and income stream of the borrower.  Such risks can be  significantly
affected by economic  conditions.  In  addition,  commercial  lending  generally
requires  substantially  greater  oversight efforts compared to residential real
estate lending.

         Commercial   loans  are   generally   provided  to  various   types  of
closely-held  businesses  located  principally  in the Company's  primary market
area.  The  Company's  business  loans  may be  structured  as term  loans or as
revolving lines of credit.  Commercial loans generally have terms of seven years
or less and interest rates which are fixed or float in accordance with the prime
rate.  Commercial  loans generally are secured by equipment,  machinery or other
corporate assets and the Company generally obtains personal  guarantees from the
principals of the borrower.

                                       6
<PAGE>

         Consumer Loans. Consumer loans primarily consist of indirect automobile
loans.  Indirect automobile loans are generally originated with terms of up to 6
years depending on the age of the  automobiles.  Indirect  automobile  loans are
underwritten  by the Registrant  and a fee is remitted to the automobile  dealer
upon the successful  underwriting and closing of the loan. The fee is rebated to
the  Company,  on a pro rata basis,  if the loan is repaid  within the first six
months.  The Company  generally  does not have recourse  against the  automobile
dealer in the event of a default by the  borrower.  Each  indirect  auto loan is
originated  in  accordance  with  the  Company's   underwriting   standards  and
procedures,  which are intended to assess the  applicant's  ability to repay the
amounts due on the loan and the adequacy of the financed  vehicle as collateral.
Indirect  automobile  loans are  secured  by the new or used  automobile.  Loans
secured by assets that depreciate  rapidly,  such as automobiles,  are generally
considered to entail greater risks than one-to- four family residential loans.

         The Company's  other consumer loans include credit card loans,  student
loans,  and secured and unsecured  personal  loans.  Secured  consumer loans are
generally  collateralized by secondary liens on real estate.  Unsecured consumer
loans are only made up to $20,000.

         Loan  Solicitation  and  Processing.  The Company's  primary  source of
mortgage loan  applications  is referrals from existing or past  customers.  The
Company also solicits loan applications  from real estate brokers,  contractors,
and  call-ins  and  walk-ins to its  offices.  The Company  advertises  in local
newspapers for first mortgage and home equity loans.

         Upon receipt of any loan  application  from a prospective  borrower,  a
credit  report and  verifications  are ordered to confirm  specific  information
relating to the loan  applicant's  employment,  income and credit  standing.  An
appraisal of the real estate  intended to secure the proposed loan is undertaken
by an independent fee appraiser.  In connection with the loan approval  process,
the  Bank's  loan  officers  analyze  the  loan  applications  and the  property
involved.  All  residential,   home  equity,   multi-family,   construction  and
commercial  real estate loans are processed at the Company's  main office by the
Company's loan servicing  department.  The Board of Directors approves all loans
over $50,000.

         Loan applicants are promptly notified of the decision of the Company by
a letter  setting forth the terms and  conditions of the decision.  If approved,
these terms and conditions include the amount of the loan,  interest rate basis,
amortization  term,  a brief  description  of real estate to be mortgaged to the
Company,  tax escrow and the notice of requirement  of insurance  coverage to be
maintained  to protect  the  Company's  interest.  The  Company  requires  title
insurance  on  first  mortgage  loans  and fire and  casualty  insurance  on all
properties  securing loans, which insurance must be maintained during the entire
term of the loan.

         Loan  Commitments.  The Company,  generally grants  commitments to fund
fixed-rate  single-family  mortgage  loans  for  periods  of up to 90  days at a
specified  term and  interest  rate.  At  December  31,  2001,  total  aggregate
commitments to extend credit were $29.4 million.

Non-performing Loans and Problem Assets

         Loan  Delinquencies.  When a mortgage  loan becomes 15 days past due, a
notice of nonpayment  is sent to the  borrower.  If such payment is not received
within 15 days after the initial  notice has been sent, an additional  notice of
nonpayment  is  sent to the  borrower.  After  60  days,  if  payment  is  still
delinquent,  a notice of right to cure default is sent to the borrower giving 30
additional  days to bring the loan current before  foreclosure is commenced.  If
the loan continues in a delinquent  status for 90 days past

                                       7
<PAGE>

due  and no  repayment  plan  is in  effect,  foreclosure  proceedings  will  be
initiated. The customer will be notified when foreclosure is commenced.

         Loans are reviewed on a monthly  basis and are placed on a  non-accrual
status  when the loan  becomes  more  than 90 days  delinquent  or when,  in the
Company's opinion,  the collection of additional interest is doubtful.  Interest
accrued and unpaid at the time a loan is placed on nonaccrual  status is charged
against  interest  income.  Subsequent  interest  payments,  if any,  are either
applied to the  outstanding  principal  balance or recorded as interest  income,
depending on the assessment of the ultimate collectibility of the loan.

         Non-performing  Assets.  The  following  table sets  forth  information
regarding nonaccrual loans and real estate owned, as of the dates indicated. The
Company has no loans  categorized  as troubled  debt  restructurings  within the
meaning of the Statement of Financial  Accounting  Standards  ("SFAS") 15 and no
impaired loans within the meaning of SFAS 114, as amended by SFAS 118.  Interest
income that would have been  recorded  on loans  accounted  for on a  nonaccrual
basis  under the  original  terms of such loans was  $61,000  for the year ended
December 31, 2001, of which $24,000 was collected.

<TABLE>
<CAPTION>
                                                         At December 31,
                                             --------------------------------------
                                              2001    2000    1999    1998    1997
                                              ----    ----    ----    ----    ----
                                                        (In thousands)
<S>                                         <C>     <C>     <C>     <C>     <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
 One- to -four family .....................   $182    $201    $214    $204    $347
  All other mortgage loans ................     --      --      --      --      --
Non-mortgage loans:
  Commercial ..............................    169     206      --      20      33
  Consumer ................................    186     175     210     168     377
                                              ----    ----    ----    ----    ----
Total .....................................   $537    $582    $424    $392    $757
                                              ----    ----    ----    ----    ----
Accruing loans which are contractually
 past due 90 days or more:
Mortgage loans:
  One- to -four family ....................   $ --    $ --    $ --    $ 10    $ 61
  All other mortgage loans ................     --      --      --      --      --
Non-mortgage loans:
  Commercial ..............................     --      --      --      --      --
  Consumer ................................     56      83      73     125      52
                                              ----    ----    ----    ----    ----
Total .....................................   $ 56    $ 83    $ 73    $135    $113
                                              ----    ----    ----    ----    ----
Total non-performing loans ................   $593    $665    $497    $527    $870
Real estate owned .........................   $ --    $ --    $ --    $ --    $ 33
                                              ----    ----    ----    ----    ----
Total non-performing assets ...............   $593    $665    $497    $527    $903
                                              ====    ====    ====    ====    ====
Total non-performing loans to total loans .   0.43%   0.51%   0.42%   0.52%   0.87%
                                              ====    ====    ====    ====    ====
Total non-performing loans to total assets    0.19%   0.25%   0.19%   0.22%   0.40%
                                              ====    ====    ====    ====    ====
</TABLE>

                                       8
<PAGE>

         Classified   Assets.   Management,   in  compliance   with   regulatory
guidelines,  has instituted an internal loan review  program,  whereby loans are
classified as special  mention,  substandard,  doubtful or loss.  When a loan is
classified  as  substandard  or doubtful  management  is required to establish a
general  valuation  reserve for loan losses in an amount that is deemed prudent.
General  allowances  represent loss  allowances  which have been  established to
recognize inherent risk associated with lending  activities,  but which,  unlike
specific allowances,  have not been allocated to particular problem assets. When
management  classifies  a loan as a loss asset,  a reserve  equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.

         An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral  pledged,  if
any.   "Substandard"   assets  include  those  characterized  by  the  "distinct
possibility"  that the company will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the  weaknesses  present  make  "collection  or  liquidation  in full,"  "highly
questionable  and  improbable,"  on  the  basis  of  currently  existing  facts,
conditions,  and  values.  Assets  classified  as "loss"  are  those  considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
which do not  currently  expose the  company to a  sufficient  degree of risk to
warrant  classification  in one of the  aforementioned  categories  but  possess
credit  deficiencies  or  potential  weaknesses  are  required to be  designated
"special  mention" by management.  In addition,  each loan that exceeds $500,000
and each group of loans to one borrower that exceeds  $500,000 is monitored more
closely due to the potentially greater losses from such loans.

         Management's  evaluation  of  the  classification  of  assets  and  the
adequacy  of the  reserve  for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.

         The  following  table sets  forth the  Company's  classified  assets in
accordance with its classification system.

                                     At December 31, 2001
                                     --------------------
                                        (In thousands)
Special Mention                             $  576
Substandard                                    842
Doubtful                                        30
Loss                                            --
                                            ------
                                            $1,448
                                            ======

         Allowance  for Loan Losses.  A provision  for loan losses is charged to
operations based on management's  evaluation of the potential losses that may be
incurred in the Company's  loan  portfolio.  Such  evaluation,  which includes a
review of all loans of which full  collectibility  of interest and principal may
not be reasonably  assured,  considers the Company's past loan loss  experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the borrower's ability to repay,  estimated value of any underlying  collateral,
and current economic conditions.

         The  allowance  for loan  losses is based upon  management's  quarterly
review of the loan  portfolio.  The  purposes  of the  review is to assess  loan
quality,  analyze delinquencies,  evaluate potential  charge-offs,  and identify
potential problem loans.  Commercial  mortgage loans are selected for individual
review based

                                       9
<PAGE>

upon  delinquency  status or larger balance loans.  Consumer loans are generally
reviewed in the  aggregate  as they are of  relative  small  dollar  amounts and
homogeneous in nature.  Individual  loans reviewed are assigned  classifications
based upon the borrowers  delinquency  status and payment  history,  the overall
risk of the loan,  financial capacity of the borrower,  the collateral  securing
the loan,  overall  economic  conditions  in the market,  and  consideration  to
examinations given by regulatory authorities.

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

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

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

                                       10
<PAGE>

         The  following  table  sets forth  certain  information  regarding  the
Company's allowances for loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                       For the Year Ended December 31,
                                         --------------------------------------------------------
                                           2001        2000        1999        1998        1997
                                         --------    --------    --------    --------    --------
                                                              (In thousands)

<S>                                    <C>         <C>         <C>         <C>         <C>
Total loans outstanding ..............   $139,037    $130,088    $119,189    $100,418    $100,367
                                         ========    ========    ========    ========    ========
Average loans outstanding ............   $131,878    $125,964    $111,050    $ 99,253    $ 99,594
                                         ========    ========    ========    ========    ========
Allowance balance (at beginning of
  period) ............................   $  1,455    $  1,360    $  1,287    $  1,394    $  1,434
Provision for loan losses ............        520         555         410         365         555
Charge-offs:
  Mortgage loans (except
    commercial) ......................          -           8          15          23         119
  Commercial mortgages ...............          -           -           -           -           -
  Commercial .........................          -           -           -           9           -
  Consumer ...........................        498         503         373         495         533
                                         --------    --------    --------    --------    --------
     Sub-total .......................        498         511         388         527         652
                                         --------    --------    --------    --------    --------
Recoveries
   Mortgage loans (except
     commercial) .....................          -           1           1          12           8
   Commercial mortgage loans .........          -           -           -           -           6
   Commercial ........................          -           -           -           -           -
   Consumer ..........................         29          50          50          43          43
                                         --------    --------    --------    --------    --------
     Sub-total .......................         29          51          51          55          57
                                         --------    --------    --------    --------    --------
Net loans charged-off ................        469         460         337         472         595
                                         --------    --------    --------    --------    --------
Allowance balance, at end of period ..   $  1,506    $  1,455    $  1,360    $  1,287    $  1,394
                                         ========    ========    ========    ========    ========
Allowance for loan losses as a percent
  of total loans outstanding .........       1.08%       1.12%       1.14%       1.28%       1.39%
                                         ========    ========    ========    ========    ========
Net loans charged-off as a percent of
  average loans outstanding ..........       0.36%       0.37%       0.30%       0.48%       0.60%
                                         ========    ========    ========    ========    ========
</TABLE>

                                       11
<PAGE>

Allocation of Allowance for Loan Losses

         The following  table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable  for the periods  indicated.  The allocation of the allowance to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowances to absorb losses in any category.

<TABLE>
<CAPTION>
                                                                   At December 31,
                   -----------------------------------------------------------------------------------------------------------------
                         2001                  2000                   1999                   1998                   1997
                   ----------------------  ---------------------  ---------------------  --------------------- ---------------------
                           % of loans in          % of loans in          % of loans in          % of loans in         % of loans in
                           each category          each category          each category          each category         each category
                   Amount  to total loans  Amount to total loans  Amount to total loans  Amount to total loans Amount to total loans
                   ------  --------------  ------ --------------  ------ --------------  ------ -------------- ------ --------------
                                                                  (In thousands)
<S>              <C>        <C>           <C>         <C>        <C>         <C>        <C>       <C>        <C>         <C>
Mortgage loans...  $  259     47.60%        $ 260       46.56%     $ 266       46.76%     $ 285     50.69%     $ 397       46.83%
Commercial
  loans and
  lease..
  financing
  receivables....     282      8.32           197        7.54        122        3.97         72       3.60        71        2.46

Consumer loans...     965     44.08           998       45.90        972       49.27        930      45.71       926       50.71
                   ------    ------        ------      ------     ------      ------     ------     ------    ------      ------
                   $1,506    100.00%       $1,455      100.00%    $1,360      100.00%    $1,287     100.00%   $1,394      100.00%
                   ======    ======        ======      ======     ======      ======     ======     ======    ======      ======
</TABLE>

                                       12

<PAGE>

Investment Activities

         The Bank is required under federal  regulation to maintain a sufficient
level of liquid assets (including  specified  short-term  securities and certain
other  investments),  as determined  by management  and defined and reviewed for
adequacy  by the  Federal  Deposit  Insurance  Corporation  during  its  regular
examinations.  The Federal  Deposit  Insurance  Corporation,  however,  does not
prescribe by regulation a minimum  amount or percentage  of liquid  assets.  The
level of liquid assets varies depending upon several factors, including: (i) the
yields  on  investment  alternatives,  (ii)  management's  judgment  as  to  the
attractiveness of the yields then available in relation to other  opportunities,
(iii) expectation of future yield levels,  and (iv) management's  projections as
to the  short-term  demand  for funds to be used in loan  origination  and other
activities.

         Investment  securities,   including  mortgage-backed   securities,  are
classified  at the time of  purchase,  based upon  management's  intentions  and
abilities, as securities held to maturity or securities available for sale. Debt
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 the
level yield method and recognized as adjustments of interest  income.  All other
debt  securities are classified as available for sale to serve  principally as a
source of  liquidity.  At December 31, 2001,  the Company had no securities of a
single issuer,  excluding U.S.  government and agency securities,  that exceeded
10% of stockholder's equity.

         Current  regulatory  and  accounting  guidelines  regarding  investment
securities  (including  mortgage  backed  securities)  require  the  Company  to
categorize  securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2001, Company had securities classified as "held to maturity"
and  "available  for sale" in the  amount of $56.4  million  and $77.5  million,
respectively  and  had  no  securities   classified  as  "trading."   Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair  market  value with net  changes in the market  value from period to
period included as a separate  component of stockholders'  equity, net of income
taxes. At December 31, 2001, the Company's  securities available for sale had an
amortized cost of $76.2 million and market value of $77.5  million.  The changes
in market value in the Company's  available for sale  portfolio  reflect  normal
market conditions and vary, either positively or negatively,  based primarily on
changes in general levels of market interest rates relative to the yields of the
portfolio. Additionally, changes in the market value of securities available for
sale do not affect the Company's income nor does it affect the Bank's regulatory
capital requirements or its loan-to-one borrower limit.

         At December 31, 2001, the Company's investment portfolio policy allowed
investments in instruments  such as: (i) U.S.  Treasury  obligations,  (ii) U.S.
federal agency or federally sponsored agency obligations,  (iii) local municipal
obligations,  (iv) mortgage-backed  securities,  (v) banker's acceptances,  (vi)
certificates of deposit,  (vii)  investment grade corporate bonds and commercial
paper,  (viii)  real  estate  mortgage  investment  conduits,  and  (ix)  equity
securities. The Board of Directors may authorize additional investments.

         As  a  source  of  liquidity  and  to  supplement   Company's   lending
activities, the Company has invested in residential  mortgage-backed securities.
Mortgage-backed  securities can serve as collateral for borrowings and,  through
repayments,  as a source of liquidity.  Mortgage-backed  securities  represent a
participation  interest in a pool of  single-family  or other type of mortgages.
Principal  and  interest  payments  are passed  from the  mortgage  originators,
through  intermediaries  (generally  quasi-governmental  agencies) that pool and
repackage the participation  interests in the form of securities,  to investors,
like us. The

                                       13
<PAGE>

quasi-governmental  agencies  guarantee the payment of principal and interest to
investors and include Freddie Mac, Ginnie Mae, and Fannie Mae.

         Mortgage-backed  securities  typically are issued with stated principal
amounts.  The  securities  are backed by pools of mortgages that have loans with
interest  rates that are  within a set range and have  varying  maturities.  The
underlying  pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage  loans.  Mortgage-backed  securities are generally  referred to as
mortgage participation certificates or pass-through  certificates.  The interest
rate risk  characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable  rate) and the prepayment  risk, are passed on to the  certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying  mortgages.  Expected  maturities will differ from contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call  or  prepay   obligations   with  or  without   prepayment   penalties.
Mortgage-backed  securities  issued by Freddie  Mac,  Ginnie Mae, and Fannie Mae
make up a majority of the pass-through certificates market.

         The Company  also  invests in  mortgage-related  securities,  primarily
collateralized  mortgage  obligations  ("CMOs"),  issued or sponsored by Freddie
Mac, Ginnie Mae, and Fannie Mae, as well as private issuers.  CMOs are a type of
debt security that aggregates pools of mortgages and mortgage-backed  securities
and creates  different  classes of CMO  securities  with varying  maturities and
amortization  schedules  as well as a residual  interest  with each class having
different risk  characteristics.  The cash flows from the underlying  collateral
are usually divided into "tranches" or classes whereby  tranches have descending
priorities with respect to the distribution of principal and interest  repayment
of the underlying  mortgages and mortgage  backed  securities as opposed to pass
through mortgage backed  securities where cash flows are distributed pro rata to
all security holders. Unlike mortgage  backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders,  cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in  accordance  with a  predetermined  priority  to  investors  holding  various
tranches of such  securities or obligations.  A particular  tranche or class may
carry  prepayment  risk  which  may be  different  from  that of the  underlying
collateral  and other  tranches.  CMOs  attempt to  moderate  reinvestment  risk
associated  with   conventional   mortgage-backed   securities   resulting  from
unexpected prepayment activity.

                                       14
<PAGE>

         The  following  tables sets forth the carrying  value of the  Company's
investment  securities  held to maturity,  securities  available for sale,  FHLB
stock,  and interest  bearing  deposits and overnight  investments  at the dates
indicated.


                                             At December 31,
                                        ---------------------------
                                          2001      2000      1999
                                        -------   -------   -------
                                               (In thousands)
Investment and mortgage-backed
securities held to maturity:
  U.S. Government agency securities .   $23,490   $15,221   $12,554
  Obligations of states and political
     subdivisions ...................     2,769     2,555     2,986
  Mortgage-backed securities ........    30,180    38,780    44,141
                                        -------   -------   -------
     Total investment and
       mortgage-backed securities ...    56,439    56,556    59,681
  Interest-bearing deposits .........    28,195     5,094    11,417
  FHLB stock ........................     2,615     2,615     2,615
                                        -------   -------   -------
     Total investments ..............   $87,249   $64,265   $73,713
                                        =======   =======   =======

                                                  At December 31,
                                             -------   -------   -------
                                               2001      2000     1999
                                             -------   -------   -------
                                                   (In thousands)
Investment and mortgage-backed
securities available for sale:
  U.S. Government treasury securities ....   $ 1,037   $ 2,005   $ 4,959
  U.S. Government agency securities ......     1,089     7,035     6,000
  Real estate mortgage investment conduits        36        45        59
  Obligations of states and political
    subdivisions .........................    19,217    15,622    16,577
  Equity Securities ......................     1,523       107      --
  Mortgage-backed securities .............    54,604    38,415    37,426
                                             -------   -------   -------
     Total ...............................   $77,506   $63,229   $65,021
                                             =======   =======   =======

                                       15

<PAGE>

Investment and Mortgage-Backed Securities Maturities

         The  following  table  sets forth  certain  information  regarding  the
carrying  values,  weighted  average  yields  and  maturities  of the  Company's
investment and  mortgage-backed  securities  portfolio at December 31, 2001. The
table does not include interest bearing deposits or FHLB stock and does not take
into  consideration  the  effects  of  scheduled  repayments  or the  effects of
possible prepayments.

<TABLE>
<CAPTION>
                                                                                                              Total Investment and
                                                                                                            ------------------------
                                                                                                                Mortgage-backed
                             One Year or Less  One to Five Years    Five to Ten Years   More than Ten Years       Securities
                             ----------------  -----------------    -----------------   ------------------- ------------------------
                             Carrying Average  Carrying  Average    Carrying  Average   Carrying  Average  Carrying Average  Market
                               Value  Yield(1)   Value   Yield(1)    Value    Yield(1)   Value    Yield(1)  Value   Yield(1)  Value
                               -----  --------   -----   --------    -----    --------   -----    --------  -----   --------  -----
                                                                           (In thousands)
<S>                         <C>       <C>      <C>        <C>       <C>       <C>     <C>         <C>    <C>      <C>     <C>
Held to Maturity:
U.S. Government
  agency securities.......... $7,000    5.30%    $9,979     4.81%     $5,312    2.31%   $ 1,199     2.40%  $23,490   4.27%  $23,787
Obligations of
  states and political
  subdivisions...............     --      --         --       --        245     7.07      2,524     7.33     2,769   7.31     2,729
Mortgage-backed
  securities.................     --      --         --       --         --       --     30,180     6.64    30,180   6.64    30,444
                              ------             ------               ------            -------            -------          -------
    Total                     $7,000   5.30%     $9,979     4.81%     $5,557    2.52%   $33,903     6.54%  $56,439   5.69%  $56,960
                              ======   ====      ======     ====      ======    ====    =======    ====    =======   ====   =======
Available for Sale:
U.S. Government
  treasury................... $   --     --%     $1,037     5.61%    $   --       --%   $    --       --%  $ 1,037   5.61%  $ 1,037
U.S. Government
  agency securities..........     --     --       1,089     7.29         --       --         --       --     1,089   7.29     1,089
Obligations of states
  and political
  subdivisions...............  1,116   8.60       2,578     8.45        104     7.78     15,419     7.61    19,217   7.78    19,217
Real estate mortgage
  investment conduits........     --     --          --       --         --       --         36     3.02        36   3.02        36
Equity securities............  1,523   3.45          --       --         --       --         --       --     1,523   3.45     1,523
Mortgage-backed securities...      1   7.16          40     8.24      1,634     7.70     52,929     6.96    54,604   6.98    54,604
                              ------             ------               ------            -------            -------          -------
    Total                     $2,640   5.63%     $4,744     7.56%    $1,738     7.70%   $68,384     7.10%  $77,506   7.10%  $77,506
                              =======  ====      ======     ====     ======     ====     =======    ====    ======   ====   =======
</TABLE>

---------------------
(1)  Average  yields  on tax  exempt  obligations  have been  computed  on a tax
     equivalent basis of 34%.

                                       16
<PAGE>

Sources of Funds

         Deposits are the Company's  major external  source of funds for lending
and other  investment  purposes.  Funds are also  derived  from the  receipt  of
payments on loans and  prepayment  of loans and  maturities  of  investment  and
mortgage-backed  securities  and,  to  a  much  lesser  extent,  borrowings  and
operations.  Scheduled loan principal  repayments are a relatively stable source
of  funds,   while  deposit  inflows  and  outflows  and  loan  prepayments  are
significantly influenced by general interest rates and market conditions.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from  within the  Company's  primary  market  area  through  the  offering  of a
selection of deposit  instruments  including  regular  savings  accounts,  money
market accounts,  and term certificate accounts.  IRA accounts are also offered.
Deposit account terms vary according to the minimum balance  required,  the time
period the funds must remain on deposit,  and the  interest  rate.  The interest
rates paid by us on  deposits  are set weekly at the  direction  of the Board of
Directors.  Interest  rates  are  determined  based on the  Company's  liquidity
requirements,  interest  rates  paid  by  the  Company's  competitors,  and  the
Company's growth goals and applicable regulatory  restrictions and requirements.
At December 31, 2001, the Company had no brokered deposits.

         The following table indicates the amount of the Company's  certificates
of deposit of $100,000 or more by time  remaining  until maturity as of December
31, 2001.

                                         Certificates
         Maturity Period                  of Deposits
         ---------------                  -----------
                                        (In thousands)

         Within three months                $ 2,852
         Three through six months             2,398
         Six through twelve months            2,392
         Over twelve months                   6,739
                                            -------
                                            $14,381
                                            =======

Borrowings

         The Bank may obtain  advances from the FHLB of Pittsburgh to supplement
its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically
secured by a pledge of the Bank's stock in the FHLB of Pittsburgh  and a portion
of the Bank's first  mortgage  loans and certain other assets.  Each FHLB credit
program has its own interest rate, which may be fixed or variable,  and range of
maturities.  The Bank, if the need arises,  may also access the Federal  Reserve
Bank  discount  window to  supplement  its supply of lendable  funds and to meet
deposit withdrawal requirements.

                                       17
<PAGE>

         The following  table sets forth  information  concerning  FHLB advances
during the periods indicated (includes both short- and long-term advances).

                                                   At or For the Years
                                                    Ended December 31,
                                               ------------------------------
                                                 2001     2000      1999
                                                 -----    -----     ----

(In thousands)

FHLB advances:
  Average outstanding.....................     $47,592   $41,692   $ 39,829
  Maximum amount outstanding at any
    month-end during the year.............      51,195    44,295     50,295
  Weighted average interest rate during
     the year.............................        5.53%     5.77%      5.62%
  Total FHLB advances at end of period          50,325    36,195     50,295
  Weighted Year End Rate..................        5.41%     5.72%      5.62%

Personnel

         As of December 31, 2001, the Company had 73 full-time  employees and 18
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining unit. The Company believes its relationship  with its employees to be
satisfactory.

Regulation

         Set forth below is a brief  description of certain laws which relate to
the regulation and supervision of the Company and the Bank. The description does
not purport to be complete  and is  qualified  in its  entirety by  reference to
applicable laws and regulations.

Regulation of the Company

         General.  The Company is a bank holding  company under the Bank Holding
Company  Act of  1956,  as  amended,  and is  also  subject  to  regulation  and
supervision  by the Board of Governors of the Federal  Reserve System and by the
Pennsylvania  Department  of  Banking.  The  Company  is also  required  to file
annually a report of its operations  with, and is subject to examination by, the
Federal Reserve and the Pennsylvania  Department of Banking. This regulation and
oversight is generally intended to ensure that the Company limits its activities
to those allowed by law and that it operates in a safe and sound manner  without
endangering the financial health of its subsidiary bank.

         Under the Bank  Holding  Company Act, the Company must obtain the prior
approval of the Federal  Reserve before it is able to acquire control of another
bank or bank holding  company,  merge or  consolidate  with another bank holding
company,  acquire all or substantially all of the assets of another bank or bank
holding  company,  or acquire  direct or  indirect  ownership  or control of any
voting  shares of any bank or bank holding  company if, after such  acquisition,
the bank holding  company would  directly or indirectly own or control more than
5% of such shares.

                                       18
<PAGE>

         Federal  statutes impose  restrictions on the ability of a bank holding
company and its nonbank  subsidiaries  to obtain  extensions  of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the  holding  company,  and on the  subsidiary  bank's  taking of the holding
company's  stock or securities as collateral  for loans to any borrower.  A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.

         A bank  holding  company is required to serve as a source of  financial
and  managerial  strength  to its  subsidiary  banks  and  may not  conduct  its
operations in an unsafe or unsound manner. In addition,  it is the policy of the
Federal  Reserve that a bank holding company should stand ready to use available
resources to provide  adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial  flexibility and
capital-raising  capacity  to obtain  additional  resources  for  assisting  its
subsidiary  banks. A bank holding  company's  failure to meet its obligations to
serve  as a source  of  strength  to its  subsidiary  banks  will  generally  be
considered by the Federal Reserve to be an unsafe and unsound  banking  practice
or a violation of the Federal Reserve regulations, or both.

         Non-Banking  Activities.  The business  activities of the Company, as a
bank holding company,  are restricted by the Bank Holding Company Act. Under the
Bank  Holding  Company  Act and  the  Federal  Reserve's  bank  holding  company
regulations,  the  Company  may only  engage in, or  acquire  or control  voting
securities or assets of a company engaged in,

          1.   banking or managing or controlling  banks and other  subsidiaries
               authorized under the Bank Holding Company Act; and

          2.   any Bank Holding  Company Act  activity  the Federal  Reserve has
               determined  to be so closely  related to banking or  managing  or
               controlling banks to be a proper incident thereto.

These include any incidental  activities necessary to carry on those activities,
as well as a lengthy list of activities  that the Federal Reserve has determined
to be so closely related to the business of banking.

         Financial  Modernization.  The  Gramm-Leach-Bliley  Act permits greater
affiliation  among  banks,  securities  firms,  insurance  companies,  and other
companies under a new type of financial  services  company known as a "financial
holding  company." A financial  holding  company  essentially  is a bank holding
company with  significantly  expanded powers.  Financial  holding  companies are
authorized by statute to engage in a number of financial  activities  previously
impermissible for bank holding  companies,  including  securities  underwriting,
dealing and market making;  sponsoring  mutual funds and  investment  companies;
insurance underwriting and agency; and merchant banking activities. The act also
permits the Federal Reserve and the Treasury Department to authorize  additional
activities for financial  holding companies if they are "financial in nature" or
"incidental"  to  financial  activities.  A bank  holding  company  may become a
financial  holding company if each of its subsidiary banks is well  capitalized,
well managed,  and has at least a "satisfactory" CRA rating. A financial holding
company  must  provide  notice  to the  Federal  Reserve  within  30 days  after
commencing activities previously determined by statute or by the Federal Reserve
and Department of the Treasury to be permissible.  The Company has not submitted
notice to the  Federal  Reserve of our intent to be deemed a  financial  holding
company.

         Regulatory  Capital  Requirements.  The  Federal  Reserve  has  adopted
capital  adequacy  guidelines  pursuant  to which it  assesses  the  adequacy of
capital in examining  and  supervising  a bank holding  company and in analyzing
applications  to it under the Bank Holding  Company  Act. The Federal  Reserve's
capital

                                       19
<PAGE>

adequacy  guidelines  are  similar to those  imposed on the Bank by the  Federal
Deposit Insurance Corporation.  See "Regulation of the Bank - Regulatory Capital
Requirements."

         Restrictions on Dividends.  The  Pennsylvania  Banking Code states,  in
part,  that  dividends  may be  declared  and paid only out of  accumulated  net
earnings and may not be declared or paid unless surplus  (retained  earnings) is
at least equal to  contributed  capital.  The Bank has not  declared or paid any
dividends that have caused its retained  earnings to be reduced below the amount
required.  Finally,  dividends  may not be  declared  or paid if the  Bank is in
default  in  payment  of  any  assessment  due  the  Federal  Deposit  Insurance
Corporation.

         The  Federal  Reserve has issued a policy  statement  on the payment of
cash dividends by bank holding companies,  which expresses the Federal Reserve's
view that a bank holding  company  should pay cash  dividends only to the extent
that the holding  company's  net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding  company's  capital  needs,  asset  quality  and  overall  financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a  company  experiencing  serious  financial  problems  to  borrow  funds to pay
dividends.  Furthermore, under the federal prompt corrective action regulations,
the  Federal  Reserve  may  prohibit  a bank  holding  company  from  paying any
dividends  if  the  holding   company's   bank   subsidiary   is  classified  as
"undercapitalized."

Regulation of the Bank

         General. As a Pennsylvania chartered savings bank with deposits insured
by the  Savings  Association  Insurance  Fund of the Federal  Deposit  Insurance
Corporation,  the Bank is subject to extensive regulation and examination by the
Pennsylvania  Department  of  Banking  and  by  the  Federal  Deposit  Insurance
Corporation,  which insures its deposits to the maximum extent permitted by law.
The federal and state laws and regulations  applicable to banks regulate,  among
other  things,  the scope of their  business,  their  investments,  the reserves
required  to be  kept  against  deposits,  the  timing  of the  availability  of
deposited  funds and the nature and amount of and  collateral for certain loans.
The laws and regulations  governing the Bank generally have been  promulgated to
protect  depositors  and not for the purpose of  protecting  stockholders.  This
regulatory structure also gives the federal and state banking agencies extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes. Any change in such regulation,  whether by the Pennsylvania Department
of Banking,  the Federal  Deposit  Insurance  Corporation  or the United  States
Congress, could have a material impact on us and our operations.

         Federal law  provides the federal  banking  regulators,  including  the
Federal Deposit Insurance  Corporation and the Federal Reserve, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties,  to issue  cease-and-desist  or removal
orders,  and to initiate  injunctive  actions against banking  organizations and
institution-affiliated  parties,  as  defined.  In  general,  these  enforcement
actions may be initiated for  violations of laws and  regulations  and unsafe or
unsound  practices.  Other  actions  or  inactions  may  provide  the  basis for
enforcement  action,   including  misleading  or  untimely  reports  filed  with
regulatory authorities.

         Pennsylvania  Savings Bank Law. The Pennsylvania  Banking Code contains
detailed provisions governing the organization,  location of offices, rights and
responsibilities  of trustees,  officers,  and  employees,  as well as corporate
powers,  savings and investment operations and other aspects of the Bank and its
affairs.  The code  delegates  extensive  rule-making  power and  administrative
discretion to the

                                       20
<PAGE>

Pennsylvania  Department of Banking so that the  supervision  and  regulation of
state-chartered  savings banks may be flexible and readily responsive to changes
in economic conditions and in savings and lending practices.

         The code also  provides  state-chartered  savings banks with all of the
powers enjoyed by federal savings and loan  associations,  subject to regulation
by the  Pennsylvania  Department  of  Banking.  The  Federal  Deposit  Insurance
Corporation  Act,  however,  prohibits  a  state-chartered  bank from making new
investments,  loans, or becoming  involved in activities as principal and equity
investments which are not permitted for national banks unless:

1.   the  Federal  Deposit  Insurance  Corporation  determines  the  activity or
     investment  does  not  pose a  significant  risk  of  loss  to the  Savings
     Association Insurance Fund; and

2.   the bank meets all applicable capital requirements.

Accordingly,  the additional  operating  authority provided to us by the code is
significantly restricted by the Federal Deposit Insurance Act.

         Federal Deposit Insurance. The Federal Deposit Insurance Corporation is
an  independent  federal  agency that  insures the  deposits,  up to  prescribed
statutory  limits,  of  federally  insured  banks and savings  institutions  and
safeguards the safety and soundness of the banking and savings  industries.  The
Federal Deposit Insurance Corporation  administers two separate insurance funds,
the Bank Insurance  Fund,  which  generally  insures  commercial  bank and state
savings  bank  deposits,  and the  Savings  Association  Insurance  Fund,  which
generally insures savings association deposits.  The Bank which was previously a
state savings association, remains a member of the Savings Association Insurance
Fund and its  deposit  accounts  are insured by the  Federal  Deposit  Insurance
Corporation, up to prescribed limits.

         The Federal  Deposit  Insurance  Corporation is authorized to establish
separate  annual  deposit  insurance  assessment  rates for  members of the Bank
Insurance  Fund and the  Savings  Association  Insurance  Fund,  and to increase
assessment rates if it determines such increases are appropriate to maintain the
reserves of either  insurance fund. In addition,  the Federal Deposit  Insurance
Corporation  is  authorized  to  levy  emergency  special  assessments  on  Bank
Insurance  Fund and Savings  Association  Insurance  Fund  members.  The Federal
Deposit Insurance  Corporation's deposit insurance premiums are assessed through
a risk-based system under which all insured  depository  institutions are placed
into one of nine  categories  and assessed  insurance  premiums based upon their
level of capital  and  supervisory  evaluation.  The Federal  Deposit  Insurance
Corporation  has  set  the  deposit  insurance   assessment  rates  for  Savings
Association  Insurance Fund member institutions for the first six months of 2001
at 0% to .027% of insured deposits on an annualized  basis,  with the assessment
rate for most institutions set at 0%.

         In addition,  all  institutions  with  deposits  insured by the Federal
Deposit  Insurance  Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation,  an agency of the Federal
government   established  to   recapitalize   the  predecessor  to  the  Savings
Association  Insurance Fund. The assessment rate for 2001 is approximately .019%
of  insured  deposits.  These  assessments  will  continue  until the  Financing
Corporation bonds mature in 2017.

         Regulatory   Capital   Requirements.   The  Federal  Deposit  Insurance
Corporation has promulgated  capital adequacy  requirements for  state-chartered
banks that, like us, are not members of the Federal Reserve System.  At December
31,  2001,  the Bank  exceeded  all  regulatory  capital  requirements  and were
classified as "well capitalized."

                                       21
<PAGE>

         The  Federal  Deposit  Insurance   Corporation's   capital  regulations
establish a minimum 3% Tier 1 leverage  capital  requirement for the most highly
rated state-chartered,  non-member banks, with an additional cushion of at least
100 to 200 basis points for all other  state-chartered,  non-member banks, which
effectively  increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more. Under the Federal Deposit Insurance Corporation's  regulation,
the highest-rated banks are those that the Federal Deposit Insurance Corporation
determines are not anticipating or experiencing significant growth and have well
diversified  risk,  including no undue  interest rate risk  exposure,  excellent
asset  quality,  high  liquidity,  good  earnings  and,  in  general,  which are
considered a strong banking  organization,  rated  composite 1 under the Uniform
Financial  Institutions  Rating System. Tier 1 or core capital is defined as the
sum of common stockholders' equity (including retained earnings),  noncumulative
perpetual  preferred  stock and  related  surplus,  and  minority  interests  in
consolidated  subsidiaries,  minus all  intangible  assets  other  than  certain
purchased mortgage servicing rights and purchased credit card relationships.

         The Federal Deposit  Insurance  Corporation's  regulations also require
that state-chartered,  non-member banks meet a risk-based capital standard.  The
risk-based  capital standard requires the maintenance of total capital (which is
defined as Tier 1 capital and  supplementary  (Tier 2) capital) to risk weighted
assets of 8%. In determining  the amount of  risk-weighted  assets,  all assets,
plus certain off balance sheet assets,  are multiplied by a risk-weight of 0% to
100%, based on the risks the Federal Deposit Insurance  Corporation believes are
inherent in the type of asset or item.  The components of Tier 1 capital for the
risk-based standards are the same as those for the leverage capital requirement.
The components of supplementary  (Tier 2) capital include  cumulative  perpetual
preferred stock,  mandatory  subordinated  debt,  perpetual  subordinated  debt,
intermediate-term  preferred  stock,  up to 45% of  unrealized  gains on  equity
securities and a bank's allowance for loan and lease losses.  Allowance for loan
and lease losses includable in supplementary  capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of supplementary capital that
may be included in total capital is limited to 100% of Tier 1 capital.

         A bank that has less than the minimum leverage  capital  requirement is
subject to various  capital plan and activities  restriction  requirements.  The
Federal  Deposit  Insurance  Corporation's  regulations  also  provide  that any
insured  depository  institution  with a ratio of Tier 1 capital to total assets
that is less  than  2.0% is deemed  to be  operating  in an  unsafe  or  unsound
condition  pursuant to Section  8(a) of the Federal  Deposit  Insurance  Act and
could be subject to potential termination of deposit insurance.

         The Bank is  subject  to minimum  capital  requirements  imposed by the
Pennsylvania   Department  of  Banking  on   Pennsylvania-chartered   depository
institutions.   Under  the   Pennsylvania   Department   of  Banking's   capital
regulations,  a  Pennsylvania  bank or  savings  bank  must  maintain  a minimum
leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance
Corporation's  capital  regulations)  to total  assets of 4%. In  addition,  the
Pennsylvania  Department of Banking has the supervisory  discretion to require a
higher  leverage  ratio  for  any  institutions   based  on  the   institution's
substandard  performance in any of a number of areas. The Bank was in compliance
with  both  the  Federal  Deposit  Insurance  Corporation  and the  Pennsylvania
Department of Banking capital requirements as of December 31, 2001.

         Affiliate  Transaction  Restrictions.  Federal laws strictly  limit the
ability  of banks to engage in  transactions  with their  affiliates,  including
their bank holding  companies.  Such transactions  between a subsidiary bank and
its parent company or the nonbank  subsidiaries  of the bank holding company are
limited to 10% of a bank  subsidiary's  capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20% of
the bank  subsidiary's  capital and surplus.  Further,  loans and  extensions of
credit generally are required to be secured by eligible  collateral in

                                       22
<PAGE>

specified  amounts.  Federal law also requires that all  transactions  between a
bank and its  affiliates  be on terms as favorable  to the bank as  transactions
with non-affiliates.

         Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank of  Pittsburgh,  which is one of 12 regional  Federal Home Loan Banks.
Each  Federal Home Loan Bank serves as a reserve or central bank for its members
within its  assigned  region.  It is funded  primarily  from funds  deposited by
member  institutions  and proceeds from the sale of consolidated  obligations of
the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in
accordance with policies and procedures  established by the board of trustees of
the Federal Home Loan Bank.

         As a member, the Bank is required to purchase and maintain stock in the
Federal Home Loan Bank of  Pittsburgh in an amount equal to the greater of 1% of
its aggregate  unpaid  residential  mortgage loans,  home purchase  contracts or
similar  obligations  at the  beginning  of each  year or 5% of our  outstanding
advances from the Federal Home Loan Bank. At December 31, 2001,  the Bank was in
compliance with this requirement.

         Federal  Reserve System.  The Federal  Reserve  requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against their  transaction  accounts  (primarily  checking and NOW accounts) and
non-personal  time  deposits.  The  balances  maintained  to  meet  the  reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department.  At December 31, 2001, the Bank
met its reserve requirements.

         Loans to One  Borrower.  Under  Pennsylvania  and federal law,  savings
banks have, subject to certain exemptions,  lending limits to one borrower in an
amount equal to 15% of the  institution's  capital  accounts.  An  institution's
capital  account  includes  the  aggregate of all  capital,  surplus,  undivided
profits, capital securities and general reserves for loan losses. As of December
31, 2001, our loans-to-one borrower limitation was $7.9 million and the Bank was
in compliance with such limitation.

Item  2.  Description of Property
---------------------------------

         (a)      Properties

                  At  December  31,  2001,  the Company  operated  from its main
office, 9 branch offices and an administrative office located in the counties of
Beaver and Lawrence,  Pennsylvania.  All offices are owned except for one branch
office.  The lease has an initial  term of 10 years,  with a renewal  option for
additional years.

           (b)    Investment  Policies.  See  "Item 1.  Business"  above  for  a
general  description of the Registrant's  investment policies and any regulatory
or Board of  Directors'  percentage  of  assets  limitations  regarding  certain
investments.  The  Registrant's  investments  are primarily  acquired to produce
income, and to a lesser extent, possible capital gain.

                  (1)   Investments  in Real Estate or Interests in Real Estate.
See "Item 1.  Business - Lending  Activities  and - Regulation of the Bank," and
"Item 2. Description of Property."

                  (2)   Investments  in  Real  Estate  Mortgages.  See  "Item 1.
Business - Lending Activities and - Regulation of the Bank."

                                       23
<PAGE>


                  (3)   Investments  in  Securities  of or Interests in  Persons
Primarily  Engaged in Real Estate  Activities.  See "Item 1.  Business - Lending
Activities and - Regulation of the Bank."

         (c)     Description of Real Estate and Operating Data.  Not applicable.

Item 3.  Legal Proceedings
-------  -----------------

         There are various  claims and lawsuits in which the Company or the Bank
are  periodically  involved,  such as  claims  to  enforce  liens,  condemnation
proceedings  on properties in which the Bank holds  security  interests,  claims
involving  the making and  servicing of real  property  loans,  and other issues
incident to the Bank's business. In the opinion of management,  no material loss
is expected from any of such pending claims or lawsuits.

Item 4.  Submission of Matters to a Vote of Security-Holders
-------  ---------------------------------------------------

         On  December 18, 2001,  PHS  Bancorp,  Inc., the  predecessor  company,
held a meeting of stockholders to approve the conversion and reorganization. The
proposal was approved by the following votes:

                  FOR                  AGAINST              ABSTAIN
                  ---                  -------              -------
               2,077,499                6,290                  0


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-------  --------------------------------------------------------

         Information  relating to the market for Registrant's  common equity and
related  stockholder  matters  appears under " Stock Market  Information" in the
Registrant's  Annual Report to  Stockholders  for the fiscal year ended December
31, 2001 ("Annual Report") and is incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation
-------  ---------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item 7.  Financial Statements
-------  --------------------

         The   Registrant's   financial   statements   listed  in  Item  13  are
incorporated herein by reference.

Item 8.  Changes  In  and  Disagreements  with  Accountants  on  Accounting  and
-------  -----------------------------------------------------------------------
         Financial Disclosure
         --------------------

         None.

                                       24
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
------- ------------------------------------------------------------------------
        with Section 16(a) of the Exchange Act.
        ---------------------------------------

         The  information  required  under this item is  incorporated  herein by
reference  to the  Proxy  Statement  for the 2002  Annual  Meeting  (the  "Proxy
Statement")  contained under the sections  captioned  "Section 16(a)  Beneficial
Ownership  Reporting  Compliance,"  "Proposal I - Election of Directors," and "-
Biographical Information."

Item 10.  Executive Compensation
--------  ----------------------

         The  information  required by this item is incorporated by reference to
the  Proxy  Statement  contained  under  the  section  captioned  "Director  and
Executive Officer Compensation."

Item 11.  Security Ownership of Certain Beneficial Owners and Management
--------  --------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners
         (b)      Security Ownership of Management
                  The information  required by items (a) and (b) is incorporated
                  herein by reference to the Proxy Statement contained under the
                  sections  captioned  "Principal  Holders"  and  "Proposal  I -
                  Election of Directors."

         (c)      Management of the Company knows of no arrangements,  including
                  any pledge by any person of  securities  of the  Company,  the
                  operation of which may at a subsequent date result in a change
                  in control of the Company.

Item 12.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section   captioned   "Certain   Relationships  and  Related
Transactions" in the Proxy Statement.

Item 13.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
--------  ---------------------------------------------------------------

         (a) Listed below are all  financial  statements  and exhibits  filed as
part of this report.

     1.   The consolidated  statements of financial conditions of PHSB Financial
          Corporation  and  subsidiary as of December 31, 2001 and 2000, and the
          related  consolidated  statements of income,  changes in stockholders'
          equity and cash  flows for each of the two years in the  period  ended
          December 31, 2001, together with the related notes and the independent
          accountants' report of S.R. Snodgrass, A.C., independent accountants.


                                       25
<PAGE>

     2.   The  following  exhibits are  included in this Report or  incorporated
          herein by reference:

          (3)      Exhibits

          (a)      The following exhibits are filed as part of this report.

           3.1     Articles of Incorporation of PHSB Financial Corporation*
           3.2     Bylaws of PHSB Financial Corporation*
           4.0     Specimen Stock Certificate of PHSB Financial Corporation*
          10.1     Employment Agreement between Peoples Home Savings Bank and
                   James P. Wetzel, Jr.*
          10.2     1998 Restricted Stock Plan**
          10.3     1998 Stock Option Plan**
          10.4     Employment Agreement between Peoples Home Savings Bank and
                     Richard E. Canonge
          13.0     Portions of Annual Report to Stockholders for the fiscal
                   year ended December 31, 2001
          21.0     Subsidiary of the Registrant (see "Item 1 - Business")
          23.0     Consent of Accountants

---------------
*         Incorporated   by  reference  to   Registrant's   Registration
          Statement on Form SB-2 initially filed with the Securities and
          Exchange   Commission   on   September   10,  2001  (File  No.
          333-69180).
 **       Incorporated by reference to the identically numbered exhibits
          to PHS  Bancorp,  Inc.'s  Form  10-Q  for  the  quarter  ended
          September 30, 1998 and filed with the  Securities and Exchange
          Commission on November 13, 1998 (File No. 0-23230).

          (b)      Reports on Form 8-K.

          None

                                       26
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 28, 2002.

                                            PHSB FINANCIAL CORPORATION


                                   By:      /s/James P. Wetzel, Jr.
                                            ------------------------------------
                                            James P. Wetzel, Jr.
                                            President, Chief Executive
                                            Officer and Director
                                            (Duly Authorized Representative)

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities indicated as of March 28, 2002.


<TABLE>
<CAPTION>
<S>                                   <C>
/s/James P. Wetzel, Jr.                 /s/Richard E. Canonge
----------------------------------      ----------------------------------------------
James P. Wetzel, Jr.                    Richard E. Canonge
President, Chief Executive Officer      Vice President, Treasurer, and Chief Financial
  and Director                            Officer
(Principal Executive Officer)           (Principal Financial Officer)


/s/Joseph D. Belas                      /s/Douglas K. Brooks
----------------------------------      ----------------------------------------------
Joseph D. Belas                         Douglas K. Brooks
Director                                Director


/s/Emlyn Charles                        /s/John C. Kelly
----------------------------------      ----------------------------------------------
Emlyn Charles                           John C. Kelly
Director                                Director

/s/Earl F. Klear                        /s/Howard B. Lenox
----------------------------------      ----------------------------------------------
Earl F. Klear                           Howard B. Lenox
Director                                Director

/s/John M. Rowse
----------------------------------
John M. Rowse
Director

</TABLE>