[GRAPHIC OMITTED]






                                 PHSB Financial
                                   Corporation


                                      2003
                                     ANNUAL
                                     REPORT


<PAGE>




                                 PHSB FINANCIAL
                                   CORPORATION
                               2003 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...............................................14

Consolidated Balance Sheet...................................................15

Consolidated Statement of Income.............................................16

Consolidated Statement of Changes in Stockholders' Equity....................17

Consolidated Statement of Cash Flows.........................................18

Notes to Consolidated Financial Statements...................................19

Office Locations and Other Corporate Information.............................53




<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, 2003.

         The year 2003 was a  challenging  year for the Company.  A weak economy
and  interest  rates  that  fell to  forty  year  lows  impacted  the  Company's
operations.  The low  interest  rates  produced a wave of  refinancing  and loan
modifications.  The  sluggish  economy  resulted in a net  reduction in our loan
portfolio of $12.2  million from year end 2002.  In addition,  deposit rates did
not decrease as rapidly as loan and security rates, as some deposit rates hit an
effective floor.

         These factors led to a reduction in the Company's net interest  income,
and will make for a challenging  2004. In spite of these  factors,  however,  we
continued to report strong earnings,  which were augmented by security sales. In
2003,  we earned  $2,723,000 or $1.01 per basic share and $.98 per diluted share
as compared to $2,625,000 or $.87 per basic share and $.85 per diluted share for
2002.

         During  2003,  we  undertook  measures to enhance  your  investment  by
repurchasing  approximately  145,000  Treasury  Shares  along with paying a $.50
Special Dividend which in addition to our regular quarterly dividend resulted in
a total of $.90 per share for the year. These enhancements were made possible by
our record earnings and the strong financial condition of the Company.

         As the company  enters 2004,  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 customer's 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

                                        1

<PAGE>

                           PHSB FINANCIAL CORPORATION
                        SELECTED FINANCIAL AND OTHER DATA


<TABLE>
<CAPTION>
Selected Financial Data
----------------------------------------------------------------------------------------------------------
December 31                                             2003       2002       2001       2000       1999
----------------------------------------------------------------------------------------------------------
                                                                        (in thousands)
<S>                                               <C>        <C>        <C>        <C>        <C>
Assets ..........................................   $339,970   $345,537   $315,382   $265,330   $268,640
Loans, net ......................................    153,584    165,668    137,001    129,017    118,745
Mortgage-backed securities held to maturity .....     55,843     70,346     30,180     38,780     44,141
Mortgage-backed securities available
  for sale ......................................     75,911     44,137     54,604     38,415     37,426
Investment securities held to maturity ..........      7,952     19,275     26,260     17,776     15,540
Investment securities available for sale ........     28,719     27,233     22,902     24,814     27,595
Interest-bearing deposits with other institutions        754      1,284     28,195      5,094     11,417
Federal Home Loan Bank stock ....................      3,607      3,620      2,615      2,615      2,615
Deposits ........................................    231,519    232,367    210,015    198,242    189,345
Other borrowings ................................       --         --           28         75        120
Advances from Federal Home Loan Bank ............     58,880     61,008     50,325     36,195     50,295
Stockholders' equity(1) .........................     46,650     49,360     52,835     28,850     26,751
</TABLE>


<TABLE>
<CAPTION>
Selected Consolidated Operating Data
----------------------------------------------------------------------------------------------------------
Year Ended December 31,                                 2003       2002       2001       2000       1999
----------------------------------------------------------------------------------------------------------
                                                                       (in thousands)
<S>                                               <C>        <C>        <C>        <C>        <C>
Interest income .................................   $ 17,585   $ 19,856   $ 19,316   $ 19,035   $ 17,511
Interest expense ................................      8,743      9,800     10,537     10,448      9,284
                                                    --------   --------   --------   --------   --------
  Net interest income ...........................      8,842     10,056      8,779      8,587      8,227
Provision for loan losses .......................        620        735        520        555        410
                                                    --------   --------   --------   --------   --------
  Net interest income after provision
    for loan losses..............................      8,222      9,321      8,259      8,032      7,817
Total non-interest income .......................      2,707      1,170      1,008        854        764
Total non-interest expense ......................      7,323      7,176      6,294      6,000      6,094
                                                    --------   --------   --------   --------   --------
Income before income taxes ......................      3,606      3,315      2,973      2,886      2,487
Income taxes ....................................        883        690        752        714        629
                                                    --------   --------   --------   --------   --------
  Net income ....................................   $  2,723   $  2,625   $  2,221   $  2,172   $  1,858
                                                    ========   ========   ========   ========   ========
</TABLE>
                          (footnotes on following page)

                                        2

<PAGE>

<TABLE>
<CAPTION>
Other Selected Data
--------------------------------------------------------------------------------------------------------------------
At or for the Year Ended December 31,                            2003          2002           2001           2000          1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>            <C>            <C>           <C>
Return on average assets (net income
  divided by average total assets)....................          0.80%         0.78%          0.78%          0.81%         0.73%
Return on average equity (net income
  divided by average equity assets)...................          5.78%         5.15%          7.31%          7.95%         6.68%
Dividend payout ratio.................................         89.50%        39.60%         44.65%         42.02%        40.03%
Average equity to average assets .....................         13.91%        15.23%         10.69%         10.22%        10.86%
Net interest rate spread (1)..........................          2.60%         2.94%          3.10%          3.18%         3.15%
Per Share Information:
  Diluted earnings per share(2).......................          $0.98         $0.85          $0.70          $0.67         $0.56
  Tangible book value per share(2)....................         $16.07        $16.31         $15.11          $8.81         $7.92
Non-performing assets to total assets.................          0.13%         0.13%          0.19%          0.25%         0.19%
Non-performing loans to total loans...................          0.26%         0.25%          0.43%          0.51%         0.42%
Allowance for loan losses to total loans..............          1.07%         1.01%          1.08%          1.12%         1.14%
</TABLE>

------------------
(1)  Interest  income is shown on a tax equivalent  basis assuming a 34% federal
     income tax rate.
(2)  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.

                                        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 canceled 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, 2003, we had assets
of $340.0 million, net loans of $153.6 million,  deposits of $231.5 million, and
stockholder's equity of $46.6 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, 2003, the Company's common
stock closed at $21.50.


                                                                   DIVIDENDS
                                                                   DECLARED
QUARTER ENDED                  HIGH                  LOW           PER SHARE
-------------                  ----                  ---           ---------
December 31, 2003              $21.95              $18.49            $0.60
September 30, 2003              19.09               17.49             0.10
June 30, 2003                   18.52               16.90             0.10
March 31, 2003                  17.90               15.50             0.10
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


         The number of  stockholders  of record of common stock as of the record
date on March 5, 2004, was  approximately  783. This does not reflect the number
of persons or  entities  who held stock in  nominee  or  "street"  name  through
various  brokerage  firms.  At  March  5,  2004,  there  were  2,903,353  shares
outstanding.

                                        4

<PAGE>

         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,  2003 of $340.0  million  represented  a
decrease of $5.5  million or 1.6% from  December  31,  2002.  This  decrease was
primarily  due to a decrease in loans,  net of allowance for loan loss, of $12.1
million,  partially  offset by an increase  in  investment  and  mortgage-backed
securities of $7.4 million.

         Loans  receivable at December 31, 2003 of $153.6 million  represented a
decrease of $12.1  million or 7.3% from $165.6  million at  December  31,  2002.
Mortgage,  commercial and consumer loans decreased by $4.2 million, $3.9 million
and $4.1 million,  respectively.  These  decreases  were primarily due to weaker
loan demand and higher  prepayment  levels during the year. The commercial  loan
portfolio  primarily  consists  of  loans  to local  municipalities  and  school
districts,  while the majority of the consumer loan  portfolio  consists of auto
loans originated through local dealers.

         Investment  and  mortgage-backed  securities  increased $7.4 million to
$168.4  million at December 31, 2003,  from $161.0 million at December 31, 2002.
This increase was primarily the result of purchases of $118.1 million which were
partially  offset by sales of $10.8  million,  maturities  of $36.3  million and
principal repayments of $63.6 million.

         Total deposits at December 31, 2003 were $231.5 million,  a decrease of
$900,000 or 0.4% from $232.4 million at December 31, 2002.

                                        5

<PAGE>

         Advances from the Federal Home Loan Bank of Pittsburgh  decreased  $2.1
million to $58.9 million at December 31, 2003 from $61.0 million at December 31,
2002.  This  decrease  was the result of $9.1 million in  maturities,  partially
offset by $7.0 million in new borrowings.

         Stockholders' equity decreased $2.7 million for the year ended December
31, 2003. This decrease was primarily due to stock  repurchases of $2.5 million,
cash  dividends paid of $2.4 million,  an increase in unallocated  RSP shares of
$519,000,  and a decrease in accumulated other comprehensive income of $657,000.
These decreases to  stockholders'  equity were partially offset by net income of
$2.7 million and proceeds from stock option exercises of $293,000,  along with a
decreases in unallocated ESOP shares of $433,000.

                                        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,
                                               -------------------------------------------------------------------------------------
                                                            2003                          2002                       2001
                                               -----------------------------  ---------------------------  ------------------------
                                                 Average              Yield/   Average             Yield/  Average           Yield/
                                                 Balance  Interest     Cost    Balance  Interest    Cost   Balance  Interest  Cost
                                                 -------  --------     ----    -------  --------    ----   -------  --------  ----
ASSETS                                                                           (Dollars in Thousands)
<S>                                           <C>        <C>         <C>    <C>       <C>         <C>   <C>      <C>        <C>
Interest-earning assets:
 Loans(1) (2).................................  $163,565   $11,375     6.95%  $154,349  $11,758     7.62% $131,878 $10,821    8.21%
 Mortgage-backed securities...................    71,619     2,959     4.13     42,630    2,364     5.55    34,718   2,237    6.44
 Investment securities(2) (3).................    19,533       568     2.91     39,337    1,356     3.45    30,573   1,583    5.18
 Securities available for sale (2)............    72,635     3,512     4.84     87,146    5,299     6.08    75,962   5,258    6.92
                                                --------   -------            --------  -------           -------- -------
  Total interest-earning assets...............   327,352    18,414     5.63    323,462   20,777     6.42   273,131  19,899    7.29
                                                           -------                      -------                    -------
Noninterest-earning assets....................    11,418                        11,208                      11,012
                                                --------                      --------                    --------
  Total assets................................  $338,770                      $334,670                    $284,143
                                                ========                      ========                    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Savings(4)..................................  $ 35,755       298     0.83%  $ 32,624      373     1.14% $ 29,589     542    1.83%
  NOW and money markets.......................    71,018       362     0.51     67,490      562     0.83    62,895   1,150    1.83
  Time deposits...............................   125,821     5,134     4.08    123,421    5,766     4.67   111,539   6,213    5.57
  Advances from FHLB..........................    56,462     2,949     5.22     57,862    3,098     5.35    47,592   2,632    5.53
                                                --------   -------            --------  -------           -------- -------
  Total interest-bearing liabilities..........   289,056     8,743     3.02    281,397    9,799     3.48   251,615  10,537    4.19
                                                           -------                      -------                    -------
Non-interest bearing liabilities..............     2,588                         2,292                       2,157
                                                --------                      --------                    --------
 Total liabilities............................   291,644                       283,689                     253,772
Stockholders' equity..........................    47,126                        50,981                      30,371
                                                --------                      --------                    --------
 Total liabilities and retained earnings......  $338,770                      $334,670                    $284,143
                                                ========                      ========                    ========
Net interest income, interest rate spread(4)..              $9,671     2.60%            $10,978     2.94%          $ 9,362    3.10%
                                                            ======     ====             =======     ====           =======    ====
Net yield on interest-earning assets..........                         2.95%                        3.39%                     3.43%
                                                                       ====                         ====                      ====
Ratio of average interest-earning assets
 to average interest-bearing liabilities.....                        113.25%                      114.95%                   108.55%
                                                                     ======                       ======                    ======
</TABLE>
_________________________________
(1)  Average balances include non-accrual loans.
(2)  Interest  income is shown on a tax equivalent  basis assuming a 34% federal
     income tax rate.
(3)  Includes interest-bearing deposits in other financial institutions.
(4)  Includes advances by borrowers for taxes and insurance.

                                        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,
                                      -----------------------------------------------------------------
                                                2003 vs. 2002                    2002 vs. 2001
                                      -------------------------------      ----------------------------
                                             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) ..........................   $   702    $(1,085)   $  (383)   $ 1,844   $  (907)   $   937
 Mortgage-backed securities .........     1,608     (1,013)       595        510      (383)       127
 Investment securities (1) ..........      (683)      (105)      (788)       454      (681)      (227)
 Securities available for sale (1) ..      (882)      (905)    (1,787)       774      (733)        41
                                        -------    -------    -------    -------   -------    -------
  Total interest-earning assets .....       745     (3,108)    (2,363)     3,582    (2,704)       878
                                        -------    -------    -------    -------   -------    -------

Interest expense:
  Savings ...........................        36       (111)       (75)        56      (225)      (169)
  NOW and money markets .............        29       (229)      (200)        84      (672)      (588)
  Time deposits .....................       112       (744)      (632)       662    (1,109)      (447)
  Advances from FHLB ................       (75)       (74)      (149)       568      (102)       466
                                        -------    -------    -------    -------   -------    -------
   Total interest-bearing liabilities       102     (1,158)    (1,056)     1,370    (2,107)      (738)
                                        -------    -------    -------    -------   -------    -------
Net change in net interest income ...   $   643    $(1,950)   $(1,307)   $ 2,212   $  (596)   $ 1,616
                                        =======    =======    =======    =======   =======    =======
</TABLE>

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

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002

         General.  Net income for the year ended  December 31, 2003 increased by
$98,000 to  $2,723,000,  from  $2,625,000  for the year ended December 31, 2002.
This increase was primarily due to a $1,537,000  increase in non-interest income
and a $115,000 decrease in loan loss provisions. This increase to net income was
partially  offset by a  $1,214,000  decrease in net  interest  income along with
increases  in  non-interest  expense and income tax  provisions  of $146,000 and
$193,000, respectively.

         Net Interest Income.  Reported net interest income decreased $1,214,000
or 12.1% for the year ended  December  31, 2003.  Net  interest  income on a tax
equivalent  basis decreased by $1,307,000 or 11.9% in a period when both average
interest-earning  assets  and  average  interest-bearing  liabilities  increased
(increased $3.9 million, or 1.2%, and $7.7 million, or 2.7%, respectively).  The
Company's  interest  rate spread on a tax  equivalent  basis  decreased 34 basis
points  (with 100 basis  points  being  equal to 1%) to 2.60% for the year ended
December  31,  2003 as compared to 2.94% in 2002.  The tax  equivalent  basis is
calculated utilizing the statutory rate of 34%.

                                        8

<PAGE>

         Interest Income. Reported interest income decreased $2,271,000 to $17.6
million  for the year ended  December  31,  2003,  from $19.9  million for 2002.
Interest  income on a tax equivalent  basis totaled $18.4 million for year ended
December 31, 2003, a decrease of  $2,363,000,  or 11.4%,  from $20.8 million for
the year ended December 31, 2002.  This decrease was primarily due to a 79 basis
point  decrease  in the yield  earned  partially  offset by an  increase  in the
Company's average interest-earning assets of $3.9 million, or 1.2%, for the year
ended December 31, 2003. Interest earned on loans decreased  $383,000,  or 3.3%,
in 2003. This decrease was due to a 67 basis point decrease in the yield earned,
partially  offset by a $9.2 million,  or 6.0% increase in the average balance of
loans.   Interest  earned  on  interest-bearing   deposits  and  investment  and
mortgage-backed  securities  (including securities available for sale) decreased
$2.0  million,  or 22.0%,  in 2003.  This  decrease was due to a decrease in the
average balance of securities of $5.3 million,  or 3.1%,  along with a 103 basis
point decrease in the yield earned.

         Interest Expense. Interest expense decreased $1,056,000 to $8.7 million
for the year ended December 31, 2003.  The decrease in interest  expense was due
to a 46 basis point decrease in the average cost of interest-bearing liabilities
to 3.09% partially  offset by a $7.7 million,  or 2.7%,  increase in the average
balance of interest-bearing  liabilities.  The $7.7 million, or 2.7% increase in
the average balance of interest- bearing liabilities was the result of increased
average  deposits of $9.1 million,  or 4.1%,  partially  offset by a decrease in
average borrowings of $1.4 million, or 2.4%.

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

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

         The provision for loan losses decreased by $115,000 to $620,000 for the
year ended  December 31,  2003,  from  $735,000 for the year ended  December 31,
2002. A decrease in loans  precipitated  the decrease in the  provision for loan
losses.  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 $1,537,000 to
$2.7 million for the year ended  December  31,  2003,  from $1.2 million for the
year ended December 31, 2002.  This increase was primarily due to an increase in
gains on sales of investment securities of $1,437,000 from $168,000 for the year
ended  December 31, 2002 to $1.6  million for the year ended  December 31, 2003.
The $1,437,000  increase in security gains resulted from management  reacting to
opportunities  to sell securities  without  significantly  impacting the overall
effective  yield of the investment  portfolio.  Management  continues to closely
monitor the  investment  portfolio  for other  similar  opportunities  which may
become available.

         Non-interest  Expense.  Non-interest expense increased $146,000 to $7.3
million for the year ended  December  31,  2003,  from $7.2 million for the year
ended  December 31, 2002.  This  increase  was  primarily  due to an increase in
compensation and employee benefits of $296,000 which was primarily the result of
normal merit increases, partially offset by a $133,000 decrease in occupancy and
equipment costs.

                                        9

<PAGE>

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
spread on a tax equivalent basis decreased 16 basis points 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

                                       10

<PAGE>

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.

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

                                       11

<PAGE>

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,  2003,  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  (21.59)%  and  15.49%,  respectively.  Net  interest  income
decreased by $502,000 or 5.1% for a downward  shift in rates of 200 basis points
and  decreased  by $156,000 or 1.3%,  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 23.52% and
18.63% 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,
2003,  2002 and 2001  the  Company  originated  loans  in the  amounts  of $83.5
million,  $98.0  million  and $67.4  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, 2003,
2002 and 2001, the Company purchased  investment and mortgage-backed  securities
in  the  amounts  of  $118.1   million,   $111.7   million  and  $55.4  million,
respectively.

         The Company has other  sources of  liquidity  if a need for  additional
funds arises,  such as advances from the FHLB of Pittsburgh.  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

                                       12

<PAGE>

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.

         Contractual  Obligations.  The following table  represents  significant
fixed and determinable  contractual obligations to third parties by payment date
as of December 31, 2003.

<TABLE>
<CAPTION>
                                                                 Less Than                                      After
                                                    Total          1 Year      1-3 Years      3-5 Years        5 Years
                                                    -----          ------      ---------      ---------        -------
<S>                                             <C>             <C>            <C>            <C>            <C>
Deposits without a stated maturity......          $107,496        $107,496       $     -        $     -        $     -
Certificates of deposit.................           124,023          65,119        31,580         25,374          1,950
FHLB advances...........................            58,880           6,250        11,130         19,000         22,500
Operating leases........................               359             103           167             69             20
                                                  --------        --------       -------        -------        -------
    Total...............................          $290,758        $178,968       $42,877        $44,443        $24,470
                                                  ========        ========       =======        =======        =======
</TABLE>

         The  following  table  represents  our  commitments  to extend  credit,
including unused lines of credit, as of December 31, 2003.


<TABLE>
<CAPTION>
                                                                 Less Than                                       Over
                                                    Total          1 Year      1-3 Years      3-5 Years        5 Years
                                                    -----          ------      ---------      ---------        -------
<S>                                             <C>             <C>          <C>            <C>            <C>
Commitments to extend credit:
   Mortgage loans......................           $   267         $   267     $       -      $       -       $      -
   Commercial loans....................             1,100           1,100             -              -              -
   Consumer loans......................             2,203           2,203             -              -              -
Unused commercial credit lines.........             2,526           2,526             -              -              -
Unused consumer credit lines...........            16,395          16,395             -              -              -
Commercial letters of credit...........                20              20             -              -              -
                                                  -------         -------     ---------      ---------       --------
    Total..............................           $22,511         $22,511     $       -      $       -       $      -
                                                  =======         =======     =========      =========       ========
</TABLE>

         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 16 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  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.

                                       13


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS




Board of Directors and Stockholders
PHSB Financial Corporation

We have audited the  accompanying  consolidated  balance sheet of PHSB Financial
Corporation  and  subsidiary  as of December 31, 2003 and 2002,  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, 2003.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of PHSB
Financial  Corporation  and subsidiary as of December 31, 2003 and 2002, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2003, in conformity  with  accounting  principles
generally accepted in the United States of America.


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


Wexford, PA
January 16, 2004

                                       14
<PAGE>

                           PHSB FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                   2003            2002
                                                              ------------    ------------
<S>                                                         <C>             <C>
ASSETS
     Cash and amounts due from other institutions             $  6,795,068    $  6,938,217
     Interest-bearing deposits with other institutions             753,727       1,283,752
                                                              ------------    ------------
         Cash and cash equivalents                               7,548,795       8,221,969
     Investment securities:
         Available for sale                                     28,718,832      27,233,227
         Held to maturity (market value $8,203,053
           and $19,611,078)                                      7,952,211      19,274,753
     Mortgage-backed securities:
         Available for sale                                     75,910,915      44,137,225
         Held to maturity (market value $56,194,217
           and $71,826,914)                                     55,843,363      70,346,358
     Loans (net of allowance for loan losses of $1,647,886
       and $1,683,596)                                         153,584,123     165,668,214
     Accrued interest receivable                                 1,573,295       1,998,773
     Premises and equipment                                      4,227,498       4,604,005
     Federal Home Loan Bank stock                                3,606,600       3,620,300
     Other assets                                                1,003,979         431,881
                                                              ------------    ------------
             TOTAL ASSETS                                     $339,969,611    $345,536,705
                                                              ============    ============
LIABILITIES
     Deposits                                                 $231,519,432    $232,366,672
     Advances from Federal Home Loan Bank                       58,880,000      61,007,800
     Accrued interest payable and other liabilities              2,920,291       2,802,061
                                                              ------------    ------------

             TOTAL LIABILITIES                                 293,319,723     296,176,533
                                                              ------------    ------------
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; 3,519,711 and 3,497,109 issued           351,971         349,711
     Additional paid-in capital                                 32,750,510      32,329,518
     Retained earnings - substantially restricted               23,857,117      23,571,132
     Accumulated other comprehensive income                      1,540,849       2,197,377
     Unallocated shares held by Employee Stock
       Ownership Plan (ESOP)                                    (2,023,187)     (2,276,111)
     Unallocated shares held by Restricted Stock Plan (RSP)       (518,654)              -
     Treasury stock, at cost (616,358 and 471,357 shares)       (9,308,718)     (6,811,455)
                                                              ------------    ------------
             TOTAL STOCKHOLDERS' EQUITY                         46,649,888      49,360,172
                                                              ------------    ------------
             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $339,969,611    $345,536,705
                                                              ============    ============
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       15

<PAGE>

                           PHSB FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                             2003          2002          2001
                                                          -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
INTEREST INCOME
      Loans:
          Taxable                                         $ 9,788,932   $10,520,699   $10,433,463
          Exempt from federal income tax                    1,046,888       816,618       255,365
      Investment securities:
          Taxable                                             861,030     1,580,707     1,673,638
          Exempt from federal income tax                      561,851       972,567       875,533
      Mortgage-backed securities                            5,278,467     5,802,854     5,795,239
      Interest-bearing deposits with other institutions        47,892       162,267       282,720
                                                          -----------   -----------   -----------
               Total interest income                       17,585,060    19,855,712    19,315,958
                                                          -----------   -----------   -----------
INTEREST EXPENSE
      Deposits                                              5,793,852     6,700,653     7,904,943
      Advances from Federal Home Loan Bank                  2,949,286     3,098,728     2,631,809
                                                          -----------   -----------   -----------
               Total interest expense                       8,743,138     9,799,381    10,536,752
                                                          -----------   -----------   -----------

               Net interest income                          8,841,922    10,056,331     8,779,206

PROVISION FOR LOAN LOSSES                                     620,000       735,000       520,000
                                                          -----------   -----------   -----------

NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                           8,221,922     9,321,331     8,259,206
                                                          -----------   -----------   -----------
NONINTEREST INCOME
      Service charges on deposit accounts                     717,957       639,283       594,701
      Investment securities gains, net                      1,605,389       168,027        58,118
      Rental income                                           103,050        92,483        97,808
      Other income                                            280,978       270,361       257,886
                                                          -----------   -----------   -----------
               Total noninterest income                     2,707,374     1,170,154     1,008,513
                                                          -----------   -----------   -----------
NONINTEREST EXPENSE
      Compensation and employee benefits                    4,263,367     3,967,772     3,356,733
      Occupancy and equipment costs                         1,247,362     1,380,076     1,304,825
      Data processing costs                                   195,428       198,566       193,188
      Other expenses                                        1,617,073     1,630,165     1,439,539
                                                          -----------   -----------   -----------
               Total noninterest expense                    7,323,230     7,176,579     6,294,285
                                                          -----------   -----------   -----------
Income before income taxes                                  3,606,066     3,314,906     2,973,434
Income taxes                                                  883,211       689,731       752,331
                                                          -----------   -----------   -----------
               NET INCOME                                 $ 2,722,855   $ 2,625,175   $ 2,221,103
                                                          ===========   ===========   ===========

EARNINGS PER SHARE
      Basic                                               $      1.01   $      0.87   $      0.70
      Diluted                                                    0.98          0.85          0.70
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       16

<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         ESOP           RSP        Stock       Equity       Income
                 --------  ----------  ------------- --------------  ------------- --------------  ---------------- --------------
<S>             <C>      <C>          <C>             <C>           <C>         <C>          <C>          <C>          <C>
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

Net income                               2,722,855                                                           2,722,855 $ 2,722,855
Other
comprehensive
income (loss):
  Unrealized
  loss on
  available
  for sale
  securities,
  net of tax of
  benefit
  ($338,211)                                             (656,528)                                            (656,528)   (656,528)
                                                                                                                       -----------
Comprehensive
  income                                                                                                               $ 2,066,327
                                                                                                                       ===========
Cash dividends
  declared
  ($.90 per
  share)                                (2,436,870)                                                         (2,436,870)
ESOP shares
  released                    180,561                                   252,924                                433,485
Treasury stock
  purchased,
  at cost                                                                                      (2,497,263)  (2,497,263)
Common stock
  acquired
  by RSP                      (76,568)                                              (771,157)                 (847,725)
Issuance of
  common stock      2,260     290,818                                                                          293,078
RSP shares
  released                     26,181                                                252,503                   278,684
                 -------- ----------- -----------      ----------   -----------    ---------  -----------  -----------
Balance,
  December
  31, 2003       $351,971 $32,750,510 $23,857,117      $1,540,849   $(2,023,187)   $(518,654) $(9,308,718) $46,649,888
                 ======== =========== ===========      ==========   ===========    =========  ===========  ===========

                                                                        2003         2002         2001
                                                                    -----------  -----------  -----------
Components of comprehensive income:
  Change in net unrealized gain on
    investments held for sale                                       $   403,029  $ 1,451,477  $   438,188
  Realized gains included in net income,
    net of tax of $545,832, $57,129, and $19,760                     (1,059,557)    (110,898)     (38,358)
                                                                    -----------  -----------  -----------
Total                                                               $  (656,528) $ 1,340,579  $   399,830
                                                                    ===========  ===========  ===========
</TABLE>
See accompanying notes to the consolidated financial statements

                                       17
<PAGE>

                                             PHSB FINANCIAL CORPORATION
                                        CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                    --------------------------------------------
                                                                         2003            2002            2001
                                                                    ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
OPERATING ACTIVITIES
Net income                                                          $  2,722,855    $  2,625,175    $  2,221,103
Adjustments to reconcile net income to net
  cash provided by operating activities:
     Provision for loan losses                                           620,000         735,000         520,000
     Provision for depreciation                                          509,374         688,004         652,309
     Amortization of discounts, premiums,
       and loan origination fees                                       1,747,276       1,363,478       1,195,295
     Investment securities gains, net                                 (1,605,389)       (168,027)        (58,118)
     Deferred income tax                                                  87,714        (112,244)         29,156
     Decrease (increase) in accrued interest receivable                  425,478        (319,741)        (53,612)
     Increase (decrease) in accrued interest payable                    (213,846)        761,222          28,896
     Amortization of ESOP unearned compensation                          433,485         339,777         131,520
     Amortization of RSP unearned compensation                           278,684         280,687         128,513
     Other, net                                                         (262,828)       (572,813)       (415,731)
                                                                    ------------    ------------    ------------
              Net cash provided by operating activities                4,742,803       5,620,518       4,379,331
                                                                    ------------    ------------    ------------

INVESTING ACTIVITIES
     Investment and mortgage-backed securites available for sale:
        Proceeds from sales                                           10,767,399       9,762,943       1,862,276
        Proceeds from maturities and principal repayments             49,209,510      30,603,655      24,221,862
        Purchases                                                    (92,708,414)    (32,199,422)    (39,748,386)
     Investment and mortgage-backed securities held to maturity:
        Proceeds from maturities and principal repayments             50,711,324      46,254,615      15,741,702
        Purchases                                                    (25,366,693)    (79,540,243)    (15,699,383)
     Decrease (increase) in loans, net                                10,086,300     (30,550,489)     (9,544,876)
     Proceeds from sales of repossessed assets                           467,584         380,407         412,018
     Purchase of premises and equipment                                 (132,867)       (262,016)     (1,044,929)
     Redemption (purchase) of Federal Home Loan Bank stock                13,700      (1,005,500)              -
                                                                    ------------    ------------    ------------
              Net cash provided by (used for) investing activities     3,047,843     (56,556,050)    (23,799,716)
                                                                    ------------    ------------    ------------

FINANCING ACTIVITIES
     Increase (decrease) in deposits, net                               (847,240)     22,352,028      11,772,943
     Proceeds from advances from Federal Home Loan Bank                7,000,000      16,000,000      23,130,000
     Repayment of advances from Federal Home Loan Bank                (9,127,800)     (5,317,000)     (9,000,000)
     Repayment of other borrowings                                             -               -               -
     Common stock acquired by ESOP                                             -               -      (1,760,950)
     Proceeds from sale of common stock                                        -               -      21,226,263
     Proceeds from exercise of stock option                              293,078               -               -
     Common stock acquired by RSP                                       (847,725)              -               -
     Capital contributed from MHC                                              -               -       2,955,314
     Cash dividends paid                                              (2,436,870)     (1,039,619)       (991,801)
     Purchase of treasury stock                                       (2,497,263)     (7,021,256)       (325,197)
                                                                    ------------    ------------    ------------
              Net cash provided by (used for) financing activities    (8,463,820)     24,974,153      47,006,572
                                                                    ------------    ------------    ------------

              Increase (decrease) in cash and cash equivalents          (673,174)    (25,961,379)     27,586,187

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                    8,221,969      34,183,348       6,597,161
                                                                    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                            $  7,548,795    $  8,221,969    $ 34,183,348
                                                                    ============    ============    ============
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       18

<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
----------------------------------------------

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.

                                       19

<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 are 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.

                                       20

<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.

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.

                                       21

<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:

<TABLE>
<CAPTION>
                                                    2003               2002              2001
                                              -----------------  -----------------  ----------------
<S>                                         <C>                <C>                <C>
Net income as reported                        $      2,722,855   $      2,625,175   $     2,221,103
Less pro forma expense related to option               147,316            187,360            44,044
                                              -----------------  -----------------  ----------------
Pro forma net income                          $      2,575,539   $      2,437,815   $     2,177,059
                                              =================  =================  ================
Basic net income per common share:
     As reported                              $           1.01   $           0.87   $          0.70
     Pro forma                                            0.96               0.81              0.69
Diluted net income per common share:
     As reported                              $           0.98   $           0.85   $          0.70
     Pro forma                                            0.93               0.79              0.68
</TABLE>

For purposes of computing pro forma results,  the Company  estimated fair values
of stock  options  using  the  Black-Scholes  option-pricing  model.  The  model
requires use of subjective  assumptions  that can  materially  affect 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: (1) expected dividend
yield of 1.02 percent; (2) risk-free interest rate of 3.78 percent; (3) expected
volatility of 8 percent; and (4) expected option lives of ten years.

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, 2003,  2002,  and 2001,  the Company made cash
payments for interest of $8,956,984, $9,038,159, and $10,507,856,  respectively.
The Company also made cash payments for income taxes of $515,321,  $966,520, and
$665,000, respectively, during these same periods.

                                       22

<PAGE>

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In December  2003, the Financial  Accounting  Standards  Board ("FASB")  revised
Statement  of  Financial   Accounting  Standards  ("FAS")  No.  132,  Employers'
Disclosures  about  Pension and Other  Postretirement  Benefit.  This  statement
retains  the  disclosures  required  by FAS  No.  132,  which  standardized  the
disclosure  requirements for pensions and other  postretirement  benefits to the
extent practicable and requires additional information on changes in the benefit
obligations  and  fair  value of plan  assets.  Additional  disclosures  include
information   describing  the  types  of  plan  assets,   investment   strategy,
measurement  date(s),  plan  obligations,  cash  flows,  and  components  of net
periodic benefit cost recognized during interim periods.  This statement retains
reduced disclosure  requirements for nonpublic entities from FAS No. 132, and it
includes reduced disclosure for certain of the new requirements.  This statement
is effective for financial  statements  with fiscal years ending after  December
15, 2003. The interim  disclosures  required by this statement are effective for
interim periods beginning after December 15, 2003.

In August 2001,  the FASB issued 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
was effective  January 1, 2003, did not have a material  effect 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  is  effective  for  exit or  disposal
activities initiated after December 31, 2002. The adoption of this statement did
not have a material  effect on the  Company's  financial  position or results of
operations.

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.

                                       23

<PAGE>

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In April 2003,  the FASB  issued FAS No.  149,  Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities.  This  statement  amends  and
clarifies  accounting for derivative  instruments,  including certain derivative
instruments  embedded in other contracts,  and for hedging  activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial  reporting by
requiring  that  contracts  with  comparable  characteristics  be accounted  for
similarly.  In particular,  this statement  clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as  discussed  in FAS No. 133.  In  addition,  it  clarifies  when a  derivative
contains a financing  component that warrants special reporting in the statement
of cash flows.  FAS No.149 amends certain other existing  pronouncements.  Those
changes  will  result  in  more  consistent  reporting  of  contracts  that  are
derivatives in their entirety or that contain embedded  derivatives that warrant
separate  accounting.  This statement is effective for contracts entered into or
modified  after  September  30,  2003,  except as stated  below and for  hedging
relationships  designated  after  September  30, 2003.  The  guidance  should be
applied  prospectively.  The provisions of this statement that relate to FAS No.
133  Implementation  Issues that have been  effective  for fiscal  quarters that
began prior to September 15, 2003,  should  continue to be applied in accordance
with their respective effective dates. In addition,  certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet  exist,  should  be  applied  to  existing  contracts  as well as new
contracts  entered into after September 30, 2003. The adoption of this statement
did not have a material effect on the Company's financial position or results of
operations.

In May 2003,  the FASB issued FAS No.  150,  Accounting  for  Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity. This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Such  instruments may have
been previously  classified as equity. This statement is effective for financial
instruments  entered  into or modified  after May 31,  2003,  and  otherwise  is
effective at the beginning of the first interim period beginning after September
15, 2003. The adoption of this  statement did not have a material  effect on the
Company's reported equity.

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. The adoption of this  interpretation did
not have a material  effect on the  Company's  financial  position or results of
operations.

                                       24

<PAGE>

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In  January,  2003,  the FASB issued  Interpretation  No. 46,  Consolidation  of
Variable Interest Entities,  in an effort to expand upon and strengthen existing
accounting  guidance  that  addresses  when  a  company  should  include  in its
financial  statements the assets,  liabilities and activities of another entity.
The  objective  of this  interpretation  is not to restrict  the use of variable
interest entities but to improve financial  reporting by companies involved with
variable  interest  entities.  Until now,  one company  generally  has  included
another entity in its  consolidated  financial  statements only if it controlled
the  entity  through  voting  interests.  This  interpretation  changes  that by
requiring a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns or both. The  consolidation  requirements of this  interpretation  apply
immediately to variable  interest  entities  created after January 31, 2003. The
consolidation  requirements  apply to older entities in the first fiscal year or
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  In October,
2003, the FASB decided to defer to the fourth quarter from the third quarter the
implementation  date for  Interpretation  No. 46. This  deferral only applies to
variable  interest entities that existed prior to February 1, 2003. The adoption
of this  interpretation has not and is not expected to have a material effect on
the Company's financial position or results of operations.

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>
                                                  2003          2002          2001
                                               ----------    ----------    ----------
<S>                                           <C>           <C>           <C>
Weighted-average common shares
     outstanding                                3,511,238     3,497,109     3,534,910

Average treasury stock shares                    (581,312)     (240,356)     (277,425)

Average unearned ESOP and RSP shares             (237,931)     (230,818)      (83,014)
                                               ----------    ----------    ----------

Weighted-average common shares and
     common stock equivalents used to
     calculate basic earnings per share         2,691,995     3,025,935     3,174,471

Additional common stock equivalents
     (stock options) used to calculate
     diluted earnings per share                    91,141        51,307        21,135
                                               ----------    ----------    ----------
Weighted-average common shares and
     common stock equivalents used
     to calculate diluted earnings per share    2,783,136     3,077,242     3,195,606
                                               ==========    ==========    ==========
</TABLE>

                                       25

<PAGE>

3.   INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                               2003
                                          -------------------------------------------------------------------------------
                                                                    Gross                Gross             Estimated
                                              Amortized           Unrealized          Unrealized            Market
                                                Cost                Gains               Losses               Value
                                          ------------------   -----------------   ------------------  ------------------
<S>                                     <C>                  <C>                 <C>                 <C>
Available for Sale
U.S. Treasury securities                  $       4,988,501    $            999    $              -    $       4,989,500
U.S. Government agency
  securities                                      9,550,555              64,617              (3,127)           9,612,045
Obligations of states and
  political subdivisions                          4,593,629             280,619                   -            4,874,248
Corporate securities                              1,100,000              19,915                   -            1,119,915
Real estate mortgage
  investment conduits                                16,518                  53                   -               16,571
                                          ------------------   -----------------   ------------------  ------------------
           Total debt securities                 20,249,203             366,203              (3,127)          20,612,279

Equity securities                                 6,937,088           1,182,790             (13,325)           8,106,553
                                          ------------------   -----------------   ------------------  ------------------

           Total                          $      27,186,291    $      1,548,993 $           (16,452) $        28,718,832
                                          ==================   =================   ==================  ==================
</TABLE>

<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                                 4,152,600             382,491            (205,006)           4,330,085
                                          ------------------   -----------------   ------------------  ------------------

           Total                          $      26,049,217    $      1,389,016    $       (205,006)   $      27,233,227
                                          ==================   =================   ==================  ==================
</TABLE>

                                       26

<PAGE>

3.   INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                                               2003
                                          -------------------------------------------------------------------------------
                                                                    Gross                Gross             Estimated
                                              Amortized           Unrealized          Unrealized            Market
                                                Cost                Gains               Losses               Value
                                          ------------------   -----------------   ------------------  ------------------
<S>                                     <C>                  <C>                 <C>                 <C>
Held to Maturity
U.S. Government agency
  securities                              $       5,696,790    $        165,200    $            -      $       5,861,990
Obligations of states and
  political subdivisions                          2,255,421              85,642                 -              2,341,063
                                          ------------------   -----------------   ------------------  ------------------

           Total                          $       7,952,211    $        250,842    $            -      $       8,203,053
                                          ==================   =================   ==================  ==================
</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>

The amortized cost and estimated market value of debt securities at December 31,
2003, 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                   $      14,140,543    $     14,142,180    $       1,491,940   $       1,548,860
Due after one year through
  five years                                      3,641,022           3,847,206            1,000,000           1,030,310
Due after five years through
  ten years                                               -                   -            2,783,440           2,862,967
Due after ten years                               2,467,638           2,622,893            2,676,831           2,760,916
                                          ------------------   -----------------   ------------------  ------------------

      Total                               $      20,249,203    $     20,612,279    $       7,952,211   $       8,203,053
                                          ==================   =================   ==================  ==================
</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:

<TABLE>
<CAPTION>
                                                                     2003                2002                2001
                                                               -----------------   ------------------  ------------------
<S>                                                           <C>                 <C>                 <C>
     Proceeds from sales                                       $     10,767,399    $       9,762,943   $       1,862,276
     Gross gains                                                      1,605,389              178,176              58,118
     Gross losses                                                             -               10,149                   -
</TABLE>

Investment  securities with an amortized cost of $15,247,346 and $19,728,173 and
an estimated  market value of $15,474,035 and $20,015,528 were pledged to secure
public deposits at December 31, 2003 and 2002, respectively.

                                       27
<PAGE>

4.   MORTGAGE-BACKED SECURITIES

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

<TABLE>
<CAPTION>
                                                                              2003
                                          -------------------------------------------------------------------------------
                                                                    Gross                Gross             Estimated
                                              Amortized           Unrealized          Unrealized            Market
                                                Cost                Gains               Losses               Value
                                          ------------------   -----------------   ------------------  ------------------
<S>                                     <C>                  <C>                 <C>                 <C>
Available for Sale
Government National Mortgage
   Association securities                 $      16,423,465    $        942,726    $              -    $      17,366,191
Federal Home Loan Mortgage
   Corporation securities                        31,863,514              80,567            (320,230)          31,623,851
Federal National Mortgage
   Association securities                        26,821,857             209,696            (110,680)          26,920,873
                                          ------------------   -----------------   ------------------  ------------------

            Total                         $      75,108,836    $      1,232,989    $       (430,910)   $      75,910,915
                                          ==================   =================   ==================  ==================
</TABLE>

<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>

<TABLE>
<CAPTION>
                                                                               2003
                                          -------------------------------------------------------------------------------
                                                                    Gross                Gross             Estimated
                                              Amortized           Unrealized          Unrealized            Market
                                                Cost                Gains               Losses               Value
                                          ------------------   -----------------   ------------------  ------------------
<S>                                     <C>                  <C>                 <C>                 <C>
Held to Maturity
Government National Mortgage
   Association securities                 $       7,650,980    $        396,426    $              -    $       8,047,406
Federal Home Loan Mortgage
   Corporation securities                        32,588,872              42,890            (193,863)          32,437,899
Federal National Mortgage
   Association securities                        15,603,511             133,038             (27,637)          15,708,912
                                          ------------------   -----------------   ------------------  ------------------

            Total                         $      55,843,363    $        572,354    $       (221,500)   $      56,194,217
                                          ==================   =================   ==================  ==================
</TABLE>

                                       28

<PAGE>

4.   MORTGAGE-BACKED SECURITIES (Continued)

<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>

The amortized cost and estimated market value of  mortgage-backed  securities at
December 31, 2003, 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                   $             718    $            734    $               -   $            -
Due after one year through
  five years                                        128,718             137,013            3,749,407           3,721,301
Due after five years through
  ten years                                       8,202,526           8,376,237           31,919,309          31,873,210
Due after ten years                              66,776,874          67,396,931           20,174,647          20,599,706
                                          ------------------   -----------------   ------------------  ------------------

      Total                               $      75,108,836    $     75,910,915    $      55,843,363   $      56,194,217
                                          ==================   =================   ==================  ==================
</TABLE>

Mortgage-backed  securities with an amortized cost of $14,806,515 and $7,940,340
and an estimated  market value of  $14,721,414  and  $8,050,029  were pledged to
secure public deposits at December 31, 2003 and 2002, respectively.

5.  UNREALIZED LOSSES ON SECURITIES

The following table shows the Company's gross unrealized  losses and fair value,
aggregated by category and length of time,  that the individual  securities have
been in a continuous unrealized loss position, at December 31, 2003.

<TABLE>
<CAPTION>

                                    Less than Twelve Months       Twelve Months or Greater              Total
                                 ----------------------------------------------------------------------------------------
                                   Estimated       Gross        Estimated         Gross         Estimated       Gross
                                    Market       Unrealized       Market       Unrealized        Market       Unrealized
                                     Value         Losses         Value          Losses           Value         Losses
                                 -------------- -------------  -------------  --------------  --------------  -----------
<S>                            <C>            <C>            <C>            <C>             <C>             <C>
U.S. Government agencies
  and corporations               $   8,548,915  $      3,127   $          -   $           -   $   8,548,915   $    3,127
Mortgage-backed securities          72,687,279       652,410              -               -      72,687,279      652,410
                                 -------------- -------------  -------------  --------------  --------------  -----------
     Total debt securities          81,236,194       655,537              -               -      81,236,194      655,537

Equity securities                      423,435         7,295        218,920           6,030         642,355       13,325
                                 -------------- -------------  -------------  --------------  --------------  -----------

     Total                       $  81,659,629  $    662,832   $    218,920   $       6,030   $  81,878,549   $  668,862
                                 ============== =============  =============  ==============  ==============  ===========
</TABLE>
                                       29
<PAGE>

5.   UNREALIZED LOSSES ON SECURITIES (Continued)

The Company's  investment  and  mortgage-backed  securities  portfolios  contain
unrealized   losses  of  direct   obligations   of  U.S.   agencies,   including
mortgage-related  instruments  issued or backed by the full  faith and credit of
the U.S.  government or generally viewed as having the implied  guarantee of the
U.S.  government,  and equity  securities  of common  stock in  publicly  traded
companies.

On a  monthly  basis,  the  Company  evaluates  the  severity  and  duration  of
impairment  for its  securities  portfolios and determine if the Company has the
ability to hold the security to maturity  without  incurring a loss.  Generally,
impairment is considered  other than temporary  when an investment  security has
sustained a decline of 10 percent or more for six months.

The Company has concluded that any  impairment of its  securities  portfolios is
not other than temporary but is the result of interest rate changes.

6.   LOANS

Loans consist of the following:

                                                       2003           2002
                                                   -------------  -------------
     Mortgage loans:
        Residential                                $ 58,870,778   $ 65,394,863
        Multi-family units                              969,956        752,296
        Construction                                    770,384        947,147
        Commercial real estate                        8,184,641      5,900,334
                                                   -------------  -------------
                                                     68,795,759     72,994,640
                                                   -------------  -------------

     Commercial loans                                 1,265,752      1,347,954
     Tax exempt loans                                19,726,481     23,583,632
                                                   -------------  -------------
                                                     20,992,233     24,931,586
                                                   -------------  -------------
     Consumer:
        Consumer credit line                          7,711,972      6,865,147
        Automobile                                   48,931,743     54,995,826
        Other                                         7,647,688      6,532,503
                                                   -------------  -------------
                                                     64,291,403     68,393,476
                                                   -------------  -------------
     Less:
       Loans in process                                 596,513        915,425
       Deferred loan costs, net                      (1,749,127)    (1,947,533)
       Allowance for loan losses                      1,647,886      1,683,596
                                                   -------------  -------------
                                                        495,272        651,488
                                                   -------------  -------------

            Total                                  $153,584,123   $165,668,214
                                                   =============  =============

                                       30

<PAGE>

6.   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.

<TABLE>
<CAPTION>
                                                                     2003                2002                2001
                                                               -----------------   ------------------  ------------------
<S>                                                          <C>                 <C>                 <C>
     Principal outstanding                                     $        374,879    $         370,549   $         536,792
     Contractual interest due                                            30,168               29,801              61,121
     Interest income recognized                                          18,407               12,256              24,373
</TABLE>

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

<TABLE>
<CAPTION>
                                                                     2003                2002                2001
                                                               -----------------   ------------------  ------------------
<S>                                                          <C>                 <C>                 <C>
     Balance, January 1,                                       $      1,683,596    $       1,506,140   $       1,454,618
         Add:
            Provisions charged to operations                            620,000              735,000             520,000
            Loan recoveries                                              74,671               67,835              29,715
         Less loans charged off                                         730,381              625,379             498,193
                                                               -----------------   ------------------  ------------------

     Balance, December 31,                                     $      1,647,886    $       1,683,596   $       1,506,140
                                                               =================   ==================  ==================
</TABLE>

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,
2003 and 2002,  loans  outstanding to  individuals  and businesses are dependent
upon the local conditions in its immediate trade area.

7.   ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following:

<TABLE>
<CAPTION>
                                                                                         2003                2002
                                                                                   ------------------  ------------------

<S>                                                                              <C>                   <C>
     Interest-bearing deposits with other institutions                             $           4,155    $          1,702
     Investment securities                                                                   161,664             338,939
     Mortgage-backed securities                                                              545,644             550,235
     Loans                                                                                   861,832           1,107,897
                                                                                   ------------------  ------------------
            Total                                                                  $       1,573,295   $       1,998,773
                                                                                   ==================  ==================
</TABLE>


8.   FHLB STOCK

The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank
maintains an  investment  in the capital  stock of the FHLB of  Pittsburgh in an
amount not less than 70 basis points of the  outstanding  unused FHLB  borrowing
capacity and  one-twentieth of its outstanding  FHLB  borrowings,  as calculated
throughout the year.

                                       31
<PAGE>

9.   PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                         2003                2002
                                                                                   ------------------  ------------------
<S>                                                                              <C>                 <C>
     Land                                                                          $         900,624   $         900,624
     Office buildings                                                                      5,156,847           5,159,608
     Furniture, fixtures, and equipment                                                    2,652,484           3,473,976
     Leasehold improvements                                                                  403,403             403,403
                                                                                   ------------------  ------------------
                                                                                           9,113,358           9,937,611
     Less accumulated depreciation and amortization                                        4,885,860           5,333,606
                                                                                   ------------------  ------------------

            Total                                                                  $       4,227,498   $       4,604,005
                                                                                   ==================  ==================
</TABLE>

Depreciation  expense for the years ended December 31, 2003,  2002, and 2001 was
$509,374, $688,004, and $652,309, respectively.

10. DEPOSITS

Comparative details of deposit accounts follow:

<TABLE>
<CAPTION>
                                                        2003                                       2002
                                        --------------------------------------     --------------------------------------
                                                               Percent of                                 Percent of
                                             Amount             Portfolio               Amount             Portfolio
                                        -----------------   ------------------     ------------------  ------------------

<S>                                   <C>                              <C>       <C>                              <C>
DDA and NOW accounts                    $     42,384,950                 18.3 %    $      38,144,708                16.4 %
Money market
  demand accounts                             29,544,169                 12.7             28,769,973
                                                                                                                    12.4
Savings accounts                              35,567,040                 15.4             33,741,991                14.5
                                        -----------------   ------------------     ------------------  ------------------
                                             107,496,159                 46.4            100,656,672                43.3
                                        -----------------   ------------------     ------------------  ------------------
Time certificates of deposit:
     Less than 2.01%                          26,356,259                 11.4             17,148,772                 7.4
     2.01%  -  4.00%                          40,266,988                 17.4             34,798,570                15.0
     4.01%  -  6.00%                          52,810,943                 22.8             53,787,347                23.1
     6.01%  -  8.00%                           4,589,083                  2.0             25,975,311                11.2
                                        -----------------   ------------------     ------------------  ------------------
                                             124,023,273                 53.6            131,710,000                56.7
                                        -----------------   ------------------     ------------------  ------------------

            Total                       $    231,519,432                100.0 %    $     232,366,672               100.0 %
                                        =================   ==================     ==================  ==================
</TABLE>

At December 31, 2003,  time deposits of $65,118,465,  $18,757,798,  $12,822,485,
$14,800,308,  $10,574,072,  and  $1,950,145 are scheduled to mature during 2004,
2005, 2006, 2007, 2008, and beyond 2008, respectively.

Time deposits  include  certificates of deposit in  denominations of $100,000 or
more. Such deposits aggregated  $33,736,163 and $34,092,419 at December 31, 2003
and 2002, respectively, with maturities at December 31, 2003, as follows:

<TABLE>
<CAPTION>
<S>                                                                                                  <C>
     Within three months                                                                               $       1,850,046
     Beyond three but within six months                                                                       16,530,035
     Beyond six but within twelve months                                                                       4,966,921
     Beyond one year                                                                                          10,389,161
                                                                                                       ------------------

            Total                                                                                      $      33,736,163
                                                                                                       ==================
</TABLE>

                                       32

<PAGE>

10.  DEPOSITS (Continued)

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

<TABLE>
<CAPTION>
                                                  2003                2002                2001
                                            -----------------   ------------------  ------------------
<S>                                        <C>                 <C>                 <C>
Savings accounts                            $        297,770    $         373,010   $         542,724
NOW and money market deposit accounts                361,936              561,419           1,150,101
Time certificates of deposit                       5,134,146            5,766,224           6,212,118
                                            -----------------   ------------------  ------------------

            Total                           $      5,793,852    $       6,700,653   $       7,904,943
                                            =================   ==================  ==================
</TABLE>


11.  ADVANCES FROM FEDERAL HOME LOAN BANK

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

<TABLE>
<CAPTION>
                                               Weighted          Stated interest
                        Maturity range          average             rate range
   Description         from          to       interest rate      from        to                2003                2002
------------------  -----------  ----------- ----------------  ---------  ----------     -----------------   -----------------
<S>                <C>         <C>                  <C>          <C>         <C>       <C>                 <C>
Convertible          02/20/08    03/01/11             5.30  %      5.15 %      5.53 %    $     30,000,000    $     30,000,000
Fixed rate           02/23/04    02/21/12             4.87         2.35        6.63            26,880,000          25,007,800
Line of credit       11/30/04                         1.03         1.03                         2,000,000           6,000,000
                                                                                         -----------------   -----------------
                                                                                         $     58,880,000    $     61,007,800
                                                                                         =================   =================
</TABLE>

The scheduled maturities of advances outstanding are as follows:

                                                        2003
                                        --------------------------------------
               Year Ending                                      Weighted-
              December 31,                   Amount           average Rate
     --------------------------------   -----------------   ------------------

                  2003                  $              -              - %
                  2004                         6,250,000           3.98
                  2005                         5,500,000           3.85
                  2006                         5,630,000           4.08
                  2007                         2,000,000           5.40
                  2008                        17,000,000           5.30
               beyond 2008                    22,500,000           5.43
                                        -----------------
                  Total                 $     58,880,000           4.96 %
                                        =================

The terms of the convertible  advances reset to the three-month London Interbank
Offered  Rate  ("LIBOR")  and have various  spreads and call dates  ranging from
three  months to seven  years.  The FHLB has the  right to call any  convertible
select advance on its call date or quarterly  thereafter.  Should the advance be
called,  the Company has the right to pay off the advance without  penalty.  The
FHLB advances are secured by the Company's FHLB stock and investment  securities
and are subject to substantial prepayment penalties.

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, 2003, the Bank's maximum  borrowing
capacity with the FHLB was approximately $159 million.

                                       33
<PAGE>

12.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                     2003                2002                2001
                                                               -----------------   ------------------  ------------------
<S>                                                          <C>                 <C>                 <C>
Currently payable:
     Federal                                                   $        638,645    $         615,821   $         574,481
     State                                                              156,852              186,154             148,694
                                                               -----------------   ------------------  ------------------
                                                                        795,497              801,975             723,175
Deferred                                                                 87,714             (112,244)             29,156
                                                               -----------------   ------------------  ------------------
            Total                                              $        883,211    $         689,731   $         752,331
                                                               =================   ==================  ==================
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                                         2003                2002
                                                                                   ------------------  ------------------
<S>                                                                              <C>                 <C>
Deferred tax assets:
     Allowance for loan losses                                                     $         560,282   $         572,423
     Premises and equipment                                                                   50,058              83,183
     Accrued employee benefits                                                               270,782             315,770
     Alternative minimum tax credit                                                           10,740              11,089
     Other                                                                                     9,043               6,154
                                                                                   ------------------  ------------------
         Total gross deferred tax assets                                                     900,905             988,619
                                                                                   ------------------  ------------------

Deferred tax liabilities:
     Net unrealized gain on securities                                                       793,771           1,131,982
                                                                                   ------------------  ------------------
         Total gross deferred tax liabilities                                                793,771           1,131,982
                                                                                   ------------------  ------------------

         Net deferred tax asset (liability)                                        $         107,134   $       (143,363)
                                                                                   ==================  ==================
</TABLE>

No valuation  allowance was established at December 31, 2003, 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>
                                           2003                             2002                             2001
                                ----------------------------     ----------------------------     ----------------------------
                                                    % 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     $    1,226,062         34.0 %    $    1,127,068         34.0 %    $    1,010,968         34.0 %
State income tax expense,
  net of federal tax benefit           103,522          2.9             122,862          3.7              98,138
                                                                                                                          3.3
Tax-exempt interest                   (546,971)       (15.2)           (608,323)       (18.4)           (384,505)       (12.9)
Other, net                             100,598          2.8              48,124          1.5              27,730          0.9
                                ---------------  -----------     ---------------  -----------     ---------------   ----------

Actual expense and
  effective rate                $      883,211         24.5 %    $      689,731         20.8 %    $      752,331         25.3 %
                                ===============  ===========     ===============  ===========     ===============   ==========
</TABLE>

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

                                       34
<PAGE>

13.  EMPLOYEE BENEFITS

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

The Bank  sponsors a trusteed,  noncontributory  defined  benefit  pension  plan
covering  substantially all employees and officers.  The plan calls for benefits
to be paid to eligible  employees at retirement  based  primarily  upon years of
service with the Bank 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.

Obligations and Funded Status
-----------------------------

The following table sets forth the status at December 31:

<TABLE>
<CAPTION>
                                                                                         2003                2002
                                                                                   ------------------  ------------------
<S>                                                                              <C>                 <C>
Change in benefit obligation
Benefit obligation at beginning of year                                            $      5,495,131    $      4,578,325
Service cost                                                                                236,088             197,171
Interest cost                                                                               366,868             329,653
Actuarial loss                                                                              375,815             492,012
Benefits paid                                                                              (121,373)           (102,030)
                                                                                   ------------------  ------------------
Benefit obligation at end of year                                                         6,352,529           5,495,131
                                                                                   ------------------  ------------------
Change in plan assets
Fair value of plan assets at beginning of year                                            4,708,564           4,341,756
Actual return on plan assets                                                                313,906             295,001
Employer contribution                                                                       337,984             173,837
Benefits paid                                                                              (121,373)           (102,030)
                                                                                   ------------------  ------------------
Fair value of plan assets at end of year                                                  5,239,081           4,708,564
                                                                                   ------------------  ------------------

Funded status                                                                            (1,113,448)           (786,567)
Unrecognized transition adjustment                                                         (117,559)           (138,373)
Unrecognized net actuarial loss                                                           1,190,133             804,211
                                                                                   ------------------  ------------------

     Net Accrued Benefit Cost Recognized                                           $        (40,874)   $       (120,729)
                                                                                   ==================  ==================
</TABLE>

The  accumulated  benefit  obligation for the defined  benefit  pension plan was
$4,675,381 and $4,022,845 at December 31, 2003 and 2002, respectively.

<TABLE>
<CAPTION>
                                                                     2003                 2002                  2001
                                                               ------------------   ------------------    -----------------
<S>                                                          <C>                  <C>                   <C>
Service cost                                                   $         236,088    $         197,171     $        185,537
Interest cost                                                            366,868              329,653              300,732
Expected return on plan assets                                          (338,735)            (349,068)            (320,703)
Amortization of prior service cost                                       (20,814)             (20,814)             (20,814)
Amortization of unrecognized loss                                         14,722                    -                    -
                                                               ------------------   ------------------    -----------------
   Net periodic benefit cost                                   $         258,129    $         156,942     $        144,752
                                                               ==================   ==================    =================
</TABLE>

                                       35

<PAGE>

13.  EMPLOYEE BENEFITS (Continued)

Assumptions
-----------

Weighted-average  assumptions used to determine benefit  obligations at December
31:

                                               2003                2002
                                         ------------------  ------------------

Discount rate                                    6.00 %              6.50 %
Rate of compensation increase                    5.00                5.00


Weighted-average assumptions used to determine net periodic cost for years ended
December 31:

                                                2003                2002
                                         ------------------  ------------------

Discount rate                                     6.00 %              6.50 %
Expected long-term return on plan assets          7.00                8.00
Rate of compensation increase                     5.00                5.00


The expected  long-term rate of return was estimated using market  benchmarks by
which the plan  assets  would  outperform  the  market in the  future,  based on
historical  experience adjusted for changes in asset allocation and expectations
for  overall  lower  future  returns on  similar  investments  compared  to past
periods.

Plan Assets
-----------

The Bank's  pension plan  weighted-average  asset  allocations at December 31 by
asset category are as follows:

Asset Category
--------------
                                                2003             2002
                                             ------------    ------------

Cash and fixed income securities                    100.0 %         100.0 %
Equity securities                                       -               -
                                             ------------    ------------
    Total                                           100.0 %         100.0 %
                                             ============    ============

The  investment  objective  for the defined  benefit  pension plan is to provide
income while  providing  safety of  principal.  Funds become part of the general
assets of Minnesota  Life,  which is invested  primarily in long-term  bonds and
mortgages.  No single  asset  represents  more  than a half of a percent  of the
general investment account.

                                       36
<PAGE>

13.  EMPLOYEE BENEFITS (Continued)

Cash Flows
----------

The Bank expects to contribute $308,544 to its pension plan in 2004.

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,  2003,  2002,  and 2001  amounted to $33,200,
$41,250,  and  $30,000,  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, 2003,
2002, and 2001, amounted to $20,000, $30,000, and $54,000, 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 401(k) 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, 2003, 2002, and 2001 amounted to
$80,291, $75,757, and $74,479, 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.

                                       37

<PAGE>

13.  EMPLOYEE BENEFITS (Continued)

Stock Option Plan (Continued)

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

<TABLE>
<CAPTION>

                                                               Weighted-                               Weighted-
                                                                Average                                 Average
                                                               Exercise                                Exercise
                                             2003                Price               2002                Price
                                       -----------------   ------------------  ------------------  ------------------
<S>                                    <C>               <C>                   <C>               <C>
Outstanding, beginning                          313,129    $     12.31                   159,129   $       9.22
  Granted                                             -              -                   154,000          15.51
  Exercised                                      22,602          10.54                         -              -
  Forfeited                                           -              -                         -              -
                                       -----------------                       ------------------

Outstanding, ending                             290,527    $     12.45                   313,129   $      12.31
                                       =================                       ==================

Exercisable at year-end                         257,227    $     12.06                   219,479   $      10.95
                                       =================                       ==================
</TABLE>


The following table summarizes the  characteristics of stock options at December
31, 2003:

<TABLE>
<CAPTION>
                                                  Outstanding                                     Exercisable
                                -------------------------------------------------       ---------------------------------
                                                                      Average                                 Average
                                                      Average         Exercise                                Exercise
     Exercise price                 Shares              Life           Price                Shares             Price
     -----------------------    ----------------    -------------   -------------       ----------------    -------------
<S> <C>                             <C>              <C>         <C>                        <C>          <C>
     $       9.22                      141,261          4.83        $      9.22                141,261      $      9.22
            15.51                      149,266          8.97              15.51                115,966            15.51
</TABLE>

                                       38

<PAGE>

13.  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  $433,485,  $339,777,  and
$131,520, for the years ended December 31, 2003, 2002, and 2001, respectively.

The following table presents the components of the ESOP shares:

<TABLE>
<CAPTION>
                                                      2003                2002                2001
                                                -----------------   ------------------  ------------------
<S>                                           <C>                 <C>                 <C>
     Allocated shares                                     82,198               60,654              48,354

     Shares released for allocation                       23,844               23,844              12,300

     Unreleased shares                                   190,751              214,595             238,439
                                                -----------------   ------------------  ------------------

     Total ESOP shares                                   296,793              299,093             299,093
                                                =================   ==================  ==================

     Fair value of unreleased shares            $      4,072,000    $       3,358,412   $       2,849,346
                                                =================   ==================  ==================
</TABLE>

                                       39


<PAGE>

13.  EMPLOYEE BENEFITS (Continued)

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

The  Company  maintains  an 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, 2003.

The RSP shares purchased  initially are 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  $252,503,
$280,687, and $128,513 for the years ended December 31, 2003, 2002, and 2001.

                                       40

<PAGE>

14.  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:

<TABLE>
<CAPTION>
                                                                     2003                2002
                                                                 ----------------  ------------------
<S>                                                            <C>               <C>
     Commitments to grant fixed rate loans                       $     3,570,013   $       9,003,490
     Unfunded commitments under variable rate lines of credit         18,941,282          16,820,280
                                                                 ----------------  ------------------

          Total                                                  $    22,511,295   $      25,823,770
                                                                 ================  ==================
</TABLE>

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.

                                       41

<PAGE>

15. 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 10 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,  2003,  surplus  funds  of
$21,956,195 were not available for dividends.

16. 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, 2003 and 2002, 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 10
percent, 6 percent, and 5 percent, respectively.

                                       42

<PAGE>

16.  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>
                                                      2003                              2002
                                      -------------------------------   --------------------------------
                                           Amount            Ratio        Amount               Ratio
                                      ------------------  -----------   -----------------   ------------
Total Capital
  (to Risk-weighted Assets)
  -------------------------

<S>                                 <C>                     <C>        <C>                    <C>
Actual                                $    47,282,017         27.30 %    $    48,846,391        30.72 %
For Capital Adequacy Purposes              13,857,486          8.00           12,718,680         8.00
To Be Well Capitalized                     17,321,858         10.00           15,898,350        10.00

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

Actual                                $    45,109,039         26.04 %    $    47,162,795        29.67 %
For Capital Adequacy Purposes               6,928,743          4.00            6,359,340         4.00
To Be Well Capitalized                     10,393,115          6.00            9,539,010         6.00

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

Actual                                $    45,109,039         13.24 %    $    47,162,795        13.56 %
For Capital Adequacy Purposes              13,632,800          4.00           13,909,085         4.00
To Be Well Capitalized                     17,041,000          5.00           17,385,356         5.00

</TABLE>

                                       43
<PAGE>



16. REGULATORY CAPITAL REQUIREMENTS (Continued)

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

<TABLE>
<CAPTION>
                                                      2003                               2002
                                      ------------------------------     -------------------------------
                                           Amount            Ratio            Amount            Ratio
                                      ------------------  ----------     -----------------   -----------
<S>                                <C>                    <C>          <C>                    <C>
Total Capital
  (to Risk-weighted Assets)
  -------------------------

Actual                                $   38,685,908         23.52 %      $   42,779,478         27.86 %
For Capital Adequacy Purposes             13,159,680          8.00            12,282,160          8.00
To Be Well Capitalized                    16,449,600         10.00            15,352,700         10.00

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

Actual                                $   37,038,022         22.52 %      $   41,095,882         26.77 %
For Capital Adequacy Purposes              6,579,840          4.00             6,141,080          4.00
To Be Well Capitalized                     9,869,760          6.00             9,211,620          6.00

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

Actual                                $   37,038,022         11.22 %      $   41,095,882         12.21 %
For Capital Adequacy Purposes             13,207,000          4.00            13,466,538          4.00
To Be Well Capitalized                    16,508,750          5.00            16,833,172          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.

                                       44

<PAGE>

17.  FAIR VALUE DISCLOSURE

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

<TABLE>
<CAPTION>
                                                          2003                                     2002
                                          --------------------------------------   --------------------------------------
                                              Carrying               Fair              Carrying              Fair
                                                Value               Value                Value               Value
                                          ------------------   -----------------   ------------------  ------------------
<S>                                   <C>                  <C>                 <C>                 <C>
Financial assets:
  Cash and amounts due
    from other institutions             $     6,795,068      $    6,795,068      $    6,938,217      $    6,938,217
  Interest-bearing deposits
    with other institutions                     753,727             753,727           1,283,752           1,283,752
  Investment securities:
    Available for sale                       28,718,832          28,718,832          27,233,227          27,233,227
    Held to maturity                          7,952,211           8,203,053          19,274,753          19,611,078
  Mortgage-backed securities:
    Available for sale                       75,910,915          75,910,915          44,137,225          44,137,225
    Held to maturity                         55,843,363          56,194,217          70,346,358          71,826,914
  Loans, net                                153,584,123         157,392,123         165,668,214         173,219,214
  Federal Home Loan Bank stock                3,606,600           3,606,600           3,620,300           3,620,300
  Accrued interest receivable                 1,573,295           1,573,295           1,998,773           1,998,773

Financial liabilities:
  Deposits                              $   231,519,432      $  233,746,432      $  232,366,672      $  237,027,672
  Advances from Federal
    Home Loan Bank                           58,880,000          61,646,000          61,007,800          64,276,800
  Advances from borrowers
    for taxes and insurance                     504,752             504,752             548,924             548,924
  Accrued interest payable                      965,875             965,875           1,179,721           1,179,721

</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.

                                       45
<PAGE>

17.  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 Federal Home Loan Bank
-------------------------------------------------------------

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 14.

18.  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.

                                       46
<PAGE>

18.  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 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, 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.

19.  PARENT COMPANY

The following are condensed financial statements for the parent company.

                             CONDENSED BALANCE SHEET


                                                        2003         2002
                                                    ----------   ----------
ASSETS
     Cash and due from banks                       $   920,770     $   816,390
     Investment securities - available for sale      9,226,468       5,441,730
     Investment in subsidiary bank                  35,666,271      40,838,046
     Loans receivable - ESOP                         2,127,610       2,330,388
     Other assets                                       40,948          28,923
                                                    ----------      ----------

TOTAL ASSETS                                       $47,982,067     $49,455,477
                                                    ==========      ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                             $ 1,332,179     $    95,305
     Stockholders' equity                           46,649,888      49,360,172
                                                    ----------      ----------

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                             $47,982,067     $49,455,477
                                                    ==========      ==========

                                       47


<PAGE>



19.  PARENT COMPANY (Continued)

                          CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                     For the Year Ended December 31,
                                                    2003            2002         2001
                                                 -----------    -----------   -----------
<S>                                            <C>            <C>           <C>
INCOME
      Dividends from subsidiary bank             $ 6,000,000    $ 1,000,000   $ 1,380,000
    Investment securities gains, net               1,103,785              -             -
      Interest income                                255,350        295,373        77,983
                                                 -----------    -----------   -----------
                                                   7,359,135      1,295,373     1,457,983

EXPENSES                                             578,419        143,314        62,439
                                                 -----------    -----------   -----------

Income before equity in undistributed
  earnings of subsidiary                           6,780,716      1,152,059     1,395,544

Equity in undistributed earnings of subsidiary    (4,057,861)     1,473,116       825,559
                                                 -----------    -----------   -----------

NET INCOME                                       $ 2,722,855    $ 2,625,175   $ 2,221,103
                                                 ===========    ===========   ===========
</TABLE>

                                       48

<PAGE>

19.  PARENT COMPANY (Continued)

                        CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                For the Year Ended December 31,
                                                                2003           2002           2001
                                                            -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
OPERATING ACTIVITIES
     Net income                                             $ 2,722,855    $ 2,625,175    $ 2,221,103
     Adjustments to reconcile net income to net cash
        provided by operating activities:
           Equity in undistributed earnings of subsidiary     4,057,861     (1,473,116)      (825,559)
           Investments securities gains, net                 (1,103,785)             -              -
           Other, net                                         1,394,154        254,354        152,856
                                                            -----------    -----------    -----------
                Net cash provided by operating activities     7,071,085      1,406,413      1,548,400
                                                            -----------    -----------    -----------

INVESTING ACTIVITIES
     Purchases of investment securities                      (6,080,944)    (6,108,447)    (1,525,828)
     Sale of investment securities                            4,400,241        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                   202,778        191,317     (1,618,170)
                                                            -----------    -----------    -----------
                Net cash used for
                   investing activities                      (1,477,925)    (3,432,390)   (11,882,444)
                                                            -----------    -----------    -----------

FINANCING ACTIVITIES
     Common stock acquired by ESOP                                    -              -     (1,760,950)
      Common stock acquired by RSP                             (847,725)             -              -
     Proceeds from sale of common stock                         293,078              -     21,226,263
     Proceeds from exercise of stock options                          -              -              -
     Capital contributed by MHC                                       -              -      2,955,314
     Cash dividends paid                                     (2,436,870)    (1,039,619)      (991,801)
     Purchase of treasury stock                              (2,497,263)    (7,021,256)      (325,197)
                                                            -----------    -----------    -----------
                Net cash provided by (used for)
                   investing activities                      (5,488,780)    (8,060,875)    21,103,629
                                                            -----------    -----------    -----------

                Increase (decrease) in cash                     104,380    (10,086,852)    10,769,585

CASH AT BEGINNING OF YEAR                                       816,390     10,903,242        133,657
                                                            -----------    -----------    -----------

CASH AT END OF YEAR                                         $   920,770    $   816,390    $10,903,242
                                                            ===========    ===========    ===========
</TABLE>

                                       49

<PAGE>

20.  SELECTED QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                      -------------------------------------------------
                                         March        June       September   December
                                         2003         2003         2003         2003
                                      ----------   ----------   ----------   ----------
<S>                                 <C>          <C>          <C>          <C>
Total interest income                 $4,788,981   $4,471,616   $4,076,711   $4,247,752
Total interest expense                 2,338,288    2,272,761    2,071,795    2,060,294
                                      ----------   ----------   ----------   ----------

Net interest income                    2,450,693    2,198,855    2,004,916    2,187,458
Provision for loan losses                190,000      180,000      130,000      120,000
                                      ----------   ----------   ----------   ----------

Net interest income after
  provision for loan losses            2,260,693    2,018,855    1,874,916    2,067,458

Investment securities gains, net         176,144      366,820      467,814      594,611
Total noninterest income                 254,101      277,789      285,095      285,000
Total noninterest expense              1,873,114    1,811,005    1,817,039    1,822,072
                                      ----------   ----------   ----------   ----------

Income before income taxes               817,824      852,459      810,786    1,124,997
Income taxes                             166,000      186,554      223,389      307,268
                                      ----------   ----------   ----------   ----------

Net income                            $  651,824   $  665,905   $  587,397   $  817,729
                                      ==========   ==========   ==========   ==========

Per share data:
Net income
     Basic                            $     0.24   $     0.25   $     0.22   $     0.30
     Diluted                                0.23         0.24         0.21         0.29
Weighted-average shares outstanding
     Basic                             2,746,632    2,671,320    2,676,199    2,674,790
     Diluted                           2,823,985    2,757,061    2,768,214    2,779,059
</TABLE>

                                       50

<PAGE>

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

<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          44,561       98,178       19,889
                                                                                  5,399
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>

                                       51
<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]


                                       52

<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>

--------------------------------------------------------------------------------
The Company's  Annual Report for the Year Ended December 31, 2003 filed with the
Securities  Exchange  Commission  on Form 10-K  without  exhibits  is  available
without  charge upon written  request.  For a copy of the Form 10-K 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 22, 2004 at 9:00 a.m.
at the Chippewa Township Municipal Building, Chippewa Township, Beaver Falls, PA
15010.

                                       53