Exhibit 13



The following tables set forth certain information concerning the consolidated position and certain performance ratios of the Company at the dates indicated:



|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  | At or for the Year Ended December 31,                |        
|                                                    |  | 2004                                                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                    |  | (Dollars in Thousands, Except Per Share Information) |        
|Balance Sheet Data                                  |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Assets                                              |  | $                                                    | 90,969  |   |      | $ | 89,372  |      |  | $ | 77,358  |   |  | $    | 74,533  |   |  | $ | 69,892  |  
|Investment securities                               |  |                                                      | 32,721  |   |      |   | 31,843  |      |  |   | 23,287  |   |  |      | 22,235  |   |  |   | 22,544  |  
|Loans                                               |  |                                                      | 44,484  |   |      |   | 45,241  |      |  |   | 45,396  |   |  |      | 42,767  |   |  |   | 39,236  |  
|Allowance for loan losses                           |  |                                                      | 501     |   |      |   | 514     |      |  |   | 514     |   |  |      | 443     |   |  |   | 448     |  
|Deposits                                            |  |                                                      | 72,306  |   |      |   | 71,379  |      |  |   | 62,135  |   |  |      | 59,585  |   |  |   | 55,601  |  
|Borrowings                                          |  |                                                      | 8,434   |   |      |   | 8,533   |      |  |   | 5,206   |   |  |      | 5,805   |   |  |   | 5,487   |  
|Stockholders equity                                |  |                                                      | 9,338   |   |      |   | 9,263   |      |  |   | 9,611   |   |  |      | 8,757   |   |  |   | 8,495   |  
|                                                    |  |                                                      |         |   |     
|Summary of Operations                               |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                     |  | $                                                    | 4,556   |   |      | $ | 4,634   |      |  | $ | 4,714   |   |  | $    | 5,024   |   |  | $ | 5,012   |  
|Interest expense                                    |  |                                                      | 965     |   |      |   | 1,137   |      |  |   | 1,372   |   |  |      | 1,958   |   |  |   | 1,998   |  
|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                 |  |                                                      | 3,591   |   |      |   | 3,497   |      |  |   | 3,342   |   |  |      | 3,066   |   |  |   | 3,014   |  
|Provision for loan losses                           |  |                                                      | 133     |   |      |   | 76      |      |  |   | 108     |   |  |      | 111     |   |  |   | 129     |  
|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses |  |                                                      | 3,458   |   |      |   | 3,421   |      |  |   | 3,234   |   |  |      | 2,955   |   |  |   | 2,885   |  
|Other operating income                              |  |                                                      | 1,388   |   |      |   | 1,140   |      |  |   | 974     |   |  |      | 822     |   |  |   | 662     |  
|Other operating expense                             |  |                                                      | 3,871   |   |      |   | 3,732   |      |  |   | 3,387   |   |  |      | 3,107   |   |  |   | 2,761   |  
|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes                          |  |                                                      | 975     |   |      |   | 829     |      |  |   | 821     |   |  |      | 670     |   |  |   | 786     |  
|Income taxes                                        |  |                                                      | 209     |   |      |   | 128     |      |  |   | 165     |   |  |      | 111     |   |  |   | 113     |  
|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                          |  | $                                                    | 766     |   |      | $ | 701     |      |  | $ | 656     |   |  | $    | 559     |   |  | $ | 673     |  
|                                                    |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Per Share Data (1)                                  |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic earnings                                      |  | $                                                    | 0.86    |   |      | $ | 0.78    |      |  | $ | 0.73    |   |  | $    | 0.62    |   |  | $ | 0.74    |  
|Diluted earnings                                    |  |                                                      | 0.86    |   |      |   | 0.78    |      |  |   | 0.73    |   |  |      | 0.61    |   |  |   | 0.73    |  
|Cash dividends declared                             |  |                                                      | 0.38    |   |      |   | 0.28    |      |  |   | 0.23    |   |  |      | 0.20    |   |  |   | 0.20    |  
|Book value                                          |  |                                                      | 10.59   |   |      |   | 10.36   |      |  |   | 10.52   |   |  |      | 9.73    |   |  |   | 9.26    |  
|Basic average shares outstanding                    |  |                                                      | 888,656 |   |      |   | 901,715 |      |  |   | 901,176 |   |  |      | 908,839 |   |  |   | 909,325 |  
|Diluted average shares outstanding                  |  |                                                      | 888,756 |   |      |   | 902,095 |      |  |   | 903,927 |   |  |      | 919,268 |   |  |   | 921,715 |  
|                                                    |  |                                                      |         |   |     
|Market Information                                  |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|High                                                |  | $                                                    | 19.25   |   |      | $ | 20.25   |      |  | $ | 19.20   |   |  | $    | 21.80   |   |  | $ | 21.82   |  
|Low                                                 |  |                                                      | 18.25   |   |      |   | 16.50   |      |  |   | 16.84   |   |  |      | 17.20   |   |  |   | 16.00   |  
|At December 31                                      |  |                                                      | 18.90   |   |      |   | 18.50   |      |  |   | 18.40   |   |  |      | 19.20   |   |  |   | 17.46   |  
|                                                    |  |                                                      |         |   |     
|Selected Financial Ratios                           |  |                                                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                            |  |                                                      | 0.85    | % |      |   | 0.80    | %    |  |   | 0.84    | % |  |      | 0.74    | % |  |   | 0.97    | %
|Return on average equity                            |  |                                                      | 8.26    |   |      |   | 7.46    |      |  |   | 7.19    |   |  |      | 6.43    |   |  |   | 9.07    |  
|Average equity to average assets                    |  |                                                      | 10.23   |   |      |   | 10.76   |      |  |   | 11.70   |   |  |      | 11.56   |   |  |   | 10.69   |  
|Equity to assets at end of period                   |  |                                                      | 10.27   |   |      |   | 10.36   |      |  |   | 12.42   |   |  |      | 11.75   |   |  |   | 12.15   |  
|Non-performing assets to total assets               |  |                                                      | 1.23    |   |      |   | 1.57    |      |  |   | 0.30    |   |  |      | 0.39    |   |  |   | 0.27    |  
|Non-performing loans to total loans                 |  |                                                      | 2.52    |   |      |   | 3.01    |      |  |   | 0.51    |   |  |      | 0.67    |   |  |   | 0.49    |  

---

|(1) | Adjusted for a five-for-four stock split effective January 24, 2003 and a 10% stock dividend effective January 11, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------



1



---

The following table sets forth certain information relating to the Companys consolidated average balance sheets and
statements of income for the years ended December 31, 2004 and 2003, 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
daily balance of assets or liabilities, respectively, for the periods shown.



|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|----------------------------------------------------------------- |  | ------------------ | ---------- | -------- | ---- | ----------------- |  | ---- | -------------- |  | -------- | ---------- | ----------------- | - | --------- |  | ---- | -
|                                                                  |  | For the Year Ended |           
|                                                                  |  | 2004               |            |          | 2003 |                  
|                                                                  |  | AverageBalance     |            | Interest |      | AverageYield/Rate |  |      | AverageBalance |  | Interest |            | AverageYield/Rate |  
|Interest-earning assets:                                          |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Interest-bearing deposits with other banks and federal funds sold |  | $                  | 3,096,496  |          | $    | 37,634            |  | 1.22 | %              |  | $        | 3,903,940  |                   | $ | 41,463    |  | 1.06 | %
|Taxable investment securities                                     |  |                    | 24,465,196 |          |      | 903,517           |  | 3.69 | %              |  |          | 20,287,209 |                   |   | 859,304   |  | 4.24 | %
|Non taxable investment securities (2)                             |  |                    | 6,440,850  |          |      | 445,312           |  | 6.91 | %              |  |          | 7,522,469  |                   |   | 545,668   |  | 7.25 | %
|Loans (1)(2)                                                      |  |                    | 44,965,329 |          |      | 3,337,608         |  | 7.42 | %              |  |          | 44,794,970 |                   |   | 3,392,975 |  | 7.57 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Total interest-earning assets                                     |  |                    | 78,967,871 |          |      | 4,724,071         |  | 5.98 | %              |  |          | 76,508,588 |                   |   | 4,839,410 |  | 6.33 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Noninterest-earning assets                                        |  |                    | 11,765,716 |          |      |                   |  |      |                |  |          | 11,186,275 |                   |   |           |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Total assets                                                      |  | $                  | 90,733,587 |          |      |                   |  |      |                |  | $        | 87,694,863 |                   |   |           |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Interest-bearing liabilities:                                     |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Interest bearing demand                                           |  | $                  | 15,168,547 |          |      | 106,661           |  | 0.70 | %              |  | $        | 16,283,175 |                   |   | 137,288   |  | 0.84 | %
|Money market accounts                                             |  |                    | 6,838,628  |          |      | 84,343            |  | 1.23 | %              |  |          | 3,842,791  |                   |   | 52,375    |  | 1.36 | %
|Savings deposits                                                  |  |                    | 13,756,216 |          |      | 122,419           |  | 0.89 | %              |  |          | 12,894,488 |                   |   | 128,278   |  | 0.99 | %
|Time deposits                                                     |  |                    | 23,378,607 |          |      | 535,338           |  | 2.29 | %              |  |          | 24,607,583 |                   |   | 730,735   |  | 2.97 | %
|Total borrowings                                                  |  |                    | 8,574,844  |          |      | 116,419           |  | 1.36 | %              |  |          | 7,053,399  |                   |   | 88,408    |  | 1.25 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Total interest-bearing liabilities                                |  |                    | 67,716,842 |          |      | 965,180           |  | 1.43 | %              |  |          | 64,681,436 |                   |   | 1,137,084 |  | 1.76 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Noninterest-bearing liabilities                                   |  |                    | 13,747,565 |          |      |                   |  |      |                |  |          | 14,348,948 |                   |   |           |  |      |  
|Stockholders equity                                              |  |                    | 9,269,180  |          |      |                   |  |      |                |  |          | 8,664,479  |                   |   |           |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Total liabilities and                                             |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|stockholders equity                                              |  | $                  | 90,733,587 |          |      |                   |  |      |                |  | $        | 87,694,863 |                   |   |           |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Net earning assets                                                |  | $                  | 11,251,029 |          |      |                   |  |      |                |  | $        | 11,827,152 |                   |   |           |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Net interest income                                               |  |                    |            |          | $    | 3,758,891         |  |      |                |  |          |            |                   | $ | 3,702,326 |  |      |  
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Net interest spread (3)                                           |  |                    |            |          |      |                   |  | 4.57 | %              |  |          |            |                   |   |           |  | 4.58 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  
|Net interest margin (4)                                           |  |                    |            |          |      |                   |  | 4.76 | %              |  |          |            |                   |   |           |  | 4.84 | %
|                                                                  |  |                    |            |          |      |                   |  |      |                |  |          |            |                   |   |           |  |      |  

---

|(1) | For the purpose of these computations, non-accrual loans (if any) are included in the daily average loan amounts outstanding and interest on loans includes fee income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields are computed on a tax equivalent basis using a 34% federal income tax rate.
|--- | ----------------------------------------------------------------------------------

|(3) | Net interest rate spread represents the difference between the average yield on interest-earning assets, and the average cost of interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Net interest margin is calculated by dividing the difference between total interest earned and total paid by total interest earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



2



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Tri-State 1st Banc, Inc.s common stock is traded on the NASDAQ OTC Bulletin Board under the trade symbol TSEO. The
following table presents the quarterly high and low prices in the Companys common stock for the two-year period ended December 31, 2004. Also included in the table are dividends declared per share on the outstanding common stock.



|                   |  |                                   |       |     |   |       |  |   |     
|------------------ |  | --------------------------------- | ----- | --- | - | ----- |  | - | ----
|Common Stock Price |  | Cash Dividends Declared Per Share
|2004               |  | High                              |       | Low |  
|First Quarter      |  | $                                 | 18.90 |     | $ | 18.25 |  | $ | 0.09
|Second Quarter     |  |                                   | 18.80 |     |   | 18.25 |  |   | 0.09
|Third Quarter      |  |                                   | 19.00 |     |   | 18.25 |  |   | 0.10
|Fourth Quarter     |  |                                   | 19.25 |     |   | 18.25 |  |   | 0.10
|                   |  |                                   |       |     |   |       |  |   |     
|                   |  |                                   |       |     |   |       |  | $ | 0.38
|                   |  |                                   |       |     |   |       |  |   |     
|2003               |  |                                   |       |     |   |      
|First Quarter      |  | $                                 | 18.40 |     | $ | 16.50 |  | $ | 0.07
|Second Quarter     |  |                                   | 18.40 |     |   | 18.15 |  |   | 0.07
|Third Quarter      |  |                                   | 19.50 |     |   | 18.50 |  |   | 0.07
|Fourth Quarter     |  |                                   | 20.25 |     |   | 18.50 |  |   | 0.07
|                   |  |                                   |       |     |   |       |  |   |     
|                   |  |                                   |       |     |   |       |  | $ | 0.28
|                   |  |                                   |       |     |   |       |  |   |     



All market
prices and cash dividend amounts have been restated to reflect a five-for-four stock split effective January 24, 2003.



At December 31, 2004, there were 881,627 of common shares outstanding, which were held by approximately 487 shareholders of record.



The Companys ability to pay dividends to shareholders may be dependent upon the receipt
of dividends from the Bank. The Bank may not declare or pay dividends on its common stock if such payment will cause its regulatory capital to be reduced below minimum requirements imposed by OCC regulations. The Company is also subject to certain
regulatory restrictions imposed by the Federal Reserve Board on the payment of dividends to its shareholders.



3



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Managements Discussion and Analysis of Financial Condition and Results of Operations



The following is Managements discussion and analysis of the financial condition and
results of operations of Tri-State 1stBanc, Inc. for the years ended December 31, 2004 and 2003. The discussion
should be read in conjunction with the consolidated financial statements and notes thereto and the summary financial information included elsewhere in this annual report.



Business



Tri-State 1stBanc, Inc. (the
Company) is an Ohio Corporation organized as the parent Company of 1st National Community Bank, a national banking association (the Bank), Gateminder Corporation (Gateminder) and MDH Investment Management, Inc.
(MDH), both Ohio corporations. The Company controls all of the capital stock of the Bank, Gateminder and MDH. The Company is a bank holding company regulated by the Board of Governors of the Federal Reserve System.



The Bank, chartered as a national banking association and headquartered in East Liverpool,
Ohio, conducts business through seven banking offices. Branch offices are located throughout the tri-state area of Columbiana County, Ohio; Hancock County, West Virginia; and Beaver County, Pennsylvania. The Banks deposits are insured to the
legal maximum amount provided by the Federal Deposit Insurance Corporation.



Gateminder Corporation was incorporated under the laws of the state of Ohio as a wholly owned non-bank subsidiary of the Company. Headquartered in East Liverpool, Ohio, Gateminder provides services for Automated Teller Machines
(ATM). The non-bank subsidiary sells ATM machines to businesses, financial institutions and merchants that operate ATMs at their place of business and provides the means for processing the ATM transactions that are generated at the
merchants ATM.



MDH Investment Management, Inc. was incorporated in 2004 under
the laws of the state of Ohio as a wholly owned non-bank subsidiary of the Company. MDH is headquartered in East Liverpool, Ohio and provides investment management advisory services to over 100 clients in fourteen states.



Forward-Looking Statements



Certain statements made by the Company and contained in this report that are not supported
by historical facts but are forward looking statements, are subject to certain risks and uncertainties. These forward-looking statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.



Such forward-looking statements include statements about
the Companys beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risk and uncertainties, and are subject to change based on various factors (some of which are beyond the
Companys control). The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar
expressions are intended to identify forward-looking statements.



Management
Strategy



The Companys philosophy is to provide a wide array of
community-oriented financial service products designed to meet the needs of its customers. Banking services are delivered through conveniently located branch banking offices which offer customer friendly hours and a variety of loan and deposit
products. In addition to full service banking, the Company offers other financial-related services through its non-bank subsidiaries by providing ATM support and operations for businesses and wealth management services through an investment advisory
firm.



The lending strategy of the Bank has historically focused on the
origination of real estate commercial mortgages, one-to-four family mortgage loans, working capital commercial loans in the form of credit lines and term notes, personal loans, automobile loans and home equity loans.



4



---

The Bank attempts to manage the interest rates it pays on deposits, while maintaining a stable to growing deposit base by
providing convenient and quality service at competitive rates to its customers. Historically, the Bank has relied upon its customer deposit base as its primary source of funds but has from time to time borrowed funds through credit arrangements with
the Federal Home Loan Bank of Cincinnati (FHLB), the use of repurchase agreements with its business customers and federal funds purchased.



Management of Interest Rate and Market Risk



The objective of the Companys interest rate risk management function is to evaluate interest rate sensitivity and determine the level of risk appropriate and
consistent with approved guidelines. The Company maintains an Asset/Liability Management Committee (ALCO), which is responsible for reviewing its asset/liability policies, securities portfolio, interest rate risk position and liquidity.
The ALCO meets at least quarterly to review trends in interest rates, changes in the market value of the investment securities portfolio, the financial position of the Company, actual performance results to budgeted performance, the Companys
interest rate position as measured by changes in its net interest income, net income and economic value of equity under certain interest rate scenarios, and the projected impact of such interest rate scenarios on earnings and capital.



Market risk is the risk of losses resulting from adverse changes in market pricing and rates.
The Companys market risk is primarily its interest rate risk associated with its investing, lending, deposit, and borrowing activities. Interest rate risk arises when interest rates on assets change in a different time period or in a different
proportion from that of liabilities. Management actively monitors its interest rate sensitivity position with the primary objective to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly
correlated and produce a reasonable net interest margin even in periods of volatile interest rates.



Summary of Financial Condition



Total
consolidated assets of the Company at December 31, 2004 were $90,969,000, an increase of 1.8% or $1,597,000 from year-end 2003. This increase was well below the 15.5% or $12,014,000 increase experienced in the 2003 period. Total deposits in 2004
grew at a much slower rate than the previous year, increasing by $927,000 compared to $9,244,000 in 2003. As a result, the Company made use of excess borrowing capacities with the FHLB to specifically fund investment security purchases as part of
2004s asset growth strategy.



Federal Funds Sold and Investment
Securities



At year-end 2004 and 2003, the Company had no federal funds
sold. On an average daily basis, federal funds sold were $2.9 million in 2004 and $3.9 million in 2003. The Company generally attempts to average between $2 and $4 million in federal funds sold, however, this range may shift as cash flows fluctuate
or liquidity needs change.



Investment Securities



Investment securities available for sale were $31,739,000 at December 31, 2004. This
compares to $30,718,000 at December 31, 2003, an increase of $1,021,000 or 3.3%. Total purchases for 2004 were $12,453,000 and were funded by a combination of deposits and borrowings. Investment securities that were either called or matured totaled
$10,553,000 compared to previous year calls and maturities of $13,750,000 and purchases of $23,870,000. Previous year purchases were much higher than the current year due to a more robust increase in funding sources. For 2004, a total of $582,000 in
securities were sold at a pre-tax gain of $10,000 compared to $1,109,000 in 2003 for a pre-tax gain of $68,000.



The year-end 2004 market value of the investment portfolio decreased $191,000 when compared to year-end 2003. This decrease was primarily due to interest rates rising
during the year. In general, as interest rates rise, and increase above the rate on a fixed-rate investment security, the market value of that security declines. As a result, the Company has taken measures to position the investment portfolio for a
rising rate environment. One such measure has been to keep-short the maturity or life of the portfolio in an attempt to minimize possible market value declines.



5



---

Investment securities held to maturity decreased $143,000 or 12.7% in 2004 when compared to the prior year as a result of
securities that matured.



Loans



Total loans for the year decreased $757,000 or 1.7% to $44,484,000. Average loans
outstanding were up slightly, at $170,000 or 0.4% for the year. Overall loan demand has continued to be at a much slower pace than anticipated and down from previous years. In June, the Company expanded the commercial lending staff by adding a
Senior Commercial Loan Officer and a Credit Analyst. These new positions will allow the Company to more effectively manage the commercial loan portfolio and provide better customer service as well as to help facilitate in generating new loan
customers.



Bank Owned Life Insurance



In early 2003, the Bank purchased $2,100,000 of Bank-owned life insurance (BOLI)
from two separate insurance carriers. The insurance is carried by the Bank at the current cash surrender values of the underlying policies. The earnings received from the cash value life insurance plans, which are tax exempt, are used to offset
employee benefit costs. For 2004 the cash value of these policies increased by $88,000 or 4.0%.



Deposits



Deposits are generally the
Banks primary source for funding its earning assets. The Bank offers a wide variety of products designed to attract new customers and retain existing customers while at the same time attempting to maintain a cost-effective funding source.
Deposits in total were up $927,000 or 1.3% when compared to total deposits at December 31, 2003. Interest-bearing demand accounts were down by $3,167,000 or 22.6% while money market accounts were up $4,485,000 or 123.5%. In 2004, the Company
discontinued an interest-bearing demand product, replacing it with an existing money market account. Most, if not all of the accounts were transferred to a money market account, accounting for most of the change in the two product types. Total time
deposits were up $417,000 for the year while noninterest-bearing demand accounts and savings decreased by $220,000 and $590,000 respectively. For 2005, the Company announced that it will be offering internet-banking services.



Borrowings



The Company may from time to time use various funding sources other than deposits to provide the funds necessary for the loan and investment
securities portfolios. Alternative funding sources may include securities sold under repurchase agreements and advances with the FHLB. Securities that are sold under repurchase agreements are funding agreements with customers of the Bank that are
collateralized by various Bank owned investment securities.



At December 31,
2004 total borrowings from the FHLB equaled $3,300,000 compared to $2,000,000 at year-end 2003. The 2003 borrowings consisted entirely of short-term overnight advances while the 2004 borrowings consist of both fixed and variable rate advances with
terms of up to twenty-four months. The increase in the FHLB advances for the year was partially a result of the slow deposit growth and the use of these advances to fund asset growth in 2004.



Securities sold under repurchase agreements totaled $6,532,000 for year-end 2003 compared to
$5,834,000 in 2004 a decrease of $699,000 or 10.7% for the year.



Summary of
Earnings



The Companys 2004 net income was $766,000, an increase of
$65,000, or 9.2%, from 2003s net income of $701,000. On a per share basis, net income rose by 10.3% to $0.86 per basic and diluted share compared to 2003s net income per share of $0.78 for basic and diluted shares, respectively. The
increase in net income for the year was primarily a result of an increase in net interest income and other operating income offset by an increase in other operating expenses.



6



---

Interest Income



Interest income on loans decreased $53,000 or 1.6% during 2004 when compared to 2003. This decrease was a result of a 39 basis point drop on the yield earned for total
loans offset by an increase of $170,000 or 0.4% increase in the average loan balance outstanding.



Interest income on federal funds sold decreased $3,000 or 8.5% during 2004 when compared to 2003 due to a decrease of 25.8% or $1,008,000 in the average balance outstanding offset by a 9 basis point increase in the
yield earned.



Interest income earned on investment securities decreased in
2004 by $22,000 or 1.8% from 2003. This decrease was a result of a 93 basis point decrease in the yield earned offset by a $6,552,000 or 23.4% increase in the average balance outstanding.



Interest Expense



Interest expense on deposits for 2004 decreased $200,000 or 19.1% when compared to 2003. This decrease was a result of a 35 basis point drop on the rate paid on deposits
for the year offset by a $1,514,000 or 2.6% increase in average interest-bearing deposits outstanding.



Interest expense on borrowings increased $28,000 or 31.7% in 2004 when compared to 2003 and was due to an increase of 12 basis points on the rate paid on these funds and a $1,521,000 or 21.6% increase in the average
balance of borrowed funds outstanding.



Provision and Allowance for Loan
Losses



For 2004, the provision for loan losses was $133,000, compared to
$76,000 charged in 2003. This represents a $57,000 or 75.9% increase for the year. The amount of the provision for loan losses charged to operations is determined by the Companys loan committee and approved by the Board of Directors. In
determining the amount of the provision, the committee considers such factors as credit risks inherent in the loan portfolio, asset quality, economic conditions, portfolio trends and the amount of charge-offs.



The Company believes that the allowance for loan losses at December 31, 2004 of $501,000 is
adequate to cover probable losses in the portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at December 31,
2004.



Other Operating Income



Total noninterest income increased $247,000 or 21.7% for 2004. Service fees on deposit
accounts increased by $247,000 or 35.5% as a result of (1) increased revenues from new deposits accounts as costs of these services were not increased and (2) fees collected from a new demand deposit product introduced late in the second quarter of
2004. The new product, named Bounce Protection is an overdraft privilege service provided to customers of the Bank. Other noninterest income increased as a result of an increase in ATM processing fees collected by Gateminder and a small
increase from new revenues from investment advisory fees generated by MDH. Investment securities gains totaled $10,000 for 2004 compared to $68,000 in 2003 from the sale of $582,000 and $1,109,000 in investment securities, respectively. Earnings
received on bank-owned life insurance increased as a result of the Company purchasing two separate cash-value life insurance policies that were funded in the first quarter of 2003.



Other Operating Expense



Total salary and employee benefits increased $158,000 or 8.8% in 2004. Employee salaries and wages increased $86,000 or 6.1% due to the hiring of additional personnel
throughout 2004 as well as normal merit increases relating to existing employees. Total employee benefit costs for the year increased by $72,000 due to increases in health insurance costs and other employee related benefit expenses.



7



---

Furniture and equipment costs increased $11,000 or 3.2% in 2004 from 2003 due mostly from an increase in depreciation
expense from capitalized costs associated with a new core processing and check imaging system purchased in 2003, offset by a reduction in maintenance costs as a result of these new purchases.



Other expenses decreased $26,000 or 2.1%, in 2004 mainly as a result of: (1) a reduction in
the amount of losses incurred from checks charged-off in 2004 compared to 2003, (2) a decrease in postage costs from the implementation of an in-house check imprinting system, and (3) a write-down that occurred in 2003 on a residential real-estate
property.



The provision for income tax was $209,000 in 2004 compared to
$128,000 in 2003. This represents an increase of $81,000 or 63.1% and is due mostly to an increase in taxable income.



Capital Resources



Total consolidated stockholders equity increased $75,000 or 0.8% when compared to December 31, 2003. For the year, treasury shares purchased totaled $228,000, which is a reduction to capital, and accumulated
comprehensive income declined by $126,000, all offset by net income of $766,000, less cash dividends declared of $337,000.



Liquidity



The liquidity of a Banking institution reflects its ability to provide funds to meet loan requests, to accommodate the possible outflows of deposits and to take advantage of interest rate market opportunities. It
requires continuous analysis by management in order to match the maturities of short-term loans and investments with the various types of deposits and borrowings. Liquidity is normally considered in terms of the nature and the mix of the Banks
sources and uses of funds.



The Banks primary sources of funds are
deposits, borrowings, proceeds from principal and interest payments on loans and interest payments and maturities on investment securities. While scheduled principal repayments on loans and interest payments on investment securities are a relatively
predictable source of funds, deposit and short-term borrowing outflows are greatly influenced by interest rates, economic conditions, competition and other factors.



Management is not aware of any known trends, events or uncertainties that would have a material effect on the liquidity, capital resources
or operations of the Company. Management is not aware of any current regulatory recommendations, which, if implemented, would have a material effect on the liquidity, capital resources or operations of the Company.



Impact of Inflation and Changing Prices



The financial statements and related data have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation.



The effects of inflation on the local economy and the Companys operating
results have been relatively modest for the past several years. However, 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 or services, since such goods and services are
affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Banks assets and liabilities are critical to the maintenance of the acceptable performance levels.



8



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Tri-State 1st Banc, Inc.



We have audited the consolidated balance sheet of Tri-State 1st Banc, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tri-State 1st Banc, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years then ended in conformity with U.S. generally accepted accounting principles.



Wexford, Pennsylvania

January 28, 2005



S.R. Snodgrass, A.C.

1000 Stonewood Drive

Suite 200

Wexford, Pa 15090

(724) 934-0344



12



---

TRI-STATE 1ST BANC, INC.

CONSOLIDATED BALANCE SHEET



|                                                                                   |  |              |            |   |      |   |            |  
|---------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                   |  | December 31, |           
|                                                                                   |  | 2004         |            |   | 2003 |  
|ASSETS                                                                             |  |              |            |   |      |   |            |  
|Cash and due from banks                                                            |  | $            | 5,821,350  |   |      | $ | 6,005,898  |  
|Interest-bearing deposits with other banks                                         |  |              | 169,820    |   |      |   | 74,894     |  
|                                                                                   |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                          |  |              | 5,991,170  |   |      |   | 6,080,792  |  
|                                                                                   |  |             
|Investment securities available for sale                                           |  |              | 31,738,674 |   |      |   | 30,718,135 |  
|                                                                                   |  |             
|Investment securities held to maturity (market value of $1,021,161 and $1,188,816) |  |              | 982,470    |   |      |   | 1,125,279  |  
|Loans                                                                              |  |              | 44,484,168 |   |      |   | 45,240,680 |  
|Less allowance for loan losses                                                     |  |              | 501,301    |   |      |   | 514,260    |  
|                                                                                   |  |              |            |   |      |   |            |  
|Net loans                                                                          |  |              | 43,982,867 |   |      |   | 44,726,420 |  
|Premises and equipment                                                             |  |              | 3,944,265  |   |      |   | 3,484,002  |  
|Bank-owned life insurance                                                          |  |              | 2,258,592  |   |      |   | 2,170,682  |  
|Goodwill                                                                           |  |              | 882,475    |   |      |   |           |  
|Accrued interest and other assets                                                  |  |              | 1,188,197  |   |      |   | 1,066,659  |  
|                                                                                   |  |              |            |   |      |   |            |  
|TOTAL ASSETS                                                                       |  | $            | 90,968,710 |   |      | $ | 89,371,969 |  
|                                                                                   |  |              |            |   |      |   |            |  
|LIABILITIES                                                                        |  |              |            |   |      |   |            |  
|Deposits:                                                                          |  |              |            |   |      |   |            |  
|Noninterest-bearing demand                                                         |  | $            | 14,884,629 |   |      | $ | 15,104,257 |  
|Interest-bearing demand                                                            |  |              | 10,827,774 |   |      |   | 13,994,300 |  
|Money market                                                                       |  |              | 8,117,013  |   |      |   | 3,631,875  |  
|Savings                                                                            |  |              | 13,524,377 |   |      |   | 14,113,973 |  
|Time                                                                               |  |              | 24,951,812 |   |      |   | 24,534,581 |  
|                                                                                   |  |              |            |   |      |   |            |  
|Total deposits                                                                     |  |              | 72,305,605 |   |      |   | 71,378,986 |  
|Short-term borrowings                                                              |  |              | 5,133,865  |   |      |   | 8,532,649  |  
|Other borrowings                                                                   |  |              | 3,300,000  |   |      |   |           |  
|Accrued interest and other liabilities                                             |  |              | 891,152    |   |      |   | 197,522    |  
|                                                                                   |  |              |            |   |      |   |            |  
|TOTAL LIABILITIES                                                                  |  |              | 81,630,622 |   |      |   | 80,109,157 |  
|                                                                                   |  |              |            |   |      |   |            |  
|STOCKHOLDERS EQUITY                                                               |  |              |            |   |      |   |            |  
|Common stock, no par value; 3,000,000 shares authorized, 915,764 shares issued     |  |              | 8,195,467  |   |      |   | 8,195,467  |  
|Retained earnings                                                                  |  |              | 1,748,559  |   |      |   | 1,319,285  |  
|Treasury stock, at cost (34,137 and 21,843 shares)                                 |  |              | (630,685   | ) |      |   | (402,637   | )
|Accumulated other comprehensive income                                             |  |              | 24,747     |   |      |   | 150,697    |  
|                                                                                   |  |              |            |   |      |   |            |  
|TOTAL STOCKHOLDERS EQUITY                                                         |  |              | 9,338,088  |   |      |   | 9,262,812  |  
|                                                                                   |  |              |            |   |      |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                         |  | $            | 90,968,710 |   |      | $ | 89,371,969 |  
|                                                                                   |  |              |            |   |      |   |            |  



See accompanying notes to the
consolidated financial statements.



13



---

TRI-STATE 1ST BANC, INC.

CONSOLIDATED STATEMENT OF INCOME



|                                                    |  |                         |           |      |   |          
|--------------------------------------------------- |  | ----------------------- | --------- | ---- | - | ---------
|                                                    |  | Year Ended December 31,
|                                                    |  | 2004                    |           | 2003
|INTEREST INCOME                                     |  |                         |           |      |   |          
|Loans, including fees                               |  | $                       | 3,320,653 |      | $ | 3,373,228
|Interest-bearing deposits with other banks          |  |                         | 4,245     |      |   | 4,968    
|Federal funds sold                                  |  |                         | 33,389    |      |   | 36,495   
|Investment securities:                              |  |                         |           |      |   |          
|Taxable                                             |  |                         | 903,517   |      |   | 859,304  
|Exempt from federal income tax                      |  |                         | 293,906   |      |   | 360,142  
|                                                    |  |                         |           |      |   |          
|Total interest income                               |  |                         | 4,555,710 |      |   | 4,634,137
|                                                    |  |                         |           |      |   |          
|INTEREST EXPENSE                                    |  |                         |           |      |   |          
|Deposits                                            |  |                         | 848,761   |      |   | 1,048,676
|Short-term borrowings                               |  |                         | 100,368   |      |   | 88,408   
|Other borrowings                                    |  |                         | 16,051    |      |   |         
|                                                    |  |                         |           |      |   |          
|Total interest expense                              |  |                         | 965,180   |      |   | 1,137,084
|                                                    |  |                         |           |      |   |          
|NET INTEREST INCOME                                 |  |                         | 3,590,530 |      |   | 3,497,053
|                                                    |  |                        
|Provision for loan losses                           |  |                         | 133,000   |      |   | 75,620   
|                                                    |  |                         |           |      |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                         | 3,457,530 |      |   | 3,421,433
|                                                    |  |                         |           |      |   |          
|OTHER OPERATING INCOME                              |  |                         |           |      |   |          
|Service fees on deposit accounts                    |  |                         | 941,513   |      |   | 694,706  
|Investment securities gains                         |  |                         | 9,959     |      |   | 68,407   
|Earnings on bank-owned life insurance               |  |                         | 87,910    |      |   | 70,682   
|Other                                               |  |                         | 348,154   |      |   | 306,367  
|                                                    |  |                         |           |      |   |          
|Total other operating income                        |  |                         | 1,387,536 |      |   | 1,140,162
|                                                    |  |                         |           |      |   |          
|OTHER OPERATING EXPENSE                             |  |                         |           |      |   |          
|Salaries and employee benefits                      |  |                         | 1,949,124 |      |   | 1,791,298
|Occupancy                                           |  |                         | 399,900   |      |   | 404,761  
|Furniture and equipment                             |  |                         | 344,513   |      |   | 333,874  
|Other                                               |  |                         | 1,176,342 |      |   | 1,202,169
|                                                    |  |                         |           |      |   |          
|Total other operating expense                       |  |                         | 3,869,879 |      |   | 3,732,102
|                                                    |  |                         |           |      |   |          
|Income before income taxes                          |  |                         | 975,187   |      |   | 829,493  
|Income taxes                                        |  |                         | 208,955   |      |   | 128,100  
|                                                    |  |                         |           |      |   |          
|NET INCOME                                          |  | $                       | 766,232   |      | $ | 701,393  
|                                                    |  |                         |           |      |   |          
|EARNINGS PER SHARE                                  |  |                         |           |      |   |          
|Basic                                               |  | $                       | 0.86      |      | $ | 0.78     
|Diluted                                             |  |                         | 0.86      |      |   | 0.78     



See accompanying notes to the
consolidated financial statements.



14



---

TRI-STATE 1ST BANC, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY



|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ---------------- | - | --------- | ------------- |  | - | ------------------------------------------ | - |  | ----- | -------- | - |  | - | --------- | -
|                                                                                                      |  | CommonStock |           | RetainedEarnings |   |           | TreasuryStock |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |         
|Balance, December 31, 2002                                                                            |  | $           | 8,182,945 |                  | $ | 914,595   |               |  | $ | (34,755                                    | ) |  | $     | 547,807  |   |  | $ | 9,610,592 |  
|                                                                                                      |  |             |           |                  |  
|Comprehensive income:                                                                                 |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Net income                                                                                            |  |             |           |                  |   | 701,393   |               |  |   |                                            |   |  |       |          |   |  |   | 701,393   |  
|Net unrealized loss on securities, net of reclassification adjustment, net of tax benefit of $204,572 |  |             |           |                  |   |           |               |  |   |                                            |   |  |       | (397,110 | ) |  |   | (397,110  | )
|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Total comprehensive income                                                                            |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   | 304,283   |  
|                                                                                                      |  |             |           |                  |  
|Purchase of treasury stock                                                                            |  |             |           |                  |   |           |               |  |   | (799,517                                   | ) |  |       |          |   |  |   | (799,517  | )
|Stock options exercised                                                                               |  |             | 12,522    |                  |   | (45,230   | )             |  |   | 431,635                                    |   |  |       |          |   |  |   | 398,927   |  
|Dividends declared ($0.28 per share)                                                                  |  |             |           |                  |   | (251,473  | )             |  |   |                                            |   |  |       |          |   |  |   | (251,473  | )
|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Balance, December 31, 2003                                                                            |  |             | 8,195,467 |                  |   | 1,319,285 |               |  |   | (402,637                                   | ) |  |       | 150,697  |   |  |   | 9,262,812 |  
|                                                                                                      |  |             |           |                  |  
|Comprehensive income:                                                                                 |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Net income                                                                                            |  |             |           |                  |   | 766,232   |               |  |   |                                            |   |  |       |          |   |  |   | 766,232   |  
|Net unrealized loss on securities, net of reclassification adjustment, net of tax benefit of $64,883  |  |             |           |                  |   |           |               |  |   |                                            |   |  |       | (125,950 | ) |  |   | (125,950  | )
|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Total comprehensive income                                                                            |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   | 640,282   |  
|                                                                                                      |  |             |           |                  |  
|Purchase of treasury stock                                                                            |  |             |           |                  |   |           |               |  |   | (228,048                                   | ) |  |       |          |   |  |   | (228,048  | )
|Dividends declared ($0.38 per share)                                                                  |  |             |           |                  |   | (336,958  | )             |  |   |                                            |   |  |       |          |   |  |   | (336,958  | )
|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  
|Balance, December 31, 2004                                                                            |  | $           | 8,195,467 |                  | $ | 1,748,559 |               |  | $ | (630,685                                   | ) |  | $     | 24,747   |   |  | $ | 9,338,088 |  
|                                                                                                      |  |             |           |                  |   |           |               |  |   |                                            |   |  |       |          |   |  |   |           |  



|                                                                          |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                          |  | 2004 |          |   | 2003 |  
|Components of other comprehensive loss:                                   |  |      |          |   |      |   |          |  
|Change in net unrealized loss on investment securities available for sale |  | $    | (119,377 | ) |      | $ | (351,961 | )
|Realized gains included in net income, net of taxes of $3,386 and $23,258 |  |      | (6,573   | ) |      |   | (45,149  | )
|                                                                          |  |      |          |   |      |   |          |  
|Total                                                                     |  | $    | (125,950 | ) |      | $ | (397,110 | )
|                                                                          |  |      |          |   |      |   |          |  



See accompanying notes to the
consolidated financial statements.



15



---

TRI-STATE 1ST BANC, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                                                  |  |                         |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | Year Ended December 31, |            
|                                                                                  |  | 2004                    |             |   | 2003 |  
|OPERATING ACTIVITIES                                                              |  |                         |             |   |      |   |             |  
|Net income                                                                        |  | $                       | 766,232     |   |      | $ | 701,393     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |             |   |      |   |             |  
|Provision for loan losses                                                         |  |                         | 133,000     |   |      |   | 75,620      |  
|Depreciation and amortization, net                                                |  |                         | 424,823     |   |      |   | 508,546     |  
|Investment securities gains, net                                                  |  |                         | (9,959      | ) |      |   | (68,407     | )
|Loss on sale of real estate owned                                                 |  |                         | 3,436       |   |      |   |            |  
|Deferred income taxes                                                             |  |                         | 17,625      |   |      |   | 4,864       |  
|Earnings on bank-owned life insurance                                             |  |                         | (87,910     | ) |      |   | (70,682     | )
|Decrease (increase) in accrued interest receivable                                |  |                         | 47,890      |   |      |   | (36,725     | )
|Increase (decrease) in accrued interest payable                                   |  |                         | 1,453       |   |      |   | (7,436      | )
|Other, net                                                                        |  |                         | (8,417      | ) |      |   | (28,587     | )
|                                                                                  |  |                         |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |                         | 1,288,173   |   |      |   | 1,078,586   |  
|                                                                                  |  |                         |             |   |      |   |             |  
|INVESTING ACTIVITIES                                                              |  |                         |             |   |      |   |             |  
|Investment securities available for sale:                                         |  |                         |             |   |      |   |             |  
|Proceeds from sales                                                               |  |                         | 582,021     |   |      |   | 1,109,157   |  
|Proceeds from principal repayments and maturities                                 |  |                         | 10,553,332  |   |      |   | 13,750,241  |  
|Purchases of securities                                                           |  |                         | (12,453,145 | ) |      |   | (23,869,849 | )
|Investment securities held to maturity:                                           |  |                         |             |   |      |   |             |  
|Proceeds from principal repayments and maturities                                 |  |                         | 143,486     |   |      |   | 181,480     |  
|Purchases of securities                                                           |  |                         |            |   |      |   | (375,000    | )
|Net decrease (increase) in loans                                                  |  |                         | 657,594     |   |      |   | (19,031     | )
|Purchase of bank-owned life insurance                                             |  |                         |            |   |      |   | (2,100,000  | )
|Proceeds from the sale of premises and equipment                                  |  |                         |            |   |      |   | 6,995       |  
|Purchase of premises and equipment                                                |  |                         | (789,885    | ) |      |   | (467,317    | )
|Proceeds from sale of real estate                                                 |  |                         | 32,000      |   |      |   |            |  
|Acquisition of MDH subsidiary                                                     |  |                         | (366,027    | ) |      |   |            |  
|                                                                                  |  |                         |             |   |      |   |             |  
|Net cash used for investing activities                                            |  |                         | (1,640,624  | ) |      |   | (11,783,324 | )
|                                                                                  |  |                         |             |   |      |   |             |  
|FINANCING ACTIVITIES                                                              |  |                         |             |   |      |   |             |  
|Net increase in deposits                                                          |  |                         | 926,619     |   |      |   | 9,243,982   |  
|Net increase (decrease) in short-term borrowings                                  |  |                         | (3,398,784  | ) |      |   | 3,326,535   |  
|Proceeds from other borrowings                                                    |  |                         | 3,300,000   |   |      |   |            |  
|Purchase of treasury stock                                                        |  |                         | (228,048    | ) |      |   | (799,517    | )
|Stock options exercised                                                           |  |                         |            |   |      |   | 386,405     |  
|Cash dividends paid                                                               |  |                         | (336,958    | ) |      |   | (251,473    | )
|                                                                                  |  |                         |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |                         | 262,829     |   |      |   | 11,905,932  |  
|                                                                                  |  |                         |             |   |      |   |             |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | (89,622     | ) |      |   | 1,201,194   |  
|                                                                                  |  |                        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    |  |                         | 6,080,792   |   |      |   | 4,879,598   |  
|                                                                                  |  |                         |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                          |  | $                       | 5,991,170   |   |      | $ | 6,080,792   |  
|                                                                                  |  |                         |             |   |      |   |             |  



See accompanying notes to the
consolidated financial statements.



16



---

TRI-STATE 1ST BANC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Nature of Operations and Basis of Presentation



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



Tri-State 1st Banc, Inc. (the Company) is an Ohio corporation
organized as the holding company of the 1st National Community Bank (the Bank), Gateminder Corporation (Gateminder), and MDH Investment Management, Inc. (MDH). The Bank is a national banking association
headquartered in East Liverpool, Ohio. The Banks principal sources of revenue emanate from its commercial, commercial mortgage, residential real estate, and consumer loan financing, its investment securities portfolio, as well as a variety of
deposit services offered to its customers through seven branch offices which are located in the tristate area of East Liverpool, Ohio. Gateminder was established by the Company to provide non-banking services to businesses with automated teller
machines (ATMs). Gateminder sells ATM machines and provides the means for processing transactions for businesses. MDH is an investment advisory firm established by the Company to provide investment management and financial planning
services. The Company and its subsidiaries are reported under one business segment.



The Companys principal assets are represented by its ownership of the Bank, Gateminder, and MDH. The Company, Gateminder, and MDH are supervised by the Board of Governors of the Federal Reserve System, while the
Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency.



The consolidated financial statements of the Company include its wholly owned subsidiaries. All intercompany transactions have been eliminated in
consolidation. The investment in subsidiaries on the parent company financial statements is carried at the Companys equity position in the underlying net assets of each entity. The financial statements have been prepared in conformity with
U.S. generally accepted accounting principles. 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 revenues and
expenses for the period. Actual results could differ significantly from those estimates.



Investment Securities



Investment securities are classified at the time of purchase, based on managements abilities and intention, as securities held to maturity or available for sale. Debt securities acquired with the ability and intent to hold to maturity
are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. All other debt securities have been classified as available for sale to
serve principally for liquidity purposes. Unrealized holding gains and losses for 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 of Cincinnati (FHLB) and the Federal Reserve Bank represents ownership in institutions that are
wholly owned by other financial institutions. These equity securities are accounted for at cost and are classified as other assets.



17



---

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- | ------------------------------------------------------



Loans



Loans are reported at their principal amount, net of the allowance for loan losses. Interest on all loans is recognized as income when earned on the
accrual method. The Companys general policy is to stop accruing interest on loans when it is determined that reasonable doubt exists as to the collectibility of additional interest. Payments received on nonaccrual loans are recorded as income
or applied against principal according to manage-ments judgment as to the collectibility of principal.



Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related
loans yield. The Company is amortizing these amounts over the contractual life of the related loans.



Allowance for Loan Losses



The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio.
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, provided the loan is not of a commercial or commercial real estate classification. Factors considered by management in determining impairment include payment status and collateral value.
The amount of impairment for these types of 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 secured by 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 concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, 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 computed on the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years for furniture, fixtures, and equipment and 3 to 40 years
for buildings and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.



18



---

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- | ------------------------------------------------------



Bank-Owned Life Insurance



Bank-owned life insurance (BOLI) is carried by the Bank at the current cash surrender values of the underlying policies. The policies are single premium
policies that do not carry loads or surrender charges. Income earned on the policies is based on the crediting rate on the individual insurance contracts.



Intangible Asset



The intangible asset consists of a premium for the value of the sellers customer listing. This customer list premium, which was developed based upon
a specific study, is amortized using the straight-line method over seven years. Annual assessments of carrying value and remaining amortization periods are made to determine possible carrying value impairment and appropriate adjustments as deemed
necessary. This asset is a component of other assets on the Consolidated Balance Sheet.



Goodwill



The
Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (FAS) No. 142, Goodwill and Other Intangible Assets. This statement, among other things, requires a two-step process for testing the
impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Companys reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company performs an annual
impairment analysis of goodwill. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2004.



Real Estate Owned



Real estate owned acquired in the settlement of foreclosed loans is carried
as a component of other assets at the lower of cost or fair value minus estimated cost to sell. Valuation allowances for estimated losses are provided when the carrying value of the real estate acquired exceeds the fair value. Direct costs incurred
in the foreclosure process and subsequent holding costs incurred on such properties are recorded as expenses of current operations.



Treasury Stock



The acquisition of treasury stock is recorded under the cost method. At the date of subsequent issue, the treasury stock is redeemed by the cost of such
stock on the average cost basis.



Advertising
Costs



Advertising costs are expensed as the costs are
incurred. Advertising expenses amounted to $64,959 and $76,624 for 2004 and 2003, respectively.



Earnings Per Share



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



Employee Benefits



Employee benefits include contributions to a defined contribution Section
401(k) plan covering eligible employees. Limited matching contributions are made for participating employees subject to plan criteria. In addition, an elective contribution is made annually at the discretion of the Board of Directors. The Company
also maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees and officers. The amount of the contribution to the ESOP is at the discretion of the Board of Directors.





19



---

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- | ------------------------------------------------------



Stock Options



The Company maintains stock option plans for the directors, officers, and key employees. The Company accounts for its stock option plans under the
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.



Had the 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 and basic and diluted net income per common share for the year ended December 31 would have been as follows:



|                                         |  |      |         |      |   |        
|---------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                         |  | 2004 |         | 2003
|Net income applicable to common stock    |  | $    | 766,232 |      | $ | 701,393
|Less pro forma expense related to option |  |      | 31,574  |      |   | 62,647 
|                                         |  |      |         |      |   |        
|Pro forma net income                     |  | $    | 734,658 |      | $ | 638,746
|                                         |  |      |         |      |   |        
|Basic net income per common share:       |  |      |         |      |   |        
|As reported                              |  | $    | 0.86    |      | $ | 0.78   
|Pro forma                                |  |      | 0.83    |      |   | 0.71   
|Diluted net income per common share:     |  |      |         |      |   |        
|As reported                              |  | $    | 0.86    |      | $ | 0.78   
|Pro forma                                |  |      | 0.83    |      |   | 0.71   



For purposes of
computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option pricing model. The model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, the
pro forma results are estimates of results of operations 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:



|           |  |                        |   |  |                         |   |  |                     |   |  |                         
|---------- |  | ---------------------- | - |  | ----------------------- | - |  | ------------------- | - |  | ------------------------
|Grant Year |  | ExpectedDividend Yield |   |  | Risk-Free Interest Rate |   |  | Expected Volatility |   |  | Expected Life (in years)
|           |  |                        |  
|2004       |  | 2.13                   | % |  | 3.77                    | % |  | 18.36               | % |  | 6.17                    
|2003       |  | 1.50                   | % |  | 3.94                    | % |  | 18.77               | % |  | 7.01                    



Income
Taxes



Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, these assets and liabilities are adjusted
through the provision for income taxes.



Comprehensive
Income



The Company is required to present
comprehensive income and its components in a full set of general-purpose financial statements for all periods presented. The Companys other comprehensive income comprises the net unrealized gains and losses attributable to its investment
securities available for sale. The Company has elected to report the effects of comprehensive income as a part of the Consolidated Statement of Changes in Stockholders Equity.



20



---

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- | ------------------------------------------------------



Cash Flow Information



The Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and due from banks and
Interest-bearing deposits with other banks that have original maturities of less than 90 days. Cash payments for interest expense in 2004 and 2003 were $963,727 and $1,144,520, respectively. Cash payments for income taxes in 2004 and
2003 were $99,811 and $133,039, respectively.



Reclassification of Comparative Amounts



Certain items previously reported have been reclassified to conform to the current years reporting format. Such reclassifications did not affect net income or stockholders equity.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (FAS) No. 123 (Revised 2004), Share-Based Payment. The statement requires that compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on July 1, 2005, and is currently evaluating the impact the adoption of the standard will have on
the Companys results of operations.



In October 2003,
the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer.SOP 03-3 applies to a loan that is acquired where it is probable, at acquisition, that a
transferee will be unable to collect all contractually required payments receivable. SOP 03-3 requires the recognition, as accretable yield, of the excess of all cash flows expected at acquisition over the investors initial investment in the
loan as interest income on a level-yield basis over the life of the loan. The amount by which the loans contractually required payments exceed the amount of its expected cash flows at acquisition may not be recognized as an adjustment to
yield, a loss accrual, or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material
impact on the consolidated financial statements.



21



---

|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.



|                                                                                                         |  |         |   |  |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------- | - |  | ------- | -
|                                                                                                         |  | 2004    |   |  | 2003    |  
|Weighted-average common shares                                                                           |  | 915,764 |   |  | 915,764 |  
|Average treasury stock shares                                                                            |  | (27,108 | ) |  | (14,049 | )
|                                                                                                         |  |         |   |  |         |  
|Weighted-average common shares outstanding used to calculate basic earnings per share                    |  | 888,656 |   |  | 901,715 |  
|                                                                                                         |  |        
|Additional common stock equivalents (stock options) used to calculate diluted earnings per share         |  | 100     |   |  | 380     |  
|                                                                                                         |  |         |   |  |         |  
|                                                                                                         |  |        
|Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share |  | 888,756 |   |  | 902,095 |  
|                                                                                                         |  |         |   |  |         |  



Options to purchase
57,100 and 32,725 shares of common stock at prices from $18.75 to $20.36 were outstanding during 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because to do so would have been anti dilutive.



|3. | BUSINESS ACQUISITION
|-- | --------------------



Effective December 22, 2004, the Company, through a newly formed subsidiary, acquired the assets of MDH Investment Management, Inc. for $1,000,000. Under
the terms of the acquisition agreement, 50 percent of the acquisition price is to be paid in cash and 50 percent is to be paid from issuance of the Companys common stock. The acquisition price will be paid over a three-year period.



The primary business of MDH was and remains an investment
advisory firm providing investment management and financial planning services with total assets under management of approximately $65 million. MDH is a registered investment advisory firm with the Securities and Exchange Commission and serves in
excess of 100 clients in 14 states.



|4. | STOCK SPLIT AND DIVIDEND
|-- | ------------------------



On December 20, 2002, the Board of Directors approved a five-for-four stock split, payable January 24, 2003, to stockholders of record on January 8, 2003.
Average shares outstanding and all per share amounts included in the consolidated financial statements are based on the increased number of shares giving retroactive effect to the stock split and stock dividend.



22



---

|5. | INVESTMENT SECURITIES
|-- | ---------------------



The amortized cost and estimated market value of investment securities available for sale are as follows:



|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|------------------------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | --------------------- | - |  | - | ----------
|                                                 |  | 2004         
|                                                 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedMarket Value
|U.S. government agency securities                |  | $             | 13,974,353 |                      | $ | 3,023                 |  | $ | (190,041              | ) |  | $ | 13,787,335
|Obligations of states and political subdivisions |  |               | 5,699,319  |                      |   | 278,128               |  |   | (5,562                | ) |  |   | 5,971,885 
|Mortgage-backed securities                       |  |               | 11,027,505 |                      |   | 29,546                |  |   | (63,520               | ) |  |   | 10,993,531
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|Total debt securities                            |  |               | 30,701,177 |                      |   | 310,697               |  |   | (259,123              | ) |  |   | 30,752,751
|                                                 |  |               |            |                     
|Mutual funds                                     |  |               | 1,000,000  |                      |   |                      |  |   | (14,077               | ) |  |   | 985,923   
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|Total                                            |  | $             | 31,701,177 |                      | $ | 310,697               |  | $ | (273,200              | ) |  | $ | 31,738,674
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           



The amortized cost and
estimated market value of investment securities held for sale are as follows:



|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|------------------------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | --------------------- | - |  | - | ----------
|                                                 |  | 2003         
|                                                 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedMarket Value
|U.S. government agency securities                |  | $             | 13,352,649 |                      | $ | 36,177                |  | $ | (222,393              | ) |  | $ | 13,166,433
|Obligations of states and political subdivisions |  |               | 6,663,850  |                      |   | 392,482               |  |   | (4,643                | ) |  |   | 7,051,689 
|Mortgage-backed securities                       |  |               | 9,473,308  |                      |   | 79,691                |  |   | (46,956               | ) |  |   | 9,506,043 
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|Total debt securities                            |  |               | 29,489,807 |                      |   | 508,350               |  |   | (273,992              | ) |  |   | 29,724,165
|Mutual funds                                     |  |               | 1,000,000  |                      |   |                      |  |   | (6,030                | ) |  |   | 993,970   
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           
|Total                                            |  | $             | 30,489,807 |                      | $ | 508,350               |  | $ | (280,022              | ) |  | $ | 30,718,135
|                                                 |  |               |            |                      |   |                       |  |   |                       |   |  |   |           



The amortized cost and
estimated market value of investment securities held to maturity are as follows:



|                                                 |  |               |         |                      |   |                       |  |                      |   |  |   |          
|------------------------------------------------ |  | ------------- | ------- | -------------------- | - | --------------------- |  | -------------------- | - |  | - | ---------
|                                                 |  | 2004         
|                                                 |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarketValue
|Obligations of states and political subdivisions |  | $             | 982,470 |                      | $ | 38,691                |  | $                    |  |  | $ | 1,021,161
|                                                 |  |               |         |                      |   |                       |  |                      |   |  |   |          
|Total                                            |  | $             | 982,470 |                      | $ | 38,691                |  | $                    |  |  | $ | 1,021,161
|                                                 |  |               |         |                      |   |                       |  |                      |   |  |   |          



|                                                 |  |               |           |                      |   |                       |  |                      |   |  |   |          
|------------------------------------------------ |  | ------------- | --------- | -------------------- | - | --------------------- |  | -------------------- | - |  | - | ---------
|                                                 |  | 2003         
|                                                 |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarketValue
|Obligations of states and political subdivisions |  | $             | 1,125,279 |                      | $ | 63,537                |  | $                    |  |  | $ | 1,188,816
|                                                 |  |               |           |                      |   |                       |  |                      |   |  |   |          
|Total                                            |  | $             | 1,125,279 |                      | $ | 63,537                |  | $                    |  |  | $ | 1,188,816
|                                                 |  |               |           |                      |   |                       |  |                      |   |  |   |          





23



---

|5. | INVESTMENT SECURITIES (Continued)
|-- | ---------------------------------



The following table shows the Companys gross unrealized losses and fair value, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position, at December 31, 2004.



|                                                 |  |                         |            |                          |   |                       |  |                       |            |                       |   |                       |  |   |            |  |   |        
|------------------------------------------------ |  | ----------------------- | ---------- | ------------------------ | - | --------------------- |  | --------------------- | ---------- | --------------------- | - | --------------------- |  | - | ---------- |  | - | -------
|                                                 |  | Less than Twelve Months |            | Twelve Months or Greater |   | Total                
|                                                 |  | EstimatedMarket Value   |            | GrossUnrealizedLosses    |   | EstimatedMarket Value |  | GrossUnrealizedLosses |            | EstimatedMarket Value |   | GrossUnrealizedLosses
|U.S. government agency securities                |  | $                       | 6,185,322  |                          | $ | 52,867                |  | $                     | 6,460,363  |                       | $ | 137,174               |  | $ | 12,645,685 |  | $ | 190,041
|Obligations of states and political subdivisions |  |                         | 431,245    |                          |   | 2,778                 |  |                       | 109,995    |                       |   | 2,784                 |  |   | 541,240    |  |   | 5,562  
|Mortgage-backed securities                       |  |                         | 3,821,805  |                          |   | 18,573                |  |                       | 2,564,472  |                       |   | 44,947                |  |   | 6,386,277  |  |   | 63,520 
|                                                 |  |                         |            |                          |   |                       |  |                       |            |                       |   |                       |  |   |            |  |   |        
|Total debt securities                            |  |                         | 10,438,372 |                          |   | 74,218                |  |                       | 9,134,830  |                       |   | 184,905               |  |   | 19,573,202 |  |   | 259,123
|                                                 |  |                         |            |                          |   |                      
|Mutual funds                                     |  |                         |           |                          |   |                      |  |                       | 985,923    |                       |   | 14,077                |  |   | 985,923    |  |   | 14,077 
|                                                 |  |                         |            |                          |   |                       |  |                       |            |                       |   |                       |  |   |            |  |   |        
|Total                                            |  | $                       | 10,438,372 |                          | $ | 74,218                |  | $                     | 10,120,753 |                       | $ | 198,982               |  | $ | 20,559,125 |  | $ | 273,200
|                                                 |  |                         |            |                          |   |                       |  |                       |            |                       |   |                       |  |   |            |  |   |        



The policy of the
Company is to evaluate for other-than-temporary impairment when the fair value has been significantly below cost for three consecutive quarters. For fixed maturity investments with unrealized losses due to interest rates where the Company has the
positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that
at December 31, 2004, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability either to hold those securities to maturity or to allow a market recovery.



The Company has concluded that any impairment of its investment securities
portfolio is not other than temporary but is the result of interest rate changes, sector credit changes, or Company-specific rating changes that are not expected to result in the noncollection of principal and interest during the period.



The amortized cost and estimated market value of debt securities by
contractual maturity at December 31, 2004, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                       |  |                    |            |                       |   |               |  |                      |         |  |   |          
|-------------------------------------- |  | ------------------ | ---------- | --------------------- | - | ------------- |  | -------------------- | ------- |  | - | ---------
|                                       |  | Available for Sale |            | Held to Maturity     
|                                       |  | AmortizedCost      |            | EstimatedMarket Value |   | AmortizedCost |  | EstimatedMarketValue
|Due in one year or less                |  | $                  | 716,330    |                       | $ | 720,932       |  | $                    |        |  | $ |         
|Due after one year through five years  |  |                    | 10,734,558 |                       |   | 10,853,968    |  |                      | 607,470 |  |   | 635,175  
|Due after five years through ten years |  |                    | 9,790,972  |                       |   | 9,754,669     |  |                      | 375,000 |  |   | 385,986  
|Due after ten years                    |  |                    | 9,459,317  |                       |   | 9,423,182     |  |                      |        |  |   |         
|                                       |  |                    |            |                       |   |               |  |                      |         |  |   |          
|Total                                  |  | $                  | 30,701,177 |                       | $ | 30,752,751    |  | $                    | 982,470 |  | $ | 1,021,161
|                                       |  |                    |            |                       |   |               |  |                      |         |  |   |          





24



---

|5. | INVESTMENT SECURITIES (Continued)
|-- | ---------------------------------



Proceeds from the sales of securities available for sale and the gross realized gains and losses for the years ended December 31 were as follows:



|                      |  |      |         |      |   |          
|--------------------- |  | ---- | ------- | ---- | - | ---------
|                      |  | 2004 |         | 2003
|Proceeds from sales   |  | $    | 582,021 |      | $ | 1,109,157
|Gross realized gains  |  |      | 9,959   |      |   | 68,407   
|Gross realized losses |  |      |        |      |   |         



Investment securities
with an amortized cost of $11,876,644 and $9,647,902 and an estimated market value of $11,746,241 and $9,631,092, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and other purposes as required by
law at December 31, 2004 and 2003.



|6. | LOANS
|-- | -----



Major classifications of loans are summarized as follows:



|                               |  |      |            |      |   |           
|------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                               |  | 2004 |            | 2003
|Commercial and agricultural    |  | $    | 11,416,620 |      | $ | 13,562,536
|Real estate mortgages:         |  |      |            |      |   |           
|Residential                    |  |      | 20,647,891 |      |   | 18,229,479
|Construction                   |  |      | 205,617    |      |   | 162,492   
|Commercial                     |  |      | 6,317,945  |      |   | 7,864,842 
|Consumer                       |  |      | 5,896,095  |      |   | 5,421,331 
|                               |  |      |            |      |   |           
|                               |  |      | 44,484,168 |      |   | 45,240,680
|Less allowance for loan losses |  |      | 501,301    |      |   | 514,260   
|                               |  |      |            |      |   |           
|Net loans                      |  | $    | 43,982,867 |      | $ | 44,726,420
|                               |  |      |            |      |   |           



The Company grants
consumer, commercial, and mortgage loans to customers throughout its trade area that encompasses the immediate tristate area of East Liverpool, Ohio. Although the Company has a diversified loan portfolio at December 31, 2004 and 2003, a substantial
portion of its debtors ability to honor their loan agreements is dependent upon the economic stability of the tristate area.



Loans on which the accrual of interest has been discontinued or reduced, inclusive of impaired loans, amounted to $197,844 and $362,756 as of December 31,
2004 and 2003, respectively. Interest income on loans would have been increased by $6,382 and $8,130 during 2004 and 2003, respectively, if these loans had performed in accordance with their original terms.



25



---

|6. | LOANS (Continued)
|-- | -----------------



Information with respect to impaired loans and the related allowance for loan losses for the years ended December 31, 2004 and 2003, is noted below.



|                                              |  |      |         |      |   |        
|--------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                              |  | 2004 |         | 2003
|Impaired loans:                               |  |      |         |      |   |        
|With a related allowance for loan losses      |  | $    | 733,378 |      | $ | 992,584
|Without a related allowance for loan losses   |  |      |        |      |   |       
|                                              |  |      |         |      |   |        
|Total                                         |  | $    | 733,378 |      | $ | 992,584
|                                              |  |      |         |      |   |        
|Allowance for loan losses                     |  | $    | 32,345  |      | $ | 186,824
|Average recorded investment in impaired loans |  |      | 763,719 |      |   | 498,131
|Interest income recognized                    |  |      | 50,384  |      |   | 15,928 



As of December 31,
2004, aggregate loans of $60,000 or more extended to officers, directors, and related affiliates or associates were $1,827,075. A summary of activity during the year is as follows:



|     |           |           |   |                 |  |      |         |  |   |          
|---- | --------- | --------- | - | --------------- |  | ---- | ------- |  | - | ---------
|2003 |           | Additions |   | AmountCollected |  | 2004
|$    | 1,520,391 |           | $ | 1,102,949       |  | $    | 796,265 |  | $ | 1,827,075



|7. | ALLOWANCE FOR LOAN LOSSES
|-- | -------------------------



Changes in the allowance for loan losses for the years ended December 31 are as follows:



|                                |  |      |         |      |   |        
|------------------------------- |  | ---- | ------- | ---- | - | -------
|                                |  | 2004 |         | 2003
|Balance, January 1              |  | $    | 514,260 |      | $ | 514,276
|Add:                            |  |      |         |      |   |        
|Provision charged to operations |  |      | 133,000 |      |   | 75,620 
|Recoveries                      |  |      | 23,752  |      |   | 33,669 
|Less loans charged off          |  |      | 169,711 |      |   | 109,305
|                                |  |      |         |      |   |        
|Balance, December 31            |  | $    | 501,301 |      | $ | 514,260
|                                |  |      |         |      |   |        



26



---

|8. | PREMISES AND EQUIPMENT
|-- | ----------------------



Major classifications of premises and equipment are summarized as follows at December 31:



|                                   |  |      |           |      |   |          
|---------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                   |  | 2004 |           | 2003
|Land and improvements              |  | $    | 435,550   |      | $ | 429,141  
|Buildings and improvements         |  |      | 3,061,623 |      |   | 2,277,434
|Leasehold improvements             |  |      | 608,619   |      |   | 610,783  
|Furniture, fixtures, and equipment |  |      | 2,266,013 |      |   | 2,028,516
|Construction in progress           |  |      |          |      |   | 272,146  
|                                   |  |      |           |      |   |          
|                                   |  |      | 6,371,805 |      |   | 5,618,020
|Less accumulated depreciation      |  |      | 2,427,540 |      |   | 2,134,018
|                                   |  |      |           |      |   |          
|Total                              |  | $    | 3,944,265 |      | $ | 3,484,002
|                                   |  |      |           |      |   |          



Depreciation and
amortization charged to operations was $339,624 in 2004 and $345,118 in 2003.



|9. | INTANGIBLE ASSETS
|-- | -----------------



As part of the acquisition of MDH, $140,219 of intangible assets was recorded. Due to the timing of the acquisition, no amortization expense was
recognized during 2004. The estimated amortization of the intangible assets is $20,031 for each of the years ending 2005, 2006, 2007, and 2008.



|10. | GOODWILL
|--- | --------



As of December 31, 2004, goodwill had a net carrying amount of $882,475, resulting from the MDH acquisition on December 22, 2004. There was no
amortization expense for 2004.



|11. | DEPOSITS
|--- | --------



Time deposits at December 31, 2004, mature $15,200,198, $2,493,278, $5,723,343, $1,085,965, and $449,028, during 2005, 2006, 2007, 2008, and 2009,
respectively.



Time deposits include certificates of deposit
in denominations of $100,000 or more. Such deposits aggregated $7,586,838 and $5,393,889 at December 31, 2004 and 2003, respectively.



Maturities on time deposits of $100,000 or more are as follows at December 31, 2004:



|                                    |  |   |          
|----------------------------------- |  | - | ---------
|Within three months                 |  | $ | 2,564,998
|Beyond three but within six months  |  |   |         
|Beyond six but within twelve months |  |   | 2,958,538
|Beyond one year                     |  |   | 2,063,302
|                                    |  |   |          
|Total                               |  | $ | 7,586,838
|                                    |  |   |          



27



---

|12. | SHORT-TERM BORROWINGS
|--- | ---------------------



Short-term borrowings can consist of federal funds purchased, securities sold under agreement to repurchase, and FHLB adjustable rate borrowings with
terms of 30 days or less.



The outstanding balances and
related information for short-term borrowings are summarized as follows:



|                                            |  |        |            |      |      |   |        |   |           |  |      |  
|------------------------------------------- |  | ------ | ---------- | ---- | ---- | - | ------ | - | --------- |  | ---- | -
|                                            |  | 2004   |            |      | 2003 |  
|                                            |  | Amount |            | Rate |      |   | Amount |   | Rate      | 
|Balance at year-end                         |  | $      | 5,133,865  |      | 1.25 | % |        | $ | 8,532,649 |  | 1.23 | %
|Average balance outstanding during the year |  |        | 8,574,844  |      | 1.17 |   |        |   | 7,053,374 |  | 1.25 |  
|Maximum amount outstanding at any month-end |  |        | 10,379,073 |      |      |   |        |   | 8,577,316 |  |      |  



The Bank also has a
line of credit with a borrowing limit of approximately $12.6 million with the FHLB as of December 31, 2004. This credit line is subject to annual renewal and incurs no service charges. Outstanding borrowings on this line are collateralized by a
blanket security agreement on qualified residential mortgage loans and the Banks investment in stock of the FHLB. There were no significant borrowings outstanding on this line of credit for the years ended December 31, 2004 or 2003.



|13. | OTHER BORROWINGS
|--- | ----------------



Other borrowings consist of advances from the FHLB.



The following table presents contractual maturities of FHLB advances as of December 31:



|            |  |              |  |              |   |  |      |           |      |   |  
|----------- |  | ------------ |  | ------------ | - |  | ---- | --------- | ---- | - | -
|Descirption |  | MaturityDate |  | InterestRate |   |  | 2004 |           | 2003
|Fixed       |  | 12/1/2005    |  | 3.11         | % |  | $    | 700,000   |      | $ | 
|Fixed       |  | 12/1/2006    |  | 3.47         | % |  |      | 1,900,000 |      |   | 
|Variable    |  | 12/1/2006    |  | 2.56         | % |  |      | 700,000   |      |   | 
|            |  |              |  |              |   |  |      |           |      |   |  
|            |  |              |  |              |   |  | $    | 3,300,000 |      | $ | 
|            |  |              |  |              |   |  |      |           |      |   |  



|14. | OTHER EXPENSES
|--- | --------------



The following is an analysis of other expenses:



|                                           |  |      |           |      |   |          
|------------------------------------------ |  | ---- | --------- | ---- | - | ---------
|                                           |  | 2004 |           | 2003
|Stationery, printing, and supplies         |  | $    | 109,125   |      | $ | 161,320  
|State franchise tax                        |  |      | 104,140   |      |   | 94,446   
|Postage                                    |  |      | 58,098    |      |   | 70,301   
|ATM and debit card processing and supplies |  |      | 94,205    |      |   | 92,612   
|Advertising and public relations           |  |      | 71,469    |      |   | 76,624   
|Other                                      |  |      | 739,305   |      |   | 706,866  
|                                           |  |      |           |      |   |          
|Total                                      |  | $    | 1,176,342 |      | $ | 1,202,169
|                                           |  |      |           |      |   |          



28



---

|15. | INCOME TAXES
|--- | ------------



The provision for income taxes consists of:



|         |  |      |         |      |   |        
|-------- |  | ---- | ------- | ---- | - | -------
|         |  | 2004 |         | 2003
|Current  |  | $    | 191,330 |      | $ | 123,236
|Deferred |  |      | 17,625  |      |   | 4,864  
|         |  |      |         |      |   |        
|Total    |  | $    | 208,955 |      | $ | 128,100
|         |  |      |         |      |   |        



The components of the
net deferred tax assets (liabilities) are as follows at December 31:



|                                  |  |      |         |   |      |   |          |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                  |  | 2004 |         |   | 2003 |  
|Deferred tax assets:              |  |      |         |   |      |   |          |  
|Allowance for loan losses         |  | $    | 142,082 |   |      | $ | 152,143  |  
|Other                             |  |      | 20,239  |   |      |   | 22,761   |  
|                                  |  |      |         |   |      |   |          |  
|Gross deferred tax assets         |  |      | 162,321 |   |      |   | 174,904  |  
|                                  |  |      |         |   |      |   |          |  
|Deferred tax liabilities:         |  |      |         |   |      |   |          |  
|Net unrealized gain on securities |  |      | 12,749  |   |      |   | 77,632   |  
|Premises and equipment            |  |      | 116,205 |   |      |   | 86,190   |  
|Accrual to cash conversion        |  |      | 27,178  |   |      |   | 54,357   |  
|Deferred loan fees                |  |      | 39,465  |   |      |   | 40,625   |  
|FHLB stock dividend               |  |      | 37,058  |   |      |   | 33,692   |  
|                                  |  |      |         |   |      |   |          |  
|Gross deferred tax liabilities    |  |      | 232,655 |   |      |   | 292,496  |  
|                                  |  |      |         |   |      |   |          |  
|Net deferred tax liabilities      |  | $    | (70,334 | ) |      | $ | (117,592 | )
|                                  |  |      |         |   |      |   |          |  



The reconciliation of
the federal statutory rate and the Companys effective income tax rate is as follows:



|                                      |  |        |          |   |                   |       |   |        |   |          |                   |  |       |  
|------------------------------------- |  | ------ | -------- | - | ----------------- | ----- | - | ------ | - | -------- | ----------------- |  | ----- | -
|                                      |  | 2004   |          |   | 2003              |      
|                                      |  | Amount |          |   | % of PretaxIncome |       |   | Amount |   |          | % of PretaxIncome | 
|Provision at statutory rate           |  | $      | 331,564  |   |                   | 34.0  | % |        | $ | 282,028  |                   |  | 34.0  | %
|Effect of tax-free income             |  |        | (113,263 | ) |                   | (11.6 | ) |        |   | (163,353 | )                 |  | (19.7 | )
|Other                                 |  |        | (9,346   | ) |                   | (1.0  | ) |        |   | 9,425    |                   |  | 1.1   |  
|                                      |  |        |          |   |                   |       |   |        |   |          |                   |  |       |  
|Actual tax expense and effective rate |  | $      | 208,955  |   |                   | 21.4  | % |        | $ | 128,100  |                   |  | 15.4  | %
|                                      |  |        |          |   |                   |       |   |        |   |          |                   |  |       |  



|16. | EMPLOYEE BENEFITS
|--- | -----------------



Savings Plan



The Bank maintains a trusteed Section 401(k) plan for all eligible employees. The Bank makes matching contributions for eligible employees of 25 percent
of the employee contributions annually, to a maximum of 12 percent of base salary. The Bank also makes discretionary contributions as determined annually by the Board of Directors. The Banks total contribution to this plan was $32,756 in 2004
and $30,556 in 2003.



29



---

|16. | EMPLOYEE BENEFITS (Continued)
|--- | -----------------------------



ESOP



The Company also maintains an ESOP covering substantially all employees and officers. The Trustee has discretionary authority to purchase shares of common
stock of the Company in the open market. The amount of the contribution to the ESOP is at the discretion of the Board of Directors with benefits vesting over a seven-year period. Contributions of $10,000 and $8,000 were recorded during 2004 and
2003, respectively. The Trustee held 8,413 and 7,918 shares of the Companys common stock at December 31, 2004 and 2003, respectively.



Stock Option Plan



The Company maintains stock option plans for the directors, officers, and key employees. The stock options typically have expiration terms of five or ten
years, subject to certain extensions and early terminations and are fully vested on the grant date. The per share exercise price of a stock option granted shall, at a minimum, equal the fair market value of a share of common stock on the date the
option is granted.



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



|                                  |  |        |  |                                |       |      |         |   |                                |   |      
|--------------------------------- |  | ------ |  | ------------------------------ | ----- | ---- | ------- | - | ------------------------------ | - | -----
|                                  |  | 2004   |  | Weighted- AverageExercisePrice |       | 2003 |         |   | Weighted- AverageExercisePrice
|Outstanding, at beginning of year |  | 53,725 |  | $                              | 19.33 |      | 62,570  |   |                                | $ | 18.31
|Granted                           |  | 13,000 |  |                                | 18.75 |      | 21,000  |   |                                |   | 18.62
|Exercised                         |  |       |  |                                |      |      | (23,719 | ) |                                |   | 16.29
|Forfeited                         |  |       |  |                                |      |      | (6,126  | ) |                                |   | 8.78 
|                                  |  |        |  |                                |       |      |         |   |                                |   |      
|Outstanding, at end of year       |  | 66,725 |  |                                | 19.21 |      | 53,725  |   |                                |   | 19.33
|                                  |  |        |  |                                |       |      |         |   |                                |   |      
|Exercisable, at end of year       |  | 66,725 |  |                                | 19.21 |      | 53,725  |   |                                |   | 19.33
|                                  |  |        |  |                                |       |      |         |   |                                |   |      



The following table
summarizes the characteristics of stock options outstanding at December 31, 2004:



|                  |  |               |       |                                 |        |                        |      |                      |   |      
|----------------- |  | ------------- | ----- | ------------------------------- | ------ | ---------------------- | ---- | -------------------- | - | -----
|Grant Date        |  | ExercisePrice |       | OutstandingandExercisableShares |        | ContractualAverageLife |      | AverageExercisePrice
|August 25, 1999   |  | $             | 19.20 |                                 | 16,363 |                        | 4.73 |                      | $ | 19.20
|August 24, 2000   |  |               | 20.36 |                                 | 16,362 |                        | 5.65 |                      |   | 20.36
|January 23, 2003  |  |               | 18.40 |                                 | 9,625  |                        | 8.07 |                      |   | 18.40
|December 12, 2003 |  |               | 18.80 |                                 | 11,375 |                        | 8.95 |                      |   | 18.80
|November 19, 2004 |  |               | 18.75 |                                 | 13,000 |                        | 9.89 |                      |   | 18.75
|                  |  |               |       |                                 |        |                        |      |                      |   |      
|                  |  |               |       |                                 | 66,725 |                        |      |                      |   |      
|                  |  |               |       |                                 |        |                        |      |                      |   |      



30



---

|17. | COMMITMENTS
|--- | -----------



In the normal course of business, the Company makes various commitments not reflected in the accompanying consolidated financial statements. The Company
offers such products to enable its customers to meet their financing objectives. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Companys
exposure to credit loss is represented by the contractual amounts as disclosed below. Losses, if any, are charged to the reserve for off-balance sheet risk.



The off-balance sheet commitments comprise the following at December 31:



|                             |  |      |           |      |   |          
|---------------------------- |  | ---- | --------- | ---- | - | ---------
|                             |  | 2004 |           | 2003
|Commitments to extend credit |  | $    | 5,135,803 |      | $ | 4,503,785
|Standby letters of credit    |  |      | 1,306,504 |      |   | 1,338,347



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 Companys exposure to credit loss, in the event of nonperformance by the other parties to the
financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as
deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.



Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance
letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these
instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For secured letters of credit, the collateral
is typically Bank deposit instruments or customer business assets.



The Company presently leases three branch bank buildings and one office building under separate operating leases that expire in various years through 2016.



Minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year as of
December 31, 2004, for each of the next five years and in the aggregate, thereafter, are $98,747, $51,650, $51,650, $54,254, $59,463, and $185,299 for the years ended December 31, 2005, 2006, 2007, 2008, 2009, and thereafter, respectively.



31



---

|18. | FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------



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



|                                                                       |  |               |            |            |   |               |  |            |            |  |   |           
|---------------------------------------------------------------------- |  | ------------- | ---------- | ---------- | - | ------------- |  | ---------- | ---------- |  | - | ----------
|                                                                       |  | 2004          |            | 2003      
|                                                                       |  | CarryingValue |            | Fair Value |   | CarryingValue |  | Fair Value
|Financial assets:                                                      |  |               |            |            |   |               |  |            |            |  |   |           
|Cash and due from banks and interest-bearing deposits with other banks |  | $             | 5,991,170  |            | $ | 5,991,170     |  | $          | 6,080,792  |  | $ | 6,080,792 
|Investment securities                                                  |  |               | 32,721,144 |            |   | 32,759,835    |  |            | 31,843,414 |  |   | 31,906,951
|Net loans                                                              |  |               | 43,982,867 |            |   | 44,656,851    |  |            | 44,726,420 |  |   | 45,444,498
|Bank-owned life insurance                                              |  |               | 2,258,592  |            |   | 2,258,592     |  |            | 2,170,682  |  |   | 2,170,682 
|Regulatory stock                                                       |  |               | 363,450    |            |   | 363,450       |  |            | 353,850    |  |   | 353,850   
|Accrued interest receivable                                            |  |               | 465,953    |            |   | 465,953       |  |            | 513,843    |  |   | 513,843   
|                                                                       |  |               |            |           
|Financial liabilities:                                                 |  |               |            |            |   |               |  |            |            |  |   |           
|Deposits                                                               |  | $             | 72,305,605 |            | $ | 72,464,295    |  | $          | 71,378,986 |  | $ | 71,308,696
|Short-term borrowings                                                  |  |               | 5,133,865  |            |   | 5,133,865     |  |            | 8,532,649  |  |   | 8,532,649 
|Other borrowings                                                       |  |               | 3,300,000  |            |   | 3,300,000     |  |            |           |  |   |          
|Accrued interest payable                                               |  |               | 43,757     |            |   | 43,757        |  |            | 42,304     |  |   | 42,304    



Financial instruments
are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.



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 management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. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair 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 fair values are based may have a significant impact on the resulting estimated fair values.



32



---

|18. | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
|--- | -----------------------------------------------



Since certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.



The Company performed 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 Due From Banks, Interest-Bearing Deposits With Other Banks,
Regulatory Stock, Accrued Interest Receivable, Short-Term Borrowings, and Accrued Interest Payable



The fair value is equal to the current carrying value.



Bank-Owned Life Insurance



The fair value is equal to the cash surrender value of the life insurance policies.



Investment Securities



The fair value of investment securities 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.



Loans, Deposits, and Other Borrowings



The fair value of loans is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating
expenses, non- interest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts which are due within 30 days are valued at the amount payable as of year-end. Fair values for time 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 of similar remaining maturities.



Commitments to Extend Credit and Commercial Letters of 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 or letter of credit, 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 and letters of credit are
presented in Note 17.



|19. | REGULATORY MATTERS
|--- | ------------------



Cash and Due From Banks



The district Federal Reserve Bank requires the Bank to maintain certain reserve balances. As of December 31, 2004 and 2003, the Bank had required reserves
of $568,000 and $939,000, respectively, consisting of vault cash and a depository amount held with the Federal Reserve Bank.



Loans



Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are
limited in amount to 10 percent of the Banks capital.



33



---

|19. | REGULATORY MATTERS (Continued)
|--- | ------------------------------



Dividends



The Bank is subject to a dividend restriction that generally limits the amount of dividends that can be paid by a national bank. Prior approval of the
Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits, as defined for the year, combined with its retained net profits for the two preceding calendar years less any
required transfers to surplus. Using this formula, the amount available for payment of dividends by the Bank to the Company in 2005, without approval of the Comptroller, was limited to approximately $123,000 plus 2005 net profits retained up to the
date of the dividend declaration.



Capital
Requirements



Federal regulations require the Company
to maintain minimum amounts of capital. Specifically, the Company and the Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets. Management
believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.



In addition to capital requirements, the Federal Deposit Insurance Corporation 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, 2004 and
2003, 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.



The capital position of the Bank does not materially differ from the Companys; therefore, the following table sets forth the Companys capital position and minimum requirements as of December 31:



|                                         |  |        |           |       |       |   |        |   |           |  |       |  
|---------------------------------------- |  | ------ | --------- | ----- | ----- | - | ------ | - | --------- |  | ----- | -
|                                         |  | 2004   |           |       | 2003  |  
|                                         |  | Amount |           | Ratio |       |   | Amount |   | Ratio     | 
|Total Capital (to Risk-Weighted Assets)  |  |        |           |       |       |   |        |   |           |  |       |  
|                                         |  |        |           |      
|Actual                                   |  | $      | 8,789,953 |       | 17.52 | % |        | $ | 9,594,907 |  | 18.66 | %
|For Capital Adequacy Purposes            |  |        | 4,013,040 |       | 8.00  |   |        |   | 4,114,000 |  | 8.00  |  
|To Be Well Capitalized                   |  |        | 5,016,300 |       | 10.00 |   |        |   | 5,142,500 |  | 10.00 |  
|                                         |  |        |           |      
|Tier I Capital (to Risk-Weighted Assets) |  |        |           |       |       |   |        |   |           |  |       |  
|                                         |  |        |           |      
|Actual                                   |  | $      | 8,279,271 |       | 16.50 | % |        | $ | 9,065,647 |  | 17.63 | %
|For Capital Adequacy Purposes            |  |        | 2,006,520 |       | 4.00  |   |        |   | 2,057,000 |  | 4.00  |  
|To Be Well Capitalized                   |  |        | 3,009,780 |       | 6.00  |   |        |   | 3,085,500 |  | 6.00  |  
|                                         |  |        |           |      
|Tier I Capital (to Average Assets)       |  |        |           |       |       |   |        |   |           |  |       |  
|                                         |  |        |           |      
|Actual                                   |  | $      | 8,279,271 |       | 9.24  | % |        | $ | 9,065,647 |  | 10.14 | %
|For Capital Adequacy Purposes            |  |        | 3,582,437 |       | 4.00  |   |        |   | 3,574,523 |  | 4.00  |  
|To Be Well Capitalized                   |  |        | 4,478,047 |       | 5.00  |   |        |   | 4,468,154 |  | 5.00  |  



34



---

|20. | PARENT COMPANY
|--- | --------------



Following are condensed financial statements for the parent company:



CONDENSED BALANCE SHEET



|                                           |  |              |            |      |   |          
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ---------
|                                           |  | December 31,
|                                           |  | 2004         |            | 2003
|ASSETS                                     |  |              |            |      |   |          
|Cash                                       |  | $            | 80,070     |      | $ | 106,506  
|Investment in subsidiaries                 |  |              | 9,415,510  |      |   | 8,640,802
|Loans                                      |  |              | 485,000    |      |   | 495,000  
|Other assets                               |  |              | 24,175     |      |   | 20,504   
|                                           |  |              |            |      |   |          
|TOTAL ASSETS                               |  | $            | 10,004,755 |      | $ | 9,262,812
|                                           |  |              |            |      |   |          
|OTHER LIABILITIES                          |  | $            | 666,667    |      | $ |         
|STOCKHOLDERS EQUITY                       |  |              | 9,338,088  |      |   | 9,262,812
|                                           |  |              |            |      |   |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $            | 10,004,755 |      | $ | 9,262,812
|                                           |  |              |            |      |   |          



CONDENSED STATEMENT OF
INCOME



|                                                                 |  |              |          |   |      |   |        
|---------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------
|                                                                 |  | December 31,
|                                                                 |  | 2004         |          |   | 2003
|INCOME                                                           |  | $            | 932,578  |   |      | $ | 460,214
|                                                                 |  |             
|EXPENSES                                                         |  |              | 40,428   |   |      |   | 31,002 
|                                                                 |  |              |          |   |      |   |        
|Earnings before income taxes                                     |  |              | 892,150  |   |      |   | 429,212
|Income tax expense                                               |  |              | 6,119    |   |      |   | 3,900  
|                                                                 |  |              |          |   |      |   |        
|Earnings before equity in undistributed earnings of subsidiaries |  |              | 898,269  |   |      |   | 433,112
|Equity in undistributed earnings of subsidiaries                 |  |              | (132,037 | ) |      |   | 268,281
|                                                                 |  |              |          |   |      |   |        
|NET INCOME                                                       |  | $            | 766,232  |   |      | $ | 701,393
|                                                                 |  |              |          |   |      |   |        



35



---

|20. | PARENT COMPANY (Continued)
|--- | --------------------------



CONDENSED STATEMENT OF CASH FLOWS



|                                                                                 |  |                         |          |   |      |   |          |  
|-------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | -
|                                                                                 |  | Year ended December 31, |         
|                                                                                 |  | 2004                    |          |   | 2003 |  
|OPERATING ACTIVITIES                                                             |  |                         |          |   |      |   |          |  
|Net income                                                                       |  | $                       | 766,232  |   |      | $ | 701,393  |  
|Adjustment to reconcile net income to net cash provided by operating activities: |  |                         |          |   |      |   |          |  
|Equity in undistributed earnings of subsidiaries                                 |  |                         | 132,037  |   |      |   | (268,281 | )
|Other, net                                                                       |  |                         | (3,672   | ) |      |   | 33,419   |  
|                                                                                 |  |                         |          |   |      |   |          |  
|Net cash provided by operating activities                                        |  |                         | 894,597  |   |      |   | 466,531  |  
|                                                                                 |  |                         |          |   |      |   |          |  
|INVESTING ACTIVITIES                                                             |  |                         |          |   |      |   |          |  
|Acquisition of MDH subsidiary                                                    |  |                         | (366,027 | ) |      |   |         |  
|Decrease in loans                                                                |  |                         | 10,000   |   |      |   | 15,000   |  
|                                                                                 |  |                         |          |   |      |   |          |  
|Net cash provided by (used for) investing activities                             |  |                         | (356,027 | ) |      |   | 15,000   |  
|                                                                                 |  |                         |          |   |      |   |          |  
|FINANCING ACTIVITIES                                                             |  |                         |          |   |      |   |          |  
|Cash dividends paid                                                              |  |                         | (336,958 | ) |      |   | (251,473 | )
|Purchase of treasury stock                                                       |  |                         | (228,048 | ) |      |   | (799,517 | )
|Stock options exercised                                                          |  |                         |         |   |      |   | 386,405  |  
|                                                                                 |  |                         |          |   |      |   |          |  
|Net cash used for financing activities                                           |  |                         | (565,006 | ) |      |   | (664,585 | )
|                                                                                 |  |                         |          |   |      |   |          |  
|Net decrease in cash                                                             |  |                         | (26,436  | ) |      |   | (183,054 | )
|                                                                                 |  |                        
|CASH AT BEGINNING OF YEAR                                                        |  |                         | 106,506  |   |      |   | 289,560  |  
|                                                                                 |  |                         |          |   |      |   |          |  
|CASH AT END OF YEAR                                                              |  | $                       | 80,070   |   |      | $ | 106,506  |  
|                                                                                 |  |                         |          |   |      |   |          |  



36



---

|21. | QUARTERLY DATA (Unaudited)
|--- | --------------------------



The following is a summary of the unaudited quarterly results of operations:



|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | ------------- |  | ------------- | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March 2004         |           | June 2004 |   | September2004 |  | December 2004
|Total interest income                               |  | $                  | 1,157,947 |           | $ | 1,141,668     |  | $             | 1,131,371 |  | $ | 1,124,723
|Total interest expense                              |  |                    | 271,730   |           |   | 255,677       |  |               | 218,994   |  |   | 218,780  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|Net interest income                                 |  |                    | 886,217   |           |   | 885,991       |  |               | 912,377   |  |   | 905,943  
|Provision for loan losses                           |  |                    | 45,000    |           |   | 34,000        |  |               | 24,000    |  |   | 30,000   
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 841,217   |           |   | 851,991       |  |               | 888,377   |  |   | 875,943  
|                                                    |  |                    |           |          
|Total noninterest income                            |  |                    | 276,652   |           |   | 328,561       |  |               | 397,504   |  |   | 384,820  
|Total noninterest expense                           |  |                    | 927,585   |           |   | 920,148       |  |               | 985,878   |  |   | 1,036,267
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|Income before income taxes                          |  |                    | 190,284   |           |   | 260,404       |  |               | 300,003   |  |   | 224,496  
|Income taxes                                        |  |                    | 36,000    |           |   | 51,300        |  |               | 75,643    |  |   | 46,012   
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|Net income                                          |  | $                  | 154,284   |           | $ | 209,104       |  | $             | 224,360   |  | $ | 178,484  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |          
|Per share data:                                     |  |                    |           |           |   |               |  |               |           |  |   |          
|Net income                                          |  |                    |           |           |   |               |  |               |           |  |   |          
|Basic                                               |  | $                  | 0.17      |           | $ | 0.23          |  | $             | 0.25      |  | $ | 0.20     
|Diluted                                             |  |                    | 0.17      |           |   | 0.23          |  |               | 0.25      |  |   | 0.20     
|Weighted-average shares outstanding                 |  |                    |           |           |   |               |  |               |           |  |   |          
|Basic                                               |  |                    | 892,464   |           |   | 892,397       |  |               | 888,086   |  |   | 881,627  
|Diluted                                             |  |                    | 892,578   |           |   | 892,516       |  |               | 888,086   |  |   | 881,786  



|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | ------------- |  | ------------- | --------- |  | - | --------- | -
|                                                    |  | Three Months Ended |          
|                                                    |  | March 2003         |           | June 2003 |   | September2003 |  | December 2003 |          
|Total interest income                               |  | $                  | 1,139,200 |           | $ | 1,159,469     |  | $             | 1,154,227 |  | $ | 1,181,241 |  
|Total interest expense                              |  |                    | 290,655   |           |   | 297,506       |  |               | 276,805   |  |   | 272,118   |  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Net interest income                                 |  |                    | 848,545   |           |   | 861,963       |  |               | 877,422   |  |   | 909,123   |  
|Provision for loan losses                           |  |                    | 30,000    |           |   | 30,000        |  |               | 30,000    |  |   | (14,380   | )
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Net interest income after provision for loan losses |  |                    | 818,545   |           |   | 831,963       |  |               | 847,422   |  |   | 923,503   |  
|                                                    |  |                    |           |          
|Total noninterest income                            |  |                    | 236,864   |           |   | 280,189       |  |               | 334,004   |  |   | 289,105   |  
|Total noninterest expense                           |  |                    | 893,651   |           |   | 902,669       |  |               | 911,260   |  |   | 1,024,522 |  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Income before income taxes                          |  |                    | 161,758   |           |   | 209,483       |  |               | 270,166   |  |   | 188,086   |  
|Income taxes                                        |  |                    | 23,100    |           |   | 29,000        |  |               | 45,000    |  |   | 31,000    |  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Net income                                          |  | $                  | 138,658   |           | $ | 180,483       |  | $             | 225,166   |  | $ | 157,086   |  
|                                                    |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Per share data:                                     |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Net income                                          |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Basic                                               |  | $                  | 0.15      |           | $ | 0.20          |  | $             | 0.25      |  | $ | 0.17      |  
|Diluted                                             |  |                    | 0.15      |           |   | 0.20          |  |               | 0.25      |  |   | 0.17      |  
|Weighted-average shares outstanding                 |  |                    |           |           |   |               |  |               |           |  |   |           |  
|Basic                                               |  |                    | 913,883   |           |   | 905,237       |  |               | 893,877   |  |   | 901,715   |  
|Diluted                                             |  |                    | 916,699   |           |   | 907,613       |  |               | 893,980   |  |   | 902,095   |  



37