REPORT OF
INDEPENDENT AUDITORS



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, 2002 and 2001, 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-State 1st Banc, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.



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

1000 Stonewood Drive

Suite 200

Wexford, PA 15090

Phone 724-934-0344

Fax      724-934-0345

February 5, 2003



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TRI-STATE 1ST
BANC, INC.

CONSOLIDATED BALANCE SHEET



|                                                                                           |  | December 31, |           
|------------------------------------------------------------------------------------------ |  | ------------ | ----------
|                                                                                           |  | 2002         |           
|ASSETS                                                                                     |  |              |           
|Cash and due from banks                                                                    |  | $            | 4,807,465 
|Interest-bearing deposits with other banks                                                 |  |              | 72,133    
|Federal funds sold                                                                         |  |              |          
|                                                                                           |  |              |           
|Cash and cash equivalents                                                                  |  |              | 4,879,598 
|Investment securities available for sale                                                   |  |              | 22,354,936
|Investment securities held to maturity (market value of $1,005,188 and
$1,242,389)         |  |              | 932,553   
|Loans                                                                                      |  |              | 45,395,942
|Less allowance for loan losses                                                             |  |              | 514,276   
|                                                                                           |  |              |           
|Net loans                                                                                  |  |              | 44,881,666
|Premises and equipment                                                                     |  |              | 3,361,803 
|Accrued interest and other assets                                                          |  |              | 947,671   
|                                                                                           |  |              |           
|TOTAL ASSETS                                                                               |  | $            | 77,358,227
|                                                                                           |  |              |           
|LIABILITIES                                                                                |  |              |           
|Deposits:                                                                                  |  |              |           
|Noninterest-bearing demand                                                                 |  | $            | 9,822,378 
|Interest-bearing demand                                                                    |  |              | 13,494,969
|Money market                                                                               |  |              | 3,842,359 
|Savings                                                                                    |  |              | 11,617,664
|Time                                                                                       |  |              | 23,357,634
|                                                                                           |  |              |           
|Total deposits                                                                             |  |              | 62,135,004
|Short-term borrowings                                                                      |  |              | 5,206,114 
|Accrued interest and other liabilities                                                     |  |              | 406,517   
|                                                                                           |  |              |           
|TOTAL LIABILITIES                                                                          |  |              | 67,747,635
|                                                                                           |  |              |           
|STOCKHOLDERS EQUITY                                                                       |  |              |           
|Common stock, no par value; 3,000,000 shares authorized, 915,764 and 917,464 shares
issued |  |              | 8,182,945 
|Retained earnings                                                                          |  |              | 914,595   
|Treasury stock, at cost (1,881 and 17,091 shares)                                          |  |              | (34,755   
|Accumulated other comprehensive income                                                     |  |              | 547,807   
|                                                                                           |  |              |           
|TOTAL STOCKHOLDERS EQUITY                                                                 |  |              | 9,610,592 
|                                                                                           |  |              |           
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                 |  | $            | 77,358,227
|                                                                                           |  |              |           



See
accompanying notes to the consolidated financial statements.





2



---

TRI-STATE 1ST BANC, INC.

CONSOLIDATED STATEMENT OF INCOME



|                                                    |  | Year Ended December 31,
|--------------------------------------------------- |  | -----------------------
|                                                    |  | 2002                   
|INTEREST INCOME                                     |  |                        
|Loans, including fees                               |  | $                      
|Interest-bearing deposits with other banks          |  |                        
|Federal funds sold                                  |  |                        
|Investment securities:                              |  |                        
|Taxable                                             |  |                        
|Exempt from federal income tax                      |  |                        
|                                                    |  |                        
|Total interest income                               |  |                        
|                                                    |  |                        
|INTEREST EXPENSE                                    |  |                        
|Deposits                                            |  |                        
|Short-term borrowings                               |  |                        
|                                                    |  |                        
|Total interest expense                              |  |                        
|                                                    |  |                        
|NET INTEREST INCOME                                 |  |                        
|Provision for loan losses                           |  |                        
|                                                    |  |                        
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                        
|                                                    |  |                        
|OTHER OPERATING INCOME                              |  |                        
|Service fees on deposit accounts                    |  |                        
|Investment securities gains, net                    |  |                        
|Other                                               |  |                        
|                                                    |  |                        
|Total other operating income                        |  |                        
|                                                    |  |                        
|OTHER OPERATING EXPENSE                             |  |                        
|Salaries and employee benefits                      |  |                        
|Occupancy                                           |  |                        
|Furniture and equipment                             |  |                        
|Other                                               |  |                        
|                                                    |  |                        
|Total other operating expense                       |  |                        
|                                                    |  |                        
|Income before income taxes                          |  |                        
|Income taxes                                        |  |                        
|                                                    |  |                        
|NET INCOME                                          |  | $                      
|                                                    |  |                        
|EARNINGS PER SHARE                                  |  |                        
|Basic                                               |  | $                      
|Diluted                                             |  |                        



See
accompanying notes to the consolidated financial statements.



3



---



TRI-STATE 1ST
BANC, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY



|                                                                                                |  | Common Stock |           |   | Retained Earnings |   |            | Treasury Stock |  |   | Accumulated Other Comprehensive Income |   |  | Total |        
|----------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ----------------- | - | ---------- | -------------- |  | - | -------------------------------------- | - |  | ----- | -------
|Balance, December 31, 2000                                                                      |  | $            | 6,570,686 |   |                   | $ | 1,883,370  |                |  | $ |                                       |   |  | $     | 40,452 
|Comprehensive income:                                                                           |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Net income                                                                                      |  |              |           |   |                   |   | 559,016    |                |  |   |                                        |   |  |       |        
|Net unrealized gain on securities, net of reclassification adjustment, net of taxes of
$100,011 |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       | 194,139
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Total comprehensive income                                                                      |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Purchase of treasury stock                                                                      |  |              |           |   |                   |   |            |                |  |   | (303,943                               | ) |  |       |        
|Dividends declared ($0.20 per share)                                                            |  |              |           |   |                   |   | (185,275   | )              |  |   |                                        |   |  |       |        
|Stock dividend                                                                                  |  |              | 1,571,712 |   |                   |   | (1,573,464 | )              |  |   |                                        |   |  |       |        
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Balance, December 31, 2001                                                                      |  |              | 8,142,398 |   |                   |   | 683,647    |                |  |   | (303,943                               | ) |  |       | 234,591
|Comprehensive income:                                                                           |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Net income                                                                                      |  |              |           |   |                   |   | 656,130    |                |  |   |                                        |   |  |       |        
|Net unrealized gain on securities, net of reclassification adjustment, net of taxes of
$161,354 |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       | 313,216
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Total comprehensive income                                                                      |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Purchase of treasury stock                                                                      |  |              |           |   |                   |   |            |                |  |   | (1,437,564                             | ) |  |       |        
|Sale of treasury stock                                                                          |  |              |           |   |                   |   |            |                |  |   | 1,185,316                              |   |  |       |        
|Stock options exercised                                                                         |  |              | 41,411    |   |                   |   | (211,665   | )              |  |   | 521,436                                |   |  |       |        
|Dividends declared ($0.23 per share)                                                            |  |              |           |   |                   |   | (210,286   | )              |  |   |                                        |   |  |       |        
|Cash paid in lieu of fractional shares                                                          |  |              | (864      | ) |                   |   | (3,231     | )              |  |   |                                        |   |  |       |        
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Balance, December 31, 2002                                                                      |  | $            | 8,182,945 |   |                   | $ | 914,595    |                |  | $ | (34,755                                | ) |  | $     | 547,807
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|                                                                                               
|                                                                                                |  |              |           |   |                   |   |            |                |  |   | 2002                                   |   |  | 2001  |        
|Components of other comprehensive income:                                                       |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Change in net unrealized gain on investment securities available for
sale                       |  |              |           |   |                   |   |            |                |  |   |                                        |   |  | $     | 360,567
|Realized gains included in net income, net of taxes of $24,393 and
$14,620                      |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       | (47,351
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        
|Total                                                                                           |  |              |           |   |                   |   |            |                |  |   |                                        |   |  | $     | 313,216
|                                                                                                |  |              |           |   |                   |   |            |                |  |   |                                        |   |  |       |        



See
accompanying notes to the consolidated financial statements.





4



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TRI-STATE 1ST BANC, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                                                  |  | Year Ended December 31, |           
|--------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                  |  | 2002                    |           
|OPERATING ACTIVITIES                                                              |  |                         |           
|Net income                                                                        |  | $                       | 656,130   
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                         |           
|Provision for loan losses                                                         |  |                         | 108,000   
|Depreciation and amortization, net                                                |  |                         | 381,613   
|Investment securities gains, net                                                  |  |                         | (71,744   
|Deferred income taxes                                                             |  |                         | (24,576   
|Decrease in accrued interest receivable                                           |  |                         | 8,569     
|Decrease in accrued interest payable                                              |  |                         | (30,520   
|Other, net                                                                        |  |                         | 4,624     
|                                                                                  |  |                         |           
|Net cash provided by operating activities                                         |  |                         | 1,032,096 
|                                                                                  |  |                         |           
|INVESTING ACTIVITIES                                                              |  |                         |           
|Investment securities available for sale:                                         |  |                         |           
|Proceeds from sales                                                               |  |                         | 2,382,091 
|Proceeds from principal repayments and maturities                                 |  |                         | 6,294,449 
|Purchases of securities                                                           |  |                         | (9,480,680
|Investment securities held to maturity:                                           |  |                         |           
|Proceeds from sales                                                               |  |                         | 36,016    
|Proceeds from principal repayments and maturities                                 |  |                         | 228,509   
|Net increase in loans                                                             |  |                         | (2,706,223
|Purchase of premises and equipment                                                |  |                         | (369,651  
|                                                                                  |  |                         |           
|Net cash used for investing activities                                            |  |                         | (3,615,489
|                                                                                  |  |                         |           
|FINANCING ACTIVITIES                                                              |  |                         |           
|Net increase in deposits                                                          |  |                         | 2,550,316 
|Net increase (decrease) in short-term borrowings                                  |  |                         | (599,063  
|Purchase of treasury stock                                                        |  |                         | (1,437,564
|Sale of treasury stock                                                            |  |                         | 1,185,316 
|Stock options exercised                                                           |  |                         | 309,771   
|Cash dividends paid including cash in lieu of fractional shares                   |  |                         | (214,381  
|                                                                                  |  |                         |           
|Net cash provided by financing activities                                         |  |                         | 1,794,395 
|                                                                                  |  |                         |           
|Increase (decrease) in cash and cash equivalents                                  |  |                         | (788,998  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    |  |                         | 5,668,596 
|                                                                                  |  |                         |           
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                          |  | $                       | 4,879,598 
|                                                                                  |  |                         |           



See
accompanying notes to the consolidated financial statements.



5



---



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), and Gateminder Corporation
(Gateminder). 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 tri-state area of East Liverpool, Ohio. Gateminder was established by the Company
to provide non-banking services to business with automated teller machines (ATM). Gateminder sells ATM machines and provides the means for processing transactions for businesses.



The Companys principal assets are represented by its
ownership of the Bank and Gateminder. The Company and Gateminder 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 accounting principles generally accepted in the United States of America. 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 (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.



6



---



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 management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 credit worthiness 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 three to twenty years for furniture, fixtures, and equipment and three to forty 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.



7



---



1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



Intangible Asset



The intangible asset consists exclusively of a core deposit acquisition premium. This core deposit acquisition premium, which was developed based upon a specific core deposit life study, is amortized using the straight-line method
over eight 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.



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.



Earnings Per Share



The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is
calculated utilizing net income as reported 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.



Stock Options



The
Company maintains a stock option plan for the directors, officers, and key employees. The Company accounts for its stock option plans under provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. Under this Opinion, no compensation expense has been recognized with respect to the plans because the exercise price of the Companys employee stock options equals the market price of the underlying stock on the grant date.
When the exercise price of the Companys stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Companys financial statements. Pro forma
net income and earnings per share are disclosed to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan in the accompanying notes to the
financial statements. For the years ending December 31, 2002 and 2001, pro forma net income did not differ from reported net income since there were no stock options granted.



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.



8



---



1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



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 is comprised exclusively of 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.



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, Interest-bearing deposits with other banks, and Federal funds sold. Cash payments for interest expense in 2002 and 2001 were $1,402,474 and $1,960,088,
respectively. Cash payments for income taxes in 2002 and 2001 were $215,662 and $108,419, 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 August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be
maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which is effective January 1, 2003, is not expected to have a material effect on the Companys
financial statements.



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



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



9



---



1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



Recent Accounting Pronouncements (Continued)



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



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



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



10



---



1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



Recent Accounting Pronouncements (Continued)



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



2. EARNINGS PER SHARE



There are no convertible securities which would effect 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.



|                                                                                                         |  | 2002    |   |  | 2001    |  
|-------------------------------------------------------------------------------------------------------- |  | ------- | - |  | ------- | -
|Weighted average common shares                                                                           |  | 915,764 |   |  | 917,464 |  
|Average treasury stock shares                                                                            |  | (14,588 | ) |  | (8,625  | )
|                                                                                                         |  |         |   |  |         |  
|Weighted average common shares outstanding used to calculate basic earnings per
share                    |  | 901,176 |   |  | 908,839 |  
|Additional common stock equivalents (stock options) used to calculate diluted earnings
per share         |  | 2,751   |   |  | 10,429  |  
|                                                                                                         |  |         |   |  |         |  
|Weighted average common shares and common stock equivalents used to calculate diluted
earnings per share |  | 903,927 |   |  | 919,268 |  
|                                                                                                         |  |         |   |  |         |  



Options
to purchase 37,129 shares of common stock at prices from $19.20 to $20.36 were outstanding during 2002 and 2001, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.



11



---



3. 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. On November 7, 2001, the Board of Directors approved a ten percent stock dividend, payable January 11, 2002 to stockholders of
record as of December 20, 2001. 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.



4. INVESTMENT SECURITIES



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



|                                                 |  | 2002          
|------------------------------------------------ |  | --------------
|                                                 |  | Amortized Cost
|U.S. Government agency securities                |  | $             
|Obligations of states and political subdivisions |  |               
|Mortgage-backed securities                       |  |               
|                                                 |  |               
|Total                                            |  | $             
|                                                 |  |               
|                                                
|                                                 |  | 2001          
|                                                 |  | Amortized Cost
|U.S. Government agency securities                |  | $             
|Obligations of states and political subdivisions |  |               
|Mortgage-backed securities                       |  |               
|                                                 |  |               
|Total                                            |  | $             
|                                                 |  |               



12



---



4. INVESTMENT SECURITIES
(Continued)



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



|                                                 |  | 2002          
|------------------------------------------------ |  | --------------
|                                                 |  | Amortized Cost
|Obligations of states and political subdivisions |  | $             
|                                                 |  |               
|Total                                            |  | $             
|                                                 |  |               
|                                                
|                                                 |  | 2001          
|                                                 |  | Amortized Cost
|Obligations of states and political subdivisions |  | $             
|Mortgage-backed securities                       |  |               
|                                                 |  |               
|Total                                            |  | $             
|                                                 |  |               



The
amortized cost and estimated market value of debt securities by contractual maturity at December 31, 2002 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      
|-------------------------------------- |  | ------------------ | ---------- | ----------------------
|                                       |  | Amortized Cost     |            | Estimated Market Value
|Due in one year or less                |  | $                  | 1,585,599  |                       
|Due after one year through five years  |  |                    | 11,344,387 |                       
|Due after five years through ten years |  |                    | 6,570,761  |                       
|Due after ten years                    |  |                    | 2,024,178  |                       
|                                       |  |                    |            |                       
|Total                                  |  | $                  | 21,524,925 |                       
|                                       |  |                    |            |                       



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:



|                      |  | 2002 |           | 2001
|--------------------- |  | ---- | --------- | ----
|Proceeds from sales   |  | $    | 2,418,107 |     
|Gross realized gains  |  |      | 72,853    |     
|Gross realized losses |  |      | 1,109     |     



13



---



4. INVESTMENT SECURITIES
(Continued)



Included with proceeds from the
sale of investment securities is $36,016 from the sale of held to maturity mortgage backed securities. These securities had been repaid in excess of 85 percent of the original amount purchased.



Investment securities with an amortized cost of $8,952,611
and $8,025,392 and an estimated market value of $9,229,662 and $8,171,140, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and other purposes as required by law at December 31, 2002 and 2001.



5. LOANS



Major classifications of loans are summarized as follows:



|                               |  | 2002 |            | 2001
|------------------------------ |  | ---- | ---------- | ----
|Commercial and agricultural    |  | $    | 16,242,973 |     
|Real estate mortgages:         |  |      |            |     
|Residential                    |  |      | 19,232,867 |     
|Construction                   |  |      | 354,813    |     
|Commercial                     |  |      | 4,073,735  |     
|Consumer                       |  |      | 5,491,554  |     
|                               |  |      |            |     
|                               |  |      | 45,395,942 |     
|Less allowance for loan losses |  |      | 514,276    |     
|                               |  |      |            |     
|Net loans                      |  | $    | 44,881,666 |     
|                               |  |      |            |     



The
Company grants consumer, commercial, and mortgage loans to customers throughout its trade area that encompasses the immediate tri-state area of East Liverpool, Ohio. Although the Company has a diversified loan portfolio, at December 31, 2002 and
2001, a substantial portion of its debtors ability to honor their loan agreements is dependent upon the economic stability of the tri-state area.



As of December 31, 2002, aggregate loans of $60,000 or more extended to officers, directors, and related affiliates or associates were
$1,341,026. A summary of activity during the year is as follows:



|2001       |  | Additions |  | Amount Collected |  | 2002      
|---------- |  | --------- |  | ---------------- |  | ----------
|$1,165,319 |  | $360,276  |  | $184,569         |  | $1,341,026



6. ALLOWANCE FOR LOAN
LOSSES



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



|                                |  | 2002 |         | 2001
|------------------------------- |  | ---- | ------- | ----
|Balance, January 1              |  | $    | 443,350 |     
|Add:                            |  |      |         |     
|Provision charged to operations |  |      | 108,000 |     
|Recoveries                      |  |      | 49,084  |     
|Less loans charged off          |  |      | 86,158  |     
|                                |  |      |         |     
|Balance, December 31            |  | $    | 514,276 |     
|                                |  |      |         |     



14



---



7. PREMISES AND EQUIPMENT



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



|                                   |  | 2002 |           | 2001
|---------------------------------- |  | ---- | --------- | ----
|Land and improvements              |  | $    | 428,391   |     
|Buildings and improvements         |  |      | 2,264,069 |     
|Leasehold improvements             |  |      | 609,584   |     
|Furniture, fixtures, and equipment |  |      | 1,905,106 |     
|                                   |  |      |           |     
|                                   |  |      | 5,207,150 |     
|Less accumulated depreciation      |  |      | 1,845,347 |     
|                                   |  |      |           |     
|Total                              |  | $    | 3,361,803 |     
|                                   |  |      |           |     



Depreciation and amortization charged to operations was $307,841 in 2002 and $266,277 in 2001.



8. DEPOSITS



Time deposits at December 31, 2002 mature $10,143,679, $11,873,999, $232,796, and $1,107,160, during 2003, 2004, 2005, and 2006, respectively.



Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated
$4,652,040 and $3,854,379 at December 31, 2002 and 2001, respectively.



Maturities on time deposits of $100,000 or more are as follows at December 31, 2002:



|Within three months                 |  | $ | 933,064  
|----------------------------------- |  | - | ---------
|Beyond three but within six months  |  |   |         
|Beyond six but within twelve months |  |   | 802,162  
|Beyond one year                     |  |   | 2,916,814
|                                    |  |   |          
|Total                               |  | $ | 4,652,040
|                                    |  |   |          



9. 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:



|                                            |  | 2002   |           |      | 2001 |  
|------------------------------------------- |  | ------ | --------- | ---- | ---- | -
|                                            |  | Amount |           | Rate |      |  
|Balance at year-end                         |  | $      | 5,206,114 |      | 1.37 | %
|Average balance outstanding during the year |  |        | 5,969,999 |      | 1.92 |  
|Maximum amount outstanding at any month-end |  |        | 7,707,641 |      |      |  



15



---



9. SHORT-TERM BORROWINGS
(Continued)



The Bank also has a line of
credit with a borrowing limit of approximately $12.4 million with the Federal Home Loan Bank of Cincinnati (FHLB) as of December 31, 2002. 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, 2002 or 2001.



10. OTHER EXPENSES



The following is an analysis of other
expenses:



|                                           |  | 2002 |           | 2001
|------------------------------------------ |  | ---- | --------- | ----
|Stationery, printing, and supplies         |  | $    | 128,248   |     
|State franchise tax                        |  |      | 95,041    |     
|Postage                                    |  |      | 66,867    |     
|ATM and debit card processing and supplies |  |      | 88,129    |     
|Advertising and public relations           |  |      | 60,590    |     
|Other                                      |  |      | 624,008   |     
|                                           |  |      |           |     
|Total                                      |  | $    | 1,062,883 |     
|                                           |  |      |           |     



11. INCOME TAXES



The provision for income taxes consists of:



|         |  | 2002 |         |   | 2001 |  
|-------- |  | ---- | ------- | - | ---- | -
|Current  |  | $    | 189,893 |   |      | $
|Deferred |  |      | (24,576 | ) |      |  
|         |  |      |         |   |      |  
|Total    |  | $    | 165,317 |   |      | $
|         |  |      |         |   |      |  



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



|                                  |  | 2002 |          |   | 2001 |  
|--------------------------------- |  | ---- | -------- | - | ---- | -
|Deferred tax assets:              |  |      |          |   |      |  
|Allowance for loan losses         |  | $    | 153,069  |   |      | $
|Other                             |  |      | 14,482   |   |      |  
|                                  |  |      |          |   |      |  
|Gross deferred tax assets         |  |      | 167,551  |   |      |  
|                                  |  |      |          |   |      |  
|Deferred tax liabilities:         |  |      |          |   |      |  
|Net unrealized gain on securities |  |      | 282,204  |   |      |  
|Premises and equipment            |  |      | 49,891   |   |      |  
|Accrual to cash conversion        |  |      | 81,535   |   |      |  
|Deferred loan fees                |  |      | 40,623   |   |      |  
|FHLB stock dividend               |  |      | 30,598   |   |      |  
|                                  |  |      |          |   |      |  
|Gross deferred tax liabilities    |  |      | 484,851  |   |      |  
|                                  |  |      |          |   |      |  
|Net deferred tax liabilities      |  | $    | (317,300 | ) |      | $
|                                  |  |      |          |   |      |  



16



---



11. INCOME TAXES
(Continued)



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



|                                      |  | 2002   |          |   | 2001                |      
|------------------------------------- |  | ------ | -------- | - | ------------------- | -----
|                                      |  | Amount |          |   | % of Pre-tax Income |      
|Provision at statutory rate           |  | $      | 279,292  |   |                     | 34.0 
|Effect of tax-free income             |  |        | (144,764 | ) |                     | (17.6
|Other                                 |  |        | 30,789   |   |                     | 3.7  
|                                      |  |        |          |   |                     |      
|Actual tax expense and effective rate |  | $      | 165,317  |   |                     | 20.1 
|                                      |  |        |          |   |                     |      



12. 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 $25,763 in 2002 and $27,925 in 2001.



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 $9,200 and $6,500 were recorded
during 2002 and 2001, respectively. The Trustee held 7,819 and 7,081 shares of the Companys common stock at December 31, 2002 and 2001, respectively.



Stock Option Plan



The Company maintains a stock option plan for the Directors, officers, and key employees. During 2001, the Company authorized additional
options for the purchase of 48,125 shares of its common stock which are available for future grant. 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. Proceeds from the exercise of the stock are credited to common
stock.



17



---



12. EMPLOYEE BENEFITS
(Continued)



Stock Option Plan
(Continued)



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



|                                  |  | 2002    |   |  | Weighted- average Exercise Price |       | 2001 |        | Weighted- average Exercise Price
|--------------------------------- |  | ------- | - |  | -------------------------------- | ----- | ---- | ------ | --------------------------------
|Outstanding, at beginning of year |  | 84,882  |   |  | $                                | 17.15 |      | 84,882 |                                 
|Granted                           |  |        |   |  |                                  |      |      |       |                                 
|Exercised                         |  | (22,312 | ) |  |                                  | 13.88 |      |       |                                 
|Forfeited                         |  |        |   |  |                                  |      |      |       |                                 
|                                  |  |         |   |  |                                  |       |      |        |                                 
|Outstanding, at end of year       |  | 62,570  |   |  |                                  | 18.31 |      | 84,882 |                                 
|                                  |  |         |   |  |                                  |       |      |        |                                 
|Exercisable, at end of year       |  | 62,570  |   |  |                                  | 18.31 |      | 84,882 |                                 
|                                  |  |         |   |  |                                  |       |      |        |                                 



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



|Grant Date      |  | Exercise Price |  | Outstanding and Exercisable Shares |  | Contractual Average Life |  | Average Exercise Price
|--------------- |  | -------------- |  | ---------------------------------- |  | ------------------------ |  | ----------------------
|August 20, 1998 |  | $16.29         |  | 25,441                             |  | 0.63                     |  | $16.29                
|August 25, 1999 |  | 19.20          |  | 18,703                             |  | 6.65                     |  | 19.20                 
|August 24, 2000 |  | 20.36          |  | 18,426                             |  | 7.65                     |  | 20.36                 
|                |  |                |  |                                    |  |                          |  |                       
|                |  |                |  | 62,570                             |  |                          |  |                       
|                |  |                |  |                                    |  |                          |  |                       



13. 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 allowance for loan
losses. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval, review procedures, and collateral requirements as deemed necessary.



The off-balance sheet commitments were comprised of the
following at December 31:



|                             |  | 2002 |           | 2001
|---------------------------- |  | ---- | --------- | ----
|Commitments to extend credit |  | $    | 4,156,416 |     
|Standby letters of credit    |  |      | 1,137,644 |     



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal
lines of credit and loans granted but not yet funded. The Company does not charge fees for the customer credit lines. Since many of the commitments are expected to expire without being fully drawn upon, the contractual amounts do not necessarily
represent future funding requirements.



18



---



13. COMMITMENTS (Continued)



Standby letters of credit represent
conditional commitments issued by the Company 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. The Company holds collateral for these instruments as deemed necessary. For secured letters of credit, the collateral is typically secured by Bank deposit
instruments or customer business assets.



The
company leases various branch buildings under operating leases expiring in various years through 2016.



Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of December 31, 2002
for each of the next 5 years and in the aggregate are $82,378, $82,378, $78,096, $31,000, $31,000, and $195,666 for the years ended December 31, 2003, 2004, 2005, 2006, 2007, and thereafter, respectively.



14. FAIR VALUE OF FINANCIAL INSTRUMENTS



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



|                                                                                            |  | 2002           |            | 2001      
|------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ----------
|                                                                                            |  | Carrying Value |            | Fair Value
|Financial assets:                                                                           |  |                |            |           
|Cash and due from banks, interest-bearing deposits with other banks, and federal funds
sold |  | $              | 4,879,598  |           
|Investment securities                                                                       |  |                | 23,287,489 |           
|Net loans                                                                                   |  |                | 44,881,666 |           
|Regulatory stock                                                                            |  |                | 344,550    |           
|Accrued interest receivable                                                                 |  |                | 477,118    |           
|                                                                                            |  |                |            |           
|Total                                                                                       |  | $              | 73,870,421 |           
|                                                                                            |  |                |            |           
|Financial liabilities:                                                                      |  |                |            |           
|Deposits                                                                                    |  | $              | 62,135,004 |           
|Short-term borrowings                                                                       |  |                | 5,206,114  |           
|Accrued interest payable                                                                    |  |                | 49,740     |           
|                                                                                            |  |                |            |           
|Total                                                                                       |  | $              | 67,390,858 |           
|                                                                                            |  |                |            |           



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.



19



---



14. FAIR VALUE OF FINANCIAL
INSTRUMENTS (Continued)



If no readily
available market exists, the fair value estimates for financial instruments are based upon manage-ments judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as
determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated 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.



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



Cash and Due from Banks, Interest-bearing Deposits with Other Banks, Federal Funds Sold, Regulatory Stock, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable



The fair value is equal to the current
carrying value.



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 and Deposits



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 13.



15. REGULATORY MATTERS



Cash and Due from Banks



The district Federal Reserve Bank requires the Bank to maintain certain reserve balances. As of December 31, 2002 and 2001, the Bank had
required reserves of $671,000 and $707,000, respectively, comprised 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 ten percent of the Banks capital.



20



---



15. 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
2003, without approval of the Comptroller, will be limited to approximately $1,177,000 plus 2003 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, 2002, 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, 2002 and 2001, the FDIC categorized the
Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at
least ten percent, six percent, and five percent, respectively.



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:



|                              |  | 2002   |           |       | 2001  |  
|----------------------------- |  | ------ | --------- | ----- | ----- | -
|                              |  | Amount |           | Ratio |       |  
|Total Capital                 |  |        |           |       |       |  
|(to Risk-weighted Assets)     |  |        |           |       |       |  
|Actual                        |  | $      | 9,536,172 |       | 20.28 | %
|For Capital Adequacy Purposes |  |        | 3,762,160 |       | 8.00  |  
|To Be Well Capitalized        |  |        | 4,702,700 |       | 10.00 |  
|Tier I Capital                |  |        |           |       |       |  
|(to Risk-weighted Assets)     |  |        |           |       |       |  
|Actual                        |  | $      | 9,021,896 |       | 19.18 | %
|For Capital Adequacy Purposes |  |        | 1,881,080 |       | 4.00  |  
|To Be Well Capitalized        |  |        | 2,821,620 |       | 6.00  |  
|Tier I Capital                |  |        |           |       |       |  
|(to Average Assets)           |  |        |           |       |       |  
|Actual                        |  | $      | 9,021,896 |       | 11.41 | %
|For Capital Adequacy Purposes |  |        | 3,163,320 |       | 4.00  |  
|To Be Well Capitalized        |  |        | 3,954,150 |       | 5.00  |  



21



---



16. PARENT COMPANY



Following are condensed financial
statements for the parent company:



CONDENSED
BALANCE SHEET



|                                           |  | December 31,
|------------------------------------------ |  | ------------
|                                           |  | 2002        
|ASSETS                                     |  |             
|Cash                                       |  | $           
|Investment in subsidiaries                 |  |             
|Loans                                      |  |             
|Other assets                               |  |             
|                                           |  |             
|TOTAL ASSETS                               |  | $           
|                                           |  |             
|OTHER LIABILITIES                          |  | $           
|STOCKHOLDERS EQUITY                       |  |             
|                                           |  |             
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $           
|                                           |  |             



CONDENSED
STATEMENT OF INCOME



|                                                                 |  | Year ended December 31, |        
|---------------------------------------------------------------- |  | ----------------------- | -------
|                                                                 |  | 2002                    |        
|INCOME                                                           |  | $                       | 77,007 
|EXPENSES                                                         |  |                         | 30,509 
|                                                                 |  |                         |        
|Earnings before income taxes                                     |  |                         | 46,498 
|Income tax liability (benefit)                                   |  |                         | 10,184 
|                                                                 |  |                         |        
|Earnings before equity in undistributed earnings of subsidiaries |  |                         | 56,682 
|Equity in undistributed earnings of subsidiaries                 |  |                         | 599,448
|                                                                 |  |                         |        
|NET INCOME                                                       |  | $                       | 656,130
|                                                                 |  |                         |        



22



---



16. PARENT COMPANY
(Continued)



CONDENSED STATEMENT OF CASH FLOWS



|                                                                                 |  | Year ended December 31, |           
|-------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                 |  | 2002                    |           
|OPERATING ACTIVITIES                                                             |  |                         |           
|Net income                                                                       |  | $                       | 656,130   
|Adjustment to reconcile net income to net cash provided by operating
activities: |  |                         |           
|Equity in undistributed earnings of subsidiaries                                 |  |                         | (599,448  
|Other, net                                                                       |  |                         | 8,255     
|                                                                                 |  |                         |           
|Net cash provided by (used for) operating activities                             |  |                         | 64,937    
|                                                                                 |  |                         |           
|INVESTING ACTIVITIES                                                             |  |                         |           
|Net decrease (increase) in loans                                                 |  |                         | (510,000  
|                                                                                 |  |                         |           
|Net cash provided by (used for) investing activities                             |  |                         | (510,000  
|                                                                                 |  |                         |           
|FINANCING ACTIVITIES                                                             |  |                         |           
|Capital contribution to service corporation subsidiary                           |  |                         |          
|Cash dividends paid including cash paid in lieu of fractional shares             |  |                         | (214,381  
|Purchase of treasury stock                                                       |  |                         | (1,437,564
|Sale of treasury stock                                                           |  |                         | 1,185,316 
|Stock options exercised                                                          |  |                         | 309,771   
|                                                                                 |  |                         |           
|Net cash used for financing activities                                           |  |                         | (156,858  
|                                                                                 |  |                         |           
|Net decrease in cash                                                             |  |                         | (601,921  
|CASH AT BEGINNING OF YEAR                                                        |  |                         | 891,481   
|                                                                                 |  |                         |           
|CASH AT END OF YEAR                                                              |  | $                       | 289,560   
|                                                                                 |  |                         |           



23



---



17. QUARTERLY DATA
(Unaudited)



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



|                                                    |  | Three Months Ended
|--------------------------------------------------- |  | ------------------
|                                                    |  | March 2002        
|Total interest income                               |  | $                 
|Total interest expense                              |  |                   
|                                                    |  |                   
|Net interest income                                 |  |                   
|Provision for loan losses                           |  |                   
|                                                    |  |                   
|Net interest income after provision for loan losses |  |                   
|Total noninterest income                            |  |                   
|Total noninterest expense                           |  |                   
|                                                    |  |                   
|Income before income taxes                          |  |                   
|Income taxes                                        |  |                   
|                                                    |  |                   
|Net income                                          |  | $                 
|                                                    |  |                   
|Per share data:                                     |  |                   
|Net income                                          |  |                   
|Basic                                               |  | $                 
|Diluted                                             |  |                   
|Weighted-average shares outstanding                 |  |                   
|Basic                                               |  |                   
|Diluted                                             |  |                   
|                                                   
|                                                    |  | Three Months Ended
|                                                    |  | March 2001        
|Total interest income                               |  | $                 
|Total interest expense                              |  |                   
|                                                    |  |                   
|Net interest income                                 |  |                   
|Provision for loan losses                           |  |                   
|                                                    |  |                   
|Net interest income after provision for loan losses |  |                   
|Total noninterest income                            |  |                   
|Total noninterest expense                           |  |                   
|                                                    |  |                   
|Income before income taxes                          |  |                   
|Income taxes                                        |  |                   
|                                                    |  |                   
|Net income                                          |  | $                 
|                                                    |  |                   
|Per share data:                                     |  |                   
|Net income                                          |  |                   
|Basic                                               |  | $                 
|Diluted                                             |  |                   
|Weighted-average shares outstanding                 |  |                   
|Basic                                               |  |                   
|Diluted                                             |  |                   



24



---



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, 2002 and 2001, 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 |           
|----------------------------------------------------------------- |  | ------------------ | ----------
|                                                                  |  | 2002               |           
|                                                                  |  | Average Balance    |           
|Interest-earning assets:                                          |  |                    |           
|Interest-bearing deposits with other banks and federal funds sold |  | $                  | 3,590,859 
|Taxable investment securities                                     |  |                    | 14,536,737
|Non taxable investment securities (2)                             |  |                    | 8,384,074 
|Loans (1)(2)                                                      |  |                    | 43,555,539
|                                                                  |  |                    |           
|Total interest-earning assets                                     |  |                    | 70,067,209
|                                                                  |  |                    |           
|Non interest-earning assets                                       |  |                    | 9,092,692 
|                                                                  |  |                    |           
|Total assets                                                      |  | $                  | 79,159,901
|                                                                  |  |                    |           
|Interest-bearing liabilities:                                     |  |                    |           
|Interest bearing demand                                           |  | $                  | 14,554,272
|Money market accounts                                             |  |                    | 3,593,368 
|Savings deposits                                                  |  |                    | 11,496,766
|Time deposits                                                     |  |                    | 23,663,866
|Short-term borrowings                                             |  |                    | 5,969,999 
|                                                                  |  |                    |           
|Total interest-bearing liabilities                                |  |                    | 59,278,271
|                                                                  |  |                    |           
|Noninterest-bearing liabilities                                   |  |                    | 11,623,715
|Stockholders equity                                              |  |                    | 8,257,915 
|                                                                  |  |                    |           
|Total liabilities and stockholders equity                        |  | $                  | 79,159,901
|                                                                  |  |                    |           
|Net earning assets                                                |  | $                  | 10,788,938
|                                                                  |  |                    |           
|Net interest income                                               |  |                    |           
|                                                                  |  |                    |           
|Net interest spread (3)                                           |  |                    |           
|                                                                  |  |                    |           
|Net interest margin (4)                                           |  |                    |           
|                                                                  |  |                    |           



|(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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



---



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



|                                                    |  | At or for the Year Ended December 31,               
|--------------------------------------------------- |  | ----------------------------------------------------
|                                                    |  | 2002                                                
|                                                    |  | (Dollars in Thousands, Except Per Share Information)
|Balance Sheet Data                                  |  |                                                     
|Assets                                              |  | $                                                   
|Investment securities                               |  |                                                     
|Loans                                               |  |                                                     
|Allowance for loan losses                           |  |                                                     
|Deposits                                            |  |                                                     
|Borrowings                                          |  |                                                     
|Stockholders equity                                |  |                                                     
|                                                   
|Summary of Operations                               |  |                                                     
|Interest income                                     |  | $                                                   
|Interest expense                                    |  |                                                     
|                                                    |  |                                                     
|Net interest income                                 |  |                                                     
|Provision for loan losses                           |  |                                                     
|                                                    |  |                                                     
|Net interest income after provision for loan losses |  |                                                     
|Other operating income                              |  |                                                     
|Other operating expense                             |  |                                                     
|                                                    |  |                                                     
|Income before income taxes                          |  |                                                     
|Income taxes                                        |  |                                                     
|                                                    |  |                                                     
|Net income                                          |  | $                                                   
|                                                    |  |                                                     
|Per Share Data (1)                                  |  |                                                     
|Basic earnings                                      |  | $                                                   
|Diluted earnings                                    |  |                                                     
|Cash dividends declared                             |  |                                                     
|Book value                                          |  |                                                     
|Basic Average shares outstanding                    |  |                                                     
|Diluted Average shares outstanding                  |  |                                                     
|                                                   
|Market Information                                  |  |                                                     
|High                                                |  | $                                                   
|Low                                                 |  |                                                     
|At December 31                                      |  |                                                     
|                                                   
|Selected Financial Ratios                           |  |                                                     
|Return on average assets                            |  |                                                     
|Return on average equity                            |  |                                                     
|Average equity to average assets                    |  |                                                     
|Equity to assets at end of period                   |  |                                                     
|Non-performing assets to total assets               |  |                                                     
|Non-performing loans to total loans                 |  |                                                     



|(1) |  | Adjusted for a five-for-stock split effective January 24, 2003, a 10% stock dividend effective January 11, 2002, a five-for-four stock split effective August 25,
1999 and a 10% stock dividend effective June 26, 1998.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





---

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 as reported by Advest, Inc., a market maker in the companys common stock and previously the banks common stock, for the recent two-year period ended December 31,
2002. Also included in the table are dividends declared per share on the outstanding common stock.



|               |  | Common Stock Price |       | Cash Dividends Declared Per Share
|-------------- |  | ------------------ | ----- | ---------------------------------
|               |  | High               |       | Low                              
|2002           |  |                    |       |                                  
|First Quarter  |  | $                  | 19.20 |                                  
|Second Quarter |  |                    | 18.40 |                                  
|Third Quarter  |  |                    | 18.88 |                                  
|Fourth Quarter |  |                    | 18.40 |                                  
|               |  |                    |       |                                  
|               |  |                    |       |                                  
|               |  |                    |       |                                  
|2001           |  |                    |       |                                  
|First Quarter  |  | $                  | 20.60 |                                  
|Second Quarter |  |                    | 21.80 |                                  
|Third Quarter  |  |                    | 20.20 |                                  
|Fourth Quarter |  |                    | 19.20 |                                  
|               |  |                    |       |                                  
|               |  |                    |       |                                  
|               |  |                    |       |                                  



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, 2002, there were 913,883 of common shares outstanding, which were held by approximately 474 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.





---

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, 2002 and 2001. 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), and Gateminder Corporation, an Ohio corporation (Gateminder). The company controls all of the capital
stock of the bank and Gateminder Corporation. 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 full-service 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 non-bank activities for Automated Teller Machines (ATM). The non-bank
subsidiary sells ATM machines to businesses 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 Machine.



Management Strategy



The companys philosophy is to provide personal community banking
services through strategic office locations that offer customer friendly hours and a variety of loan and deposit products tailored to fit the needs of its customers.



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.



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 other 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.



The bank monitors its interest rate sensitivity through an asset/liability management program. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the fluctuations in net interest spread and achieve constant growth in net interest income during periods of changing interest rates.



Summary of Financial Condition



The consolidated assets of Tri-State 1stBanc were $77,358,000 at December 31, 2002, an increase of $2,825,000 or 3.8% over assets at December 31, 2001. Total loans for the year grew by
$2,629,000 or 6.1% and comprised much of the asset growth. Funding for the asset growth was provided mostly from deposits, which increased by $2,550,000 or 4.3%. Total earning assets, which principally include loans, investment securities and
federal funds sold equaled $68,756,000 at December 31, 2002, an increase of $2,235,000 or 3.4% over total earning assets at December 31, 2001.





---

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



---



Federal Funds Sold and Investment Securities



At December 31, 2002 the company had no federal funds sold but did purchase federal funds in the amount of $200,000 that are
reported as short-term borrowings. On an average basis, federal funds sold for the year were $3.1 million compared to $4.9 million for the same prior year period. The company generally attempts to average between $2 million and $4 million in federal
funds sold, however, this range may shift as deposits increase or as cash liquidity needs change.



The investment activities of the company play a key role in managing the overall yield on earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with
the intent and ability to retain until maturity are classified as held to maturity and carried at amortized cost. All other securities are classified as securities available for sale and are carried at market value. The decision to purchase or sell
securities is based upon the current assessment of economic and financial conditions, including the interest rate environment and other on and off-balance sheet positions.



Investment securities available for sale were $22,355,000 at December 31, 2002. This compares to $21,038,000 at December 31,
2001, an increase of $1,317,000 or 6.3%. The increase was a result of $9.5 million in securities being added to the portfolio from purchases throughout the year offset by $2.4 million in security sales and $6.3 million in calls or maturities. Also
contributing to the increase in the portfolio balance at year-end was a $475,000 increase in the market value of the portfolio over year-end 2001.



Investment securities held to maturity decreased $265,000 or 22.2% in 2002 when compared to the prior year as a result of principal pay-downs, maturities,
calls and the sale of several securities with very small residual balances remaining. Total securities sold were $36,000, all of which have been repaid in excess of 85% of their original amount purchased. There were no purchases of held to maturity
securities in 2002.



Loans



Total loans for the year grew by 6.1%, increasing to $45,396,000 at December
31, 2002 and representing an increase of $2,629,000 for the year. Loan originations for 2002 were $19.7 million, slightly lower than the previous year level of $21.0 million. The historically low interest rate environment of the last two years have
brought about a strong demand for loan refinancings which has resulted in greater volumes of loans originated at much lower rates. While the overall composition of the banks loan portfolio remained stable, the yield earned on the portfolio has
decreased considerably in the last two years.



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. Total deposits were up $2,550,000
or 4.3% when compared to total deposits at December 31, 2001. All deposit types were up for the year with savings and time deposits increasing the most. Savings were up $1,137,000 or 10.8% while time deposits were up $812,000 or 3.6%.



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 Federal Home Loan Bank of Cincinnati. Securities that are sold under repurchase agreements are funding
agreements with customers of the bank that are collateralized by various bank owned investment securities.





---

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



---



At December 31, 2002 short-term borrowings consisted of $200,000 in federal funds purchased and $5,006,000 in securities sold under repurchase agreements.
For the year-ended 2001 short-term borrowings consisted entirely of securities sold under repurchase agreements and totaled $5,805,000.



Summary of Earnings



The companys 2002 net income was $656,000, an increase of $97,000, or 17.4%, from 2001s net income of $559,000. The increase in net income for
the year was primarily a result of an increase in net interest income and noninterest income offset by an increase in noninterest expenses.



On a per share basis, net income for 2002 was $0.73 per basic and diluted share. This compares to 2001s net income per share of $0.62 for basic
shares and $0.61 for diluted shares, respectively.



Interest
Income



Interest income on loans decreased $109,000 or 3.1%
during 2002 when compared to 2001. This decrease was a result of a 117 basis point drop on the yield earned for total loans offset by a $3,502,000 or 8.7% increase in the average loan balance outstanding.



Interest income on federal funds sold decreased $125,000 or 70.8% during 2002
when compared to 2001 due to a decrease of 197 basis points in the yield earned and a $1,825,000 or 36.9% decrease in the average balance outstanding.



Interest income earned on investment securities decreased in 2002 by $81,000 or 6.3% from 2001. This decrease was a result of a decrease of 97 basis
points on the yield earned for the year offset by a $576,000 or 2.6% increase in the average balance outstanding.



Interest Expense



Interest expense on deposits for 2002 decreased $525,000 or 29.5% when compared to 2001. This decrease was a result of a 107 basis point drop on the rate
paid on deposits for the year offset by a $1,326,000 or 2.6% increase in average interest-bearing deposits outstanding.



Interest expense on short-term borrowings decreased $61,000 or 34.6% in 2002 when compared to 2001 and was due to a decrease of 109 basis points on the
rate paid on these funds offset by an increase of $156,000 or 2.7% in the average balance of borrowed funds outstanding.



Provision and Allowance for Loan Losses



Current expense reflecting expected credit losses are referred to by the company as the provision for loan losses on the consolidated statements of
income. Actual losses on loans are charged against the allowance for loan losses, which is a reserve built up on the consolidated balance sheet. The companys policy is to charge-off loans when, in managements opinion, the collection of
loan principal is in doubt. All loans charged-off are subject to continuous review and concerted efforts are made to maximize the recovery of charged-off loans. In order to determine the adequacy of the allowance for loan losses, management
considers the risk classification of loans, delinquency trends, charge-off experience, credit concentrations, economic conditions, and other relevant factors. The allowance is maintained at a level determined according to established methodologies.





---

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



---



The provision for loan losses charged to operations in 2002 was $108,000, compared to $111,000 charged in 2001. This represents a $3,000 or 2.9% decrease
for the year. The factors that effected the amount of the provision for loan losses for the year were credit risks inherent in the portfolio, loan quality, economic conditions and managements ongoing analysis of the adequacy of the allowance
for loan losses.



Actual loan losses, net of recoveries, were
$37,000 in 2002 compared to $116,000 incurred in 2001. Net loan losses by type for 2002 were $9,000 in consumer-related loans, $26,000 in commercial related loans and $2,000 in real-estate loans. This compares to net losses of $101,000 in
consumer-related loans and $15,000 in commercial related loans in the 2001 period.



The company believes that the allowance for loan losses at December 31, 2002 of $514,000 is adequate to cover losses inherent 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, 2002.



Other Operating Income



Total other operating income, excluding gains incurred from investment securities that were sold, totaled $902,000, an increase of $124,000 or 15.9% over
2001. Service fees on deposit accounts increased $71,000 or 13.3% in 2002 and were a result of continued growth in the number of accounts serviced by the bank, and to a lessor extent, increases in the fees charged for these services. Other operating
income increased $52,000 or 21.5% due to an increase in transaction based fees such as ATM and Debit card usage as well as an overall increase in other bank service fees.



Investment securities available for sale totaling $2.4 and $1.1 million were sold in 2002 and 2001, respectively and resulted
in gains of $72,000 and $43,000 for years 2002 and 2001, respectively. The sales for both periods were in conjunction with the interest rate environments at the time of the sales and managements overall investment strategy.



Other Operating Expense



Total salary and employee benefits increased $170,000 or 11.4% in 2002.
Employee wages increased $104,000 or 8.5% due to the hiring of additional personnel throughout 2002 as well as normal merit increases relating to existing employees. Total employee benefit costs for the year increased by $66,000 due to an overall
increase in health insurance and other employee related benefit costs.



Net occupancy expense increased $31,000 or 8.5% in 2002 due to increased costs associated with the expansion of the banks branch banking network. Construction was completed in 2001 for two new branch-banking facilities located
in Midland, Pennsylvania and downtown East Liverpool, Ohio. The increase from these new facilities were offset by a reduction in expense related to the banks loan production office which was closed in late 2002.



Furniture and equipment costs increased $40,000 or 17.4% in 2002 from 2001.
The increase for the year was mostly due to an increase in depreciation and costs associated with additional branch banking facilities and capitalized costs associated with a new core processing and check imaging system purchased in 2002.



Other expenses increased $40,000 or 3.9%, in 2002 as a result of
increases in the banks state franchise tax expense, an increase in directors fees, ATM processing fees and audit and examination fees, offset by a decrease in advertising and consulting fees.



The provision for income tax was $165,000 in 2002 compared to $111,000 in
2001. This represents an increase of $54,000 or 48.4% and is due mostly to an increase in taxable income. The effective tax rate for 2002 was 20.1% compared to 16.6% in 2001.





---

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



---



Capital Resources



Total consolidated stockholders equity increased $854,000 or 9.8% when compared to December 31, 2002. Contributing to the increase in total
stockholders equity for the year was; net income of $656,000 less cash dividends declared to shareholders of $210,000, and an increase of $313,000 in the net unrealized gain on investment securities available for sale.



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 maturaties 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.