EXHIBIT 13



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



This consolidated review and analysis of Dimeco, Inc. (the Company) is intended to assist the reader in
evaluating the performance of the Company for the years ended December 31, 2003 and 2002. This information should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements.



Dimeco, Inc., headquartered in Honesdale, Pennsylvania, is the
one-bank holding company of The Dime Bank (the Bank), which is wholly-owned by the Company. Both the Company and the Bank derive their primary income from the operation of a commercial bank, including earning interest on loans and
investment securities and providing investment and trust services. The Banks main expenses are related to interest paid on deposits and other borrowings and salary and benefits for employees. The Bank operates four full service branches in
Honesdale, Hawley, Damascus and Greentown, Pennsylvania and three off-site automatic teller machines, one in Wayne County and two in Pike County, Pennsylvania. The Bank has been granted approval to open a fifth branch in Dingmans Ferry, Pike County,
Pennsylvania and expects to open that office during 2004. Principal market areas include Wayne and Pike Counties, Pennsylvania and Sullivan County, New York. The Bank employed 85 full time employees and 27 part time employees at December 31, 2003.



FORWARD-LOOKING STATEMENT



The Private Securities Litigation Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion, the words believes, anticipates, contemplated, expects and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and
expenses and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.



CRITICAL ACCOUNTING POLICIES



The Companys
accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the Notes to Consolidated Financial Statements. Our most complex accounting policies require
managements judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure that valuation methods are well controlled and
applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting
policies involving significant management valuation judgments.



Allowance
for Loan Losses



Arriving at an appropriate level of
allowance for loan losses involves a high degree of judgment. The Companys allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.



Management uses historical information as well as information gathered
regarding our estimation of our prevailing business environment. The probability of collection of loans is affected by changing economic conditions and various external factors which may impact the portfolio in ways currently unforeseen. We monitor
this information in an effort to assess the adequacy of the allowance for loan losses. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion
of the Companys methodology of assessing the adequacy of the reserve for loan losses refer to Note 1.



Mortgage Servicing Rights



The Bank originates residential mortgages that are sold on the secondary market. It is the Banks normal practice to retain the servicing of these loans. This means that the customers whose loans have been sold to the secondary market
still make their monthly payments to the Bank. As a result of these mortgage loan sales, the Bank capitalizes a value allocated to the servicing rights in other assets and recognizes other income from the sale and servicing of these loans. The
capitalized servicing rights are amortized against noninterest income in proportion to the estimated net servicing income over the remaining periods of the underlying financial assets.



Capitalized servicing rights are evaluated for impairment periodically based upon the fair value of the rights as compared
to amortized cost. The rights are deemed to be impaired when the fair value of the rights is less than the amortized cost. The fair value of the servicing rights is determined using quoted prices for similar assets with similar characteristics when
available or estimated based on projected discounted cash flows using market based assumptions. The Bank primarily uses the discounted cash flow method.



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Deferred Tax Assets



We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove
non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Our deferred tax assets are described further in Note 12 of the
Notes to Consolidated Financial Statements.



Other than
Temporary Impairment of Investments



Investments are
evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the
loss in value is other than temporary. The term other than temporary is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that
there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to
earnings is recognized.



All dollars are stated in
thousands, with the exception of per share numbers.



STATEMENT OF CONDITION



At
December 31, 2003 the Company had total assets of $304,304, representing an increase of $23,352 or 8.3% from the previous year end.



Cash and cash equivalents increased $2,980 or 41.2% from balances one year earlier. An additional $1,589 or 877.9% increase in federal funds sold was the
largest increase in this category. Federal funds sold offers necessary liquidity for the banking business. The Company had anticipated a greater need for liquidity at December 31, 2003 and kept balances in these investments for use in the first
weeks of 2004.



Investment securities available for sale
decreased $14,523 or 18.4% at year end 2003 as compared to the same point in 2002. With greater availability of quality loans in 2003, management took advantage of using some investment maturities to fund loan demand rather than invest in similar
securities. The average rate earned on investments is typically less than that earned on loans, which offer increased net interest income with the added benefit of helping to expand the local economy through granting commercial loans. Balances of
commercial paper were decreased by $19,978 or 66.7% while balances of U.S. Government Agency investments increased $6,958 or 25.0% during the year 2003. With interest rates at the lowest point in forty years, short-term commercial paper investments
carried the lowest interest rates in the investment portfolio. Management chose to enhance the U.S. Government Agency callable step-up balances in order to increase current interest earnings while maintaining the possibility of higher interest rates
as the market rises.



Loans increased $32,248 or 17.2% from
December 31, 2002 to December 31, 2003. The growth was centered in our commercial loan portfolio with commercial real estate loans increasing $23,483 or 26.4% during the period and other commercial loans increasing $3,826 or 13.5%. These loans were
granted to businesses in several industries with the greatest in summer camps and investment real estate. In the second quarter of 2003 we hired an experienced loan officer with contacts in Pike County, near the site of our next branch location. He
has been successful in originating over $9,000 of commercial loans in 2003. We expect this trend to continue in 2004 due to the many relationships he has developed in that area over several years. Another category of loan growth is in the consumer
installment loan area which increased a modest $2,594 or 15.5%. During the past two years, customers have taken advantage of the ability to include consumer installment loan balances in lower rate residential loan refinances, paying off their higher
interest rate consumer loans. In spite of the tremendous increase in this activity, the Company increased the installment loan portfolio by purchasing auto loans from an Ohio bank and offering several loan promotions during the year 2003. Management
offered a challenge to the loan origination staff who responded with great enthusiasm resulting in several loan promotions to enhance consumer loans. Since consumer loans generally have a maturity of between two and ten years, origination of a
greater number of loans is necessary to replace declining balances as a result of regularly scheduled payments in addition to residential real estate refinancing payoffs. These loan promotions were successful in 2003 but management feels this
performance will be difficult to duplicate in 2004.



Bank-owned
life insurance increased $3,136 or 181.8% during the period due to an additional investment of $3,000. This investment vehicle provides an attractive interest rate combined with the ability to offer enhanced benefits to our officers while increasing
their life insurance coverage. The amount of life insurance purchased is sufficient to offer increased benefits to the officers and provide key man insurance in case we were to lose an important member of our management team.



Total deposits increased $22,848 or 9.6% during 2003. With an initiative to
increase balances of money market deposits in 2003, this type of account increased $13,932 or 441.6%. Management offered a very attractive interest rate on this product, enabling our customers to benefit by reallocating their funds to this type of
account and encouraging them to move balances here from other institutions. This strategy enables us to better manage deposits by having these balances in accounts which can be repriced at any time. In addition, noninterest-bearing deposits
increased $6,985 or 31.0% over the period due to increasing the minimum balance requirement on several categories of demand deposit accounts and simultaneously offering employee incentives for increasing the



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number of accounts and dollar balances. Individual balances in commercial accounts also increased due to seasonal
business swings and a concerted effort by the loan origination staff to ask commercial customers to establish a deposit account when the commercial loan relationship is begun.



Short-term borrowings increased $2,872 or 32.2% from the end of 2002 to 2003. The primary component of short-term borrowings
is securities sold under agreements to repurchase. These liabilities are associated with the deposit sweep product offered to commercial customers. The liability is not insured by the Federal Deposit Insurance Corporation (FDIC) and is
collateralized by a pool of marketable bonds. We offer these customers a favorable tiered interest rate on funds which are automatically swept from their noninterest-bearing demand deposit account on a daily basis. The other component of short-term
borrowings is overnight borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB). At year end 2003, several large loans closed necessitating a short-term funding requirement of $2,612. These borrowings were repaid by the end of
January 2004.



Other borrowed funds decreased $3,000 as a
result of the maturity of a three year borrowing from the FHLB which carried an interest rate of 6.85%. Management did not have a specific need to replace this type of funding although we are investigating this alternative for the future in light of
the current low interest rate environment.



Other liabilities
declined $1,993 or 60.3% due primarily to an accrual at December 31, 2002 to purchase an investment which was not matched at year end 2003.



CAPITAL RESOURCES



Growth of $2,789 or 11.4% in stockholders equity during the year 2003 was primarily the result of earnings of $3,854. Net income at this level
represents a return on average stockholders equity of 14.79% and a return on average assets of 1.34%, both ratios representing an increase over the same figures for 2002. Dividends declared to stockholders increased to $1,320, an increase of
7.8% over the amount paid in 2002. These 2003 dividends were $.87 per share, or 6.1% greater than the amount of dividends declared in 2002, adjusted for the December 1, 2003 stock dividend. The Board of Directors voted to declare a 100% stock split
effected in the form of a dividend to stockholders of record on November 14, 2003. This event increased the total shares outstanding by approximately 759,000 and lowered the market price of stock to $43.00 per share on that day. The Dividend
Reinvestment Plan added $291 to stockholders equity from shares issued from authorized but unissued. The Company has directed its stock transfer agent to pursue purchases in the open market to fill the share needs of the plan, but has issued
stock when insufficient amounts are available at current market rates.



The following table represents the Companys capital position as it compares to regulatory guidelines at December 31, 2003:



|                     |  |              |   |  |                  |   |  |                      |  
|-------------------- |  | ------------ | - |  | ---------------- | - |  | -------------------- | -
|                     |  | Dimeco, Inc. |   |  | Well-Capitalized |   |  | Minimum Requirements |  
|Leverage Ratio       |  | 9.31         | % |  | 5.00             | % |  | 4.00                 | %
|Tier I Capital Ratio |  | 11.15        | % |  | 6.00             | % |  | 4.00                 | %
|Total Capital Ratio  |  | 12.43        | % |  | 10.00            | % |  | 8.00                 | %



LIQUIDITY



A key component of administration within
the financial services industry is the maintenance of liquidity within the organization. The Company must assess its need to have the proper level of cash flow in order to accommodate loan demand and deposit withdrawals while maintaining the ability
to capitalize on investment opportunities that may arise and fund normal operations and capital projects. Bank regulations stipulate certain liquidity requirements in order to operate in a safe and sound manner. These guidelines are followed closely
with the intent to stay well within regulatory requirements while investing assets in a manner which we believe will add the greatest profitability to the Company.



The Companys primary source of liquidity is its ability to retain current deposits and generate new deposits. This is
accomplished by offering customers four branch locations and three off-site automated teller machines. The Bank has been approved to establish an additional branch location in 2004 which will expand this opportunity for deposit growth. Additional
sources of liquidity are maturities or sale of investments, regularly scheduled and prepayments of loans, sale of loans in the secondary market, operating income, use of federal funds sold and our deposits in correspondent banks and increases in
short-term borrowings. The Bank, through its affiliation with the FHLB has the ability to borrow up to $58 million if further need arises. Management has used this borrowing capability for short-term liquidity needs through overnight borrowing and
also has used long-term financing of up to $4 million for other specific needs. We expect that use of this long-term borrowing option will increase as traditional deposit growth lessens in the future. We do expect to generate a significant growth in
deposits with the opening of the new branch in Dingmans Ferry, but we are cognizant of the nations renewed comfort level with investing in equity markets and the disintermediation this will pose for banks. We believe that one reason for the
large growth in deposits during the past few years was the general distrust of the stock market. Given the current low interest rate environment combined with the perception of stabilization in the equity market and the tremendous growth in mutual
fund vehicles whereby funds can be diversified, customers are increasing investment in stocks rather than traditional bank deposits. This trend, combined with pressure from other financial services competitors, could force the Company to pursue
other sources of liquidity including borrowing from the FHLB, issuing more capital stock or increasing the number of short-term borrowings in commercial sweep accounts if traditional deposit gathering declines.



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The attached Consolidated Statement of Cash Flows reveals that the primary source of funds in each
of the past three years has come from maturities or calls of bonds in the investment portfolio. Deposit growth has continued to be the main source of new funds and sales of residential loans in the secondary market were greatly increased in 2003 to
$30 million. These funds were mainly used to generate new loans, both for our portfolio and for sale in the secondary market and for purchases of investment securities.



INTEREST RATE SENSITIVITY



A key function of management in its role as the Asset/Liability Committee (ALCO) is to evaluate the
Companys exposure to interest rate risk. The primary business of the Company in the financial services industry is to act as a depository financial intermediary. In this role, an integral element of risk involves the chance that prevailing
interest rates will adversely affect assets, liabilities, capital, income and/or expense at different times and in different amounts. The ALCO is comprised of all senior officers of the Bank. This committee reports directly to the Board of Directors
on at least a quarterly basis.



Two separate reports are used
to assist in measuring interest rate risk. The first is the Statement of Interest Sensitivity Gap report. This report matches all interest-earning assets and all interest-bearing liabilities by the time frame, or bucket, in which funds can be
reinvested or repriced. The second report is the Interest Rate Shock Analysis discussed in more detail below. In both reports, there are inherent assumptions that must be used in the evaluation. These assumptions include the maturity or
repricing times of deposits, even though all deposits, other than time deposits, have no stated maturity and the reference that interest rate shifts will be parallel, with the rates of assets and liabilities shifting in the same amount in the same
time frame. In reality, various assets and various liabilities will react differently to changes in interest rates, with some lagging behind the change and some anticipating the upcoming change and reacting before any actual change occurs. Each tool
also suggests that there is a propensity to replace assets and liabilities with similar assets and liabilities rather than taking into consideration managements ability to reallocate the Balance Sheet. In addition, the models used do not
include any elements to determine how an action by management to increase or decrease interest rates charged on loans or paid on deposits or to increase borrowings at the FHLB will affect the results of the analysis. In spite of these limitations,
these analyses are still very good tools to assist in management of the Company and similar versions of these same reports are used by all financial institutions.



STATEMENT OF INTEREST SENSITIVITY GAP



|                                                    |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|--------------------------------------------------- |  | --------------- | ------ | -- | --------------------- | - | ------ | ----------- |  | - | -------- | -- |  | ----- | ------ | - |  | - | -------
|(In thousands)                                      |  | 90 days or less |        |    | >90 days but < 1 year |   |        | 1 - 5 years |  |   | >5 years |    |  | Total
|Assets:                                             |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Interest-bearing deposits and federal funds sold    |  | $               | 2,717  |    |                       | $ |       |             |  | $ |         |    |  | $     |       |   |  | $ | 2,717  
|Mortgage loans held for sale                        |  |                 | 654    |    |                       |   |       |             |  |   |         |    |  |       |       |   |  |   | 654    
|Investment securities available for sale(1) (4) (6) |  |                 | 14,618 |    |                       |   | 19,079 |             |  |   | 23,124   |    |  |       | 8,064  |   |  |   | 64,885 
|Investment securities held to maturity(1)           |  |                 |       |    |                       |   |       |             |  |   | 197      |    |  |       |       |   |  |   | 197    
|Loans(1) (5)                                        |  |                 | 35,584 |    |                       |   | 66,274 |             |  |   | 81,180   |    |  |       | 35,400 |   |  |   | 218,438
|                                                    |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Rate sensitive assets                               |  | $               | 53,573 |    |                       | $ | 85,353 |             |  | $ | 104,501  |    |  | $     | 43,464 |   |  | $ | 286,891
|                                                    |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Liabilities:                                        |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Interestbearing deposits:                          |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Interestbearing demand(2)                          |  | $               | 3,012  |    |                       | $ | 9,411  |             |  | $ | 25,222   |    |  | $     |       |   |  | $ | 37,645 
|Money market(3)                                     |  |                 | 2,905  |    |                       |   | 8,543  |             |  |   | 5,639    |    |  |       |       |   |  |   | 17,087 
|Savings(2)                                          |  |                 | 3,329  |    |                       |   | 10,402 |             |  |   | 27,876   |    |  |       |       |   |  |   | 41,607 
|Time deposits                                       |  |                 | 32,896 |    |                       |   | 53,244 |             |  |   | 50,205   |    |  |       |       |   |  |   | 136,345
|Shortterm borrowings                               |  |                 | 11,800 |    |                       |   |       |             |  |   |         |    |  |       |       |   |  |   | 11,800 
|Other borrowed funds                                |  |                 |       |    |                       |   |       |             |  |   |         |    |  |       | 1,000  |   |  |   | 1,000  
|                                                    |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Rate sensitive liabilities                          |  | $               | 53,942 |    |                       | $ | 81,600 |             |  | $ | 108,942  |    |  | $     | 1,000  |   |  | $ | 245,484
|                                                    |  |                 |        |    |                       |   |        |             |  |   |          |    |  |       |        |   |  |   |        
|Interest sensitivity gap                            |  | $               | (369   | )  |                       | $ | 3,753  |             |  | $ | (4,441   | )  |  | $     | 42,464 |   |  | $ | 41,407 
|Cumulative gap                                      |  | $               | (369   | )  |                       | $ | 3,384  |             |  | $ | (1,057   | )  |  | $     | 41,407 |   |  |   |        
|Cumulative gap to total assets                      |  |                 | (.12   | )% |                       |   | 1.11   | %           |  |   | (.35     | )% |  |       | 13.61  | % |  |   |        

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|(1) | Investments and loans are included in the earlier of the period in which interest rates are next scheduled to adjust or in which they are due. No adjustment has been
made for scheduled repayments or for anticipated prepayments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Interest-bearing demand deposits and savings are segmented based on the percentage of decay method. The decay rates used are 8% in 90 days or less, 25% in >90
days but < 1 year, and 67% in 1 - 5 years.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Money market deposits are segmented based on the percentage of decay method. The decay rates used are 17% in 90 days or less, 50% in >90 days but < 1 year and
33% in 1 - 5 years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes Federal Home Loan Bank and Atlantic Central Bankers Bank stock which is included in
Other Assets on the Consolidated Balance Sheet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Does not include loans in nonaccrual status, deposit overdrafts, unposted items or deferred fees on loans.
|--- | ----------------------------------------------------------------------------------------------------------

|(6) | Among Dimecos investment portfolio are step-up securities. Due to this feature these securities have been reallocated from their maturity date to their next
step-up date. The specific impact of this policy by timeframe is as follows: 90 days or less increased $1,502, >90 days but < 1 year increased $16,014, 1- 5 years increased $10,283 and >5 years decreased $27,798.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As this report shows, the Company was nearly balanced with a slight asset
sensitive position at December 31, 2003. This means that in the one year time frame, or bucket, there were more interest-sensitive assets than liabilities. This position is optimal with interest rates poised to increase since assets tend to reprice
quicker than liabilities. The Company has classified its callable, step-up U.S. Government Agency bonds in the periods in which the bonds will next reprice versus the period in which they mature since, in managements judgment, these repricing
events will occur.



The second report used to monitor interest
rate risk is the Interest Rate Shock Analysis. This tool attempts to determine the affect on income of various shifts in the interest rate environment. In particular, a shift of 200 basis points, or 2% in interest rates, is the industry
standard. Given a shift downward of 200 basis points, net interest income would decrease by $479 or 4.4% while net income would decrease $331 or 8.1%. Given the current low interest rate environment, management feels that a general decrease in
interest rates of this magnitude is nearly impossible. If interest rates were to rise 200 basis points, the report predicts an increase of $71 or .7% in net interest income and an increase of $64 or 1.5% in net income as compared to the actual
results for 2003. The results of a potential shift of 200 basis points in either direction are well within internal policy guidelines. If the results were not tolerable, our policy would determine that management should reallocate the Balance Sheet
in order to maintain compliance with the policy.



ALLOWANCE FOR LOAN LOSSES



The allowance for loan
losses represents the largest subjective measurement in the financial statements. This balance represents the amount that management estimates is adequate to provide for probable losses inherent in the loan portfolio. Specifically, the accounting
practice is that losses are charged against the allowance while recoveries are credited to it. As of December 31, 2003, the Companys allowance totaled $3,014 which represented 1.37% of the loan portfolio at that date. The amount of the
allowance increased $196 or 7.0% over the balance one year earlier while the amount as a percentage of the loan portfolio decreased from 1.50% of total loans at December 31, 2002. The allowance is established through a provision for loan losses
which is charged to operations. The provision is based on managements periodic evaluation of the adequacy of the allowance for loan losses, taking into consideration the overall risk characteristics of the portfolio, our specific loan loss
experience, current and projected economic conditions, industry loan experience and other relevant factors. The estimates, including the amounts and timing of future cash flows relating to impaired loans, used to determine the adequacy of the
allowance are particularly susceptible to significant change. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance and a qualitative allowance. The specific allowance is
determined by measuring impairment based upon the practices outlined in Statement of Financial Accounting Standards (FAS) No. 114, Accounting by Creditors for Impairment of a Loan and by FAS No. 118, Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosures. This standard prescribes methods to measure impairment and income recognition as well as documenting disclosure requirements. The formula allowance is calculated by applying factors
to outstanding loans by type and risk weighting, excluding those loans for which a specific allowance has been determined. These loss factors are determined by management using historical loss information, current economic factors, portfolio
concentration analysis, current delinquency ratios, an evaluation of the experience level of the loan officers and appraisal of the loan review process. The qualitative portion of the allowance is determined based upon managements evaluation
of a number of factors including: national and local economic business conditions, collateral values within the portfolio, credit quality trends and managements evaluation of appropriate balances in the allowance.



The Company employs an experienced outside professional loan review agency to
perform the loan review function. A review of all loans or loan relationships over $400 is made in order to assure an annual review of a majority of the commercial loan portfolio. This review is based upon current financial information of the
customer, an analysis of loan concentrations, financial ratio comparisons, adherence to payment schedule, regulatory evaluations and portfolio peer comparisons. Management evaluates all other loans utilizing similar guidelines. After careful
evaluation of all factors, a risk weight is assigned. Groups of smaller dollar amount loans are evaluated as a homogeneous pool with similar factors used to evaluate the appropriateness of the allowance for those loans.



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SUMMARY OF LOAN LOSS EXPERIENCE



|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(In thousands)                                                                            |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Balance January 1,                                                                        |  | $    | 2,818 |   |      | $ | 2,373 |      |  | $ | 2,088 |  
|                                                                                          |  |      |      
|Charge-offs:                                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Commercial                                                                                |  |      | 69    |   |      |   | 100   |      |  |   | 218   |  
|Real estate                                                                               |  |      | 558   |   |      |   | 48    |      |  |   | 208   |  
|Installment                                                                               |  |      | 195   |   |      |   | 151   |      |  |   | 199   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|                                                                                          |  |      |      
|Total charge-offs                                                                         |  |      | 822   |   |      |   | 299   |      |  |   | 625   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Recoveries:                                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|Commercial                                                                                |  |      | 4     |   |      |   | 6     |      |  |   | 11    |  
|Real estate                                                                               |  |      | 2     |   |      |   | 23    |      |  |   | 8     |  
|Installment                                                                               |  |      | 52    |   |      |   | 40    |      |  |   | 24    |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|                                                                                          |  |      |      
|Total recoveries                                                                          |  |      | 58    |   |      |   | 69    |      |  |   | 43    |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Net charge-offs                                                                           |  |      | 764   |   |      |   | 230   |      |  |   | 582   |  
|Additions charged to operations                                                           |  |      | 960   |   |      |   | 675   |      |  |   | 867   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Balance December 31,                                                                      |  | $    | 3,014 |   |      | $ | 2,818 |      |  | $ | 2,373 |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |      | .37   | % |      |   | .13   | %    |  |   | .37   | %
|Allowance for loan loss as a % of average loans outstanding                               |  |      | 1.47  | % |      |   | 1.63  | %    |  |   | 1.50  | %



DISTRIBUTION OF
ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY:

INTEREST RATES AND INTEREST DIFFERENTIAL



|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|-------------------------------------------------------------------------------- |  | ------------------- | ------- | ---------------- | ---- | ----------- |  | ------ | ------------------- |  | ---------------- | ------- | ----------- | - | ------ | ------------------- | ------ | ---------------- |  | ----------- | ------- |  | - | ------ |  | ------ | -
|                                                                                 |  | 2003                |         |                  | 2002 |             |  | 2001   |                    
|(In thousands)                                                                   |  | Average Balance (3) |         | Revenue/ Expense |      | Yield/ Rate |  |        | Average Balance (3) |  | Revenue/ Expense |         | Yield/ Rate |   |        | Average Balance (3) |        | Revenue/ Expense |  | Yield/ Rate |        
|ASSETS                                                                           |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Interest-earning assets:                                                         |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total Loans(1) (4)                                                               |  | $                   | 205,209 |                  | $    | 12,864      |  | 6.27   | %                   |  | $                | 172,368 |             | $ | 12,472 |                     | 7.24   | %                |  | $           | 158,521 |  | $ | 13,948 |  | 8.80   | %
|Investment securities:                                                           |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Taxable(5)                                                                       |  |                     | 57,454  |                  |      | 2,131       |  | 3.71   | %                   |  |                  | 61,700  |             |   | 2,571  |                     | 4.17   | %                |  |             | 51,025  |  |   | 2,880  |  | 5.64   | %
|Exempt from federal income tax(2)                                                |  |                     | 6,702   |                  |      | 447         |  | 6.67   | %                   |  |                  | 6,500   |             |   | 470    |                     | 7.23   | %                |  |             | 5,260   |  |   | 391    |  | 7.43   | %
|Interest-bearing deposits                                                        |  |                     | 124     |                  |      | 1           |  | .81    | %                   |  |                  | 2,196   |             |   | 34     |                     | 1.55   | %                |  |             | 1,765   |  |   | 67     |  | 3.80   | %
|Federal funds sold                                                               |  |                     | 2,675   |                  |      | 30          |  | 1.12   | %                   |  |                  | 4,971   |             |   | 81     |                     | 1.63   | %                |  |             | 4,303   |  |   | 168    |  | 3.90   | %
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total interest-earning assets/ interest income                                   |  |                     | 272,164 |                  |      | 15,473      |  | 5.69   | %                   |  |                  | 247,735 |             |   | 15,628 |                     | 6.31   | %                |  |             | 220,874 |  |   | 17,454 |  | 7.90   | %
|Cash and due from banks                                                          |  |                     | 7,380   |                  |      |             |  |        |                     |  |                  | 6,507   |             |   |        |                     |        |                  |  |             | 5,039   |  |   |        |  |        |  
|Premises and equipment, net                                                      |  |                     | 4,234   |                  |      |             |  |        |                     |  |                  | 4,088   |             |   |        |                     |        |                  |  |             | 4,101   |  |   |        |  |        |  
|Other assets, less allowance for loan losses                                     |  |                     | 3,835   |                  |      |             |  |        |                     |  |                  | 1,403   |             |   |        |                     |        |                  |  |             | 2,155   |  |   |        |  |        |  
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total assets                                                                     |  | $                   | 287,613 |                  |      |             |  |        |                     |  | $                | 259,733 |             |   |        |                     |        |                  |  | $           | 232,169 |  |   |        |  |        |  
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                             |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Interest-bearing liabilities:                                                    |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Savings                                                                          |  | $                   | 42,565  |                  | $    | 348         |  | .82    | %                   |  | $                | 39,413  |             | $ | 532    |                     | 1.35   | %                |  | $           | 33,082  |  | $ | 727    |  | 2.20   | %
|Interest-bearing checking                                                        |  |                     | 45,623  |                  |      | 313         |  | .69    | %                   |  |                  | 35,952  |             |   | 317    |                     | .88    | %                |  |             | 30,811  |  |   | 497    |  | 1.61   | %
|Time deposits                                                                    |  |                     | 130,515 |                  |      | 3,724       |  | 2.85   | %                   |  |                  | 122,846 |             |   | 4,358  |                     | 3.55   | %                |  |             | 114,488 |  |   | 6,223  |  | 5.44   | %
|Short-term borrowings                                                            |  |                     | 11,369  |                  |      | 112         |  | .99    | %                   |  |                  | 10,886  |             |   | 143    |                     | 1.31   | %                |  |             | 7,298   |  |   | 178    |  | 2.44   | %
|Other borrowed funds                                                             |  |                     | 3,055   |                  |      | 202         |  | 6.61   | %                   |  |                  | 4,000   |             |   | 268    |                     | 6.70   | %                |  |             | 4,000   |  |   | 268    |  | 6.70   | %
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total interest-bearing liabilities/interest expense                              |  |                     | 233,127 |                  |      | 4,699       |  | 2.02   | %                   |  |                  | 213,097 |             |   | 5,618  |                     | 2.64   | %                |  |             | 189,679 |  |   | 7,893  |  | 4.16   | %
|Noninterest-bearing deposits                                                     |  |                     | 26,430  |                  |      |             |  |        |                     |  |                  | 21,294  |             |   |        |                     |        |                  |  |             | 18,994  |  |   |        |  |        |  
|Other liabilities                                                                |  |                     | 1,998   |                  |      |             |  |        |                     |  |                  | 2,075   |             |   |        |                     |        |                  |  |             | 2,518   |  |   |        |  |        |  
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total liabilities                                                                |  |                     | 261,555 |                  |      |             |  |        |                     |  |                  | 236,466 |             |   |        |                     |        |                  |  |             | 211,191 |  |   |        |  |        |  
|Stockholders Equity                                                             |  |                     | 26,058  |                  |      |             |  |        |                     |  |                  | 23,267  |             |   |        |                     |        |                  |  |             | 20,978  |  |   |        |  |        |  
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Total Liabilities and Stockholders Equity                                       |  | $                   | 287,613 |                  |      |             |  |        |                     |  | $                | 259,733 |             |   |        |                     |        |                  |  | $           | 232,169 |  |   |        |  |        |  
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Net interest income/ interest spread                                             |  |                     |         |                  | $    | 10,774      |  | 3.67   | %                   |  |                  |         |             | $ | 10,010 |                     | 3.67   | %                |  |             |         |  | $ | 9,561  |  | 3.74   | %
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Margin Analysis:                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Interest income/earning assets                                                   |  |                     |         |                  | $    | 15,473      |  | 5.69   | %                   |  |                  |         |             | $ | 15,628 |                     | 6.31   | %                |  |             |         |  | $ | 17,454 |  | 7.90   | %
|Interest expense/earning assets                                                  |  |                     |         |                  |      | 4,699       |  | 1.73   | %                   |  |                  |         |             |   | 5,618  |                     | 2.27   | %                |  |             |         |  |   | 7,893  |  | 3.57   | %
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Net interest income/earning assets                                               |  |                     |         |                  | $    | 10,774      |  | 3.96   | %                   |  |                  |         |             | $ | 10,010 |                     | 4.04   | %                |  |             |         |  | $ | 9,561  |  | 4.33   | %
|                                                                                 |  |                     |         |                  |      |             |  |        |                     |  |                  |         |             |   |        |                     |        |                  |  |             |         |  |   |        |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                     |         |                  |      |             |  | 116.74 | %                   |  |                  |         |             |   |        |                     | 116.25 | %                |  |             |         |  |   |        |  | 116.45 | %

---

Certain amounts for prior years have been
reclassified in order to conform to current presentation.



|(1) | Nonaccrual loans are not included.
|--- | ----------------------------------



---

|(2) | Income on interest-earning assets is based on a taxable equivalent basis using a federal income tax rate of 34%.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Average balances are calculated using daily balances.
|--- | -----------------------------------------------------

|(4) | Interest on loans includes fee income.
|--- | --------------------------------------

|(5) | Includes equity investments in FHLB and ACBB
|--- | --------------------------------------------



RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME



|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|-------------------------------------------- |  | --------------------- | -------- | - | --------------------- | ------ | ------ | -------------- |  | -------- | --------- | - | ------ | - | ------ | - |  | - | ------ | - |  | - | -----
|                                             |  | 2003 Compared to 2002 |          |   | 2002 Compared to 2001
|                                             |  | Total Variance        |          |   | Caused by             |        |        | Total Variance |  |          | Caused by
|(In thousands)                               |  |                       | Rate (1) |   |                       | Volume |        |                |  | Rate (1) |           |   | Volume
|Interest income:                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Loans                                        |  | $                     | 392      |   |                       | $      | (1,984 | )              |  | $        | 2,376     |   |        | $ | (1,476 | ) |  | $ | (2,694 | ) |  | $ | 1,218
|Investment securities:                       |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Taxable                                      |  |                       | (440     | ) |                       |        | (263   | )              |  |          | (177      | ) |        |   | (309   | ) |  |   | (912   | ) |  |   | 603  
|Exempt from federal income tax               |  |                       | (23      | ) |                       |        | (38    | )              |  |          | 15        |   |        |   | 79     |   |  |   | (13    | ) |  |   | 92   
|Interest-bearing deposits                    |  |                       | (33      | ) |                       |        | (1     | )              |  |          | (32       | ) |        |   | (33    | ) |  |   | (49    | ) |  |   | 16   
|Federal funds sold                           |  |                       | (51      | ) |                       |        | (14    | )              |  |          | (37       | ) |        |   | (87    | ) |  |   | (113   | ) |  |   | 26   
|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Increase (decrease) in tax-equivalent income |  |                       | (155     | ) |                       |        | (2,300 | )              |  |          | 2,145     |   |        |   | (1,826 | ) |  |   | (3,781 | ) |  |   | 1,955
|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Interest expense:                            |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Savings                                      |  |                       | (184     | ) |                       |        | (227   | )              |  |          | 43        |   |        |   | (195   | ) |  |   | (334   | ) |  |   | 139  
|Interest-bearing checking                    |  |                       | (4       | ) |                       |        | (89    | )              |  |          | 85        |   |        |   | (180   | ) |  |   | (263   | ) |  |   | 83   
|Time deposits                                |  |                       | (634     | ) |                       |        | (906   | )              |  |          | 272       |   |        |   | (1,865 | ) |  |   | (2,319 | ) |  |   | 454  
|Short-term borrowings                        |  |                       | (31      | ) |                       |        | (37    | )              |  |          | 6         |   |        |   | (35    | ) |  |   | (123   | ) |  |   | 88   
|Other borrowed funds                         |  |                       | (66      | ) |                       |        | (3     | )              |  |          | (63       | ) |        |   |       |   |  |   |       |   |  |   |     
|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Total interest expense                       |  |                       | (919     | ) |                       |        | (1,262 | )              |  |          | 343       |   |        |   | (2,275 | ) |  |   | (3,039 | ) |  |   | 764  
|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      
|Increase (decrease) in interest expense      |  | $                     | 764      |   |                       | $      | (1,038 | )              |  | $        | 1,802     |   |        | $ | 449    |   |  | $ | (742   | ) |  | $ | 1,191
|                                             |  |                       |          |   |                       |        |        |                |  |          |           |   |        |   |        |   |  |   |        |   |  |   |      

---

|(1) | Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of
assets and liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

RESULTS OF OPERATIONS



Net income continued to increase in 2003 with the year end amount of $3,854, representing growth of $483 or 14.3% more than
in 2002. Net interest income and noninterest income both showed gains in 2003 as compared to previous years.



Net Interest Income



The difference between interest earned on assets and interest paid on liabilities is the key component of earnings for the Company. The following discussion regarding net interest income should be read in conjunction with the schedule
Distribution of Assets, Liabilities and Stockholders Equity: Interest Rates and Interest Differentialand Rate/Volume Analysis of Changes in Net Interest Income.



Interest earned on loans increased $392 or 3.1% from 2002 to 2003 based on growth of $32,841 or 19.1% in the average size of
the loan portfolio combined with a decrease of 97 basis points in the average interest rate charged for loans. Loans which have variable interest rates comprise 66% of the loan portfolio and the majority of those loans reprice within a one year time
frame. Management believes, due to the large volume of loan refinancing seen in the past few years combined with the portfolio loan repricing frequency, that the general decline in interest rates has been fully reflected in the variable portion of
the loan portfolio at year end 2003. Competition for loans is keen in the markets we serve and our rates are reflective of this. We believe that by continuing to serve our customers to our mutual benefit, we will continue to maintain and even
increase our market penetration for loans.



With the large loan
demand seen in 2003, the average balance of taxable investment securities declined over the period due to reinvestment of these funds in higher yielding loans. The investment portfolio has been consistently maintained to offer liquidity for loan
demand or other corporate needs. The average balance of taxable investment securities decreased $4,246 or 6.9% from 2002 to 2003 while the average interest rate earned on the portfolio also declined from an average rate of 4.17% to 3.71% over the
period. In order to maintain the liquidity position at acceptable levels while waiting for upward movement in the interest rate curve, management has accepted lower rates of return for reinvestment of bond calls or maturities. We believe that a
short-term decrease in interest earned is better than taking the risk of investing in long-term securities in the current low interest rate environment and feel that this position will enable the Company to garner increased returns on investments as
the market rises.



Deposits continued to grow in 2003, with
average savings deposits increasing $3,152 or 8.0% while the average interest rate paid for the deposits declined 53 basis points from 1.35% to .82% over the period. At the same time, interest-bearing deposits, including money market deposits, also
increased with growth of $9,671 of average balances and the corresponding average interest rate paid for the deposits decreasing 19 basis points from .88% in 2002 to .69% in 2003. Interest expense relating to time deposits also decreased $634 or
14.5% with average time deposits growing $7,669 or 6.2% while the average interest rate paid for these deposits declined 70 basis points from 3.55% to 2.85%. The Rate/Volume Analysis of Changes in Net Interest Income indicates that the
decreased interest expense in each category is due entirely to the lower interest rates paid for deposits in spite of higher balances in each category. Management monitors interest rates in our marketplace and sets rates to remain competitive; we
believe that by emphasizing the extra level of service given to depositors we can maintain or increase the deposit base without marginally adding interest expense. Due to the extended period of low market interest rates, management has taken steps
to retain and expand the deposit base by planning several marketing campaigns and additional employee incentives to increase deposits for 2004. We are also confident that new deposits will be garnered with the opening of the Dingmans Ferry office.



Expense associated with short-term borrowings during 2003
decreased $31 or 21.7% with the average volume of these liabilities increasing $483 or 4.4% while the average interest rate paid declined from 1.31% to .99%. Management has lowered the interest rate paid on sweep accounts in line with decreases in
short-term investment rates.



Provision for Loan Losses



The provision for loan losses of $960 for the year ended December 31, 2003
represented an increase of $285 or 42.2% over the provision expense recorded in 2002. The loan portfolio increased $32,248 or 17.2% during 2003. Management reviews the adequacy of the allowance for loan losses on a quarterly basis and has determined
that the allowance, which represented 1.37% of total loans, was adequate. During 2002 an impaired commercial loan customer experienced difficulty in making scheduled payments on its loan which was to revert from interest only to a monthly payment of
principal and interest. Management modified the loan payment schedule to include payments based upon cash flow of the business. Their cash flow projections for operations were not realized and therefore they were able to pay interest only payments
in 2003. After completing updated appraisals on the real estate and business, we felt it prudent to charge off $424 of the loan. We believe that this charge off has placed the loan balance in an amount that is collectible. Loan delinquencies are
monitored monthly and for the past two years the delinquency rate was generally less than 1.00% at each month end.



Noninterest Income



Financial institutions have historically earned the majority of their income from net interest income. Over the past several years, these interest spreads
have been challenged by both increased competition and the current low interest rate environment. While net interest income is still the primary source of income for the Company, noninterest income is the primary solution to maintaining
profitability. Noninterest income is basically all revenues related to services rendered to customers within regulatory guidelines.



Service charges on deposit accounts are the main component of noninterest income. In February 2003, the Bank began offering an



---

overdraft protection plan which entitles deposit customers the privilege of paying overdrawn checks up to a predetermined
limit when repaid according to pre-established terms. Fees associated with this service were $510 in 2003, this amount being the main reason for the increase of $456 or 76.0% over 2002 service charge income.



Net gains on the sale of mortgage loans held for sale expanded to $834 in
2003, representing a gain of $383 or 85.0% over this income in 2002. The number of residential mortgage loans sold in 2003 increased to 272 from 188 the previous year with a notable slowing in the number of originations during the fourth quarter of
2003. Customers have taken advantage of the perception that residential mortgage rates are at or near as low as they will go, increasing the level of both new financing and refinances. Management believes that the refinance rush is
nearly over and has budgeted for half the net gains on sale of mortgage loans for 2004. We are expanding our presence in the local residential real estate market and are looking at enhancing the product line in order to attain the goal.



The category of other noninterest income includes many miscellaneous
revenue items including participation service charges earned on servicing loans which are sold in the secondary market, fees for wiring funds, merchant credit card commissions and debit card interchange fees along with fees for other activities. The
sale of investment products in conjunction with a third party was begun in July 2003. Brokerage service commissions relating to these sales were $146 in 2003. Management expects this new line of business to continue to grow in future periods.
Earnings on the cash surrender value of life insurance policies also increased in 2003 by $64 or 72.2% over the earnings in 2002 primarily as a result of the Bank purchasing an additional $3,000 of bank-owned life insurance in July 2003. Offsetting
these increases in income, a contra account to noninterest income is the amortization of mortgage servicing rights which increased $83 or 195.0% over 2002. Variations in all other income categories made up the remaining increase in other noninterest
income.



Noninterest Expense



The largest noninterest expense for the Company is salaries and employee
benefits. Totaling $3,524 for 2003, this category increased $520 or 17.3% over the 2002 amount. In order to accommodate new operations including the sale of investment products and expanding loan originations in Pike County, Pennsylvania, the
Company hired two new Vice Presidents along with several other employees to handle the larger volume of transactions relating to growth of both loans and deposits. The number of full time equivalent employees increased from 89 in 2002 to 97 in 2003.
At that level, the Company still outperformed its national peer group in salary and employee benefit expense as of the latest survey dated September 30, 2003. The average assets per employee of $2,980 compared favorably to a national average of
$2,790 and listed the Bank in the top 62% of similar sized institutions. The average personnel expense per employee of $34 as compared to $42 ranks the Bank in the top 9% if this peer group.



Professional fees increased $155 or 49.4% from 2002 to 2003. A significant
item in 2003 which was not incurred in 2002 is related to the implementation of an overdraft protection plan. The Bank entered into an agreement with a third party to provide the program software whereby we agreed to pay a percentage of earnings on
the program for thirty months, amounting to $77 in 2003. The Company had such a positive experience with a profit improvement project begun in 1999 that management decided to re-establish the program in 2003. We hired a consultant to facilitate the
effort and paid $50 in 2003 for the service for which we expect to generate approximately 20% in annual increases of net income. The program touches on all areas of the Company, asking input from every functional area, expanding services and
decreasing expenses while enhancing income from traditional services. Examples of the initiatives are the overdraft protection program and the formation of a title insurance subsidiary in order to offer title services to our loan customers. In
addition, the Company instituted a training initiative in 2003 to boost the level of service provided by employees to our customers and paid a consultant $26 to implement the training. We believe that one of the best methods to retain customers is
to offer the best service in our markets.



MARKET PRICES OF STOCK/DIVIDENDS PAID



The
Companys stock is currently listed on the OTC Bulletin Board under the symbol DIMC. The book value per share at December 31, 2003 was $17.89 as compared to $16.25, restated for the stock split, at December 31, 2002. There were
approximately 718 shareholders of record at December 31, 2003. This number does not include persons or entities that hold their stock in nominee name through various brokerage firms.



The following table sets forth high and low sale prices per share of the common stock for the calendar quarters indicated,
based upon information obtained from published sources.



MARKET PRICES OF STOCK / DIVIDENDS DECLARED



|               |  |      |       |      |   |                   |  |      |      |     |   |                   |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | ----------------- |  | ---- | ---- | --- | - | ----------------- |  | - | ----- |  | - | ----
|               |  | 2003 |       | 2002
|               |  | High |       | Low  |   | Dividend Declared |  | High |      | Low |   | Dividend Declared
|First Quarter  |  | $    | 25.75 |      | $ | 18.75             |  | $    | .215 |     | $ | 20.00             |  | $ | 17.80 |  | $ | .200
|Second Quarter |  | $    | 29.00 |      | $ | 25.50             |  | $    | .215 |     | $ | 22.00             |  | $ | 20.32 |  | $ | .200
|Third Quarter  |  | $    | 32.50 |      | $ | 28.75             |  | $    | .215 |     | $ | 22.00             |  | $ | 21.10 |  | $ | .200
|Fourth Quarter |  | $    | 45.00 |      | $ | 32.00             |  | $    | .225 |     | $ | 23.75             |  | $ | 21.38 |  | $ | .215



Table reflects high and low stock
prices and dividends adjusted to reflect 100% stock split effected in the form of a dividend on 12/1/03.



---

The ability of the Company to pay dividends is dependent upon the ability of the Bank to pay dividends to
the Company. Because the Bank is a depository institution insured by the FDIC it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. Additionally, the Bank is subject to certain state banking
regulations that limit the ability of the Bank to pay dividends to the Company. Under Federal Reserve policy, the Company is required to maintain adequate regulatory capital and is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where it might not do so absent such a policy. This policy could have the effect of reducing the amount of dividends declarable by the Company.



---

DIMECO, INC.



HONESDALE, PENNSYLVANIA



AUDIT REPORT



DECEMBER 31, 2003



---

DIMECO, INC.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003



|                                                          |  |            
|--------------------------------------------------------- |  | -----------
|                                                          |  | Page Number
|Report of Independent Auditors                            |  | 1          
|                                                          | 
|Financial Statements                                      |  |            
|                                                          | 
|Consolidated Balance Sheet                                |  | 2          
|                                                          | 
|Consolidated Statement of Income                          |  | 3          
|                                                          | 
|Consolidated Statement of Changes in Stockholders Equity |  | 4          
|                                                          | 
|Consolidated Statement of Cash Flows                      |  | 5          
|                                                          | 
|Notes to Consolidated Financial Statements                |  | 6 - 31     





---

REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders

Dimeco,
Inc.



We have audited the accompanying consolidated balance sheet of Dimeco,
Inc. and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



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



Wexford, PA

February 6, 2004



---

DIMECO, INC.

CONSOLIDATED BALANCE SHEET

(In thousands)



|                                                                                               |  |              |         |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|                                                                                               |  | December 31, |        
|                                                                                               |  | 2003         |         | 2002 |  
|Assets                                                                                         |  |              |         |      |   |         |  
|Cash and due from banks                                                                        |  | $            | 7,493   |      | $ | 7,033   |  
|Interest-bearing deposits in other banks                                                       |  |              | 947     |      |   | 16      |  
|Federal funds sold                                                                             |  |              | 1,770   |      |   | 181     |  
|                                                                                               |  |              |         |      |   |         |  
|Total cash and cash equivalents                                                                |  |              | 10,210  |      |   | 7,230   |  
|                                                                                               |  |             
|Mortgage loans held for sale (market value of $662 and $1,199)                                 |  |              | 654     |      |   | 1,195   |  
|Investment securities available for sale                                                       |  |              | 64,357  |      |   | 78,880  |  
|Investment securities held to maturity (market value of $228 and $462)                         |  |              | 197     |      |   | 426     |  
|                                                                                               |  |             
|Loans (net of unearned income of $741 and $746)                                                |  |              | 219,609 |      |   | 187,361 |  
|Less allowance for loan losses                                                                 |  |              | 3,014   |      |   | 2,818   |  
|                                                                                               |  |              |         |      |   |         |  
|Net loans                                                                                      |  |              | 216,595 |      |   | 184,543 |  
|                                                                                               |  |             
|Premises and equipment                                                                         |  |              | 4,179   |      |   | 4,262   |  
|Accrued interest receivable                                                                    |  |              | 1,295   |      |   | 1,224   |  
|Bank-owned life insurance                                                                      |  |              | 4,861   |      |   | 1,725   |  
|Other assets                                                                                   |  |              | 1,956   |      |   | 1,467   |  
|                                                                                               |  |              |         |      |   |         |  
|TOTAL ASSETS                                                                                   |  | $            | 304,304 |      | $ | 280,952 |  
|                                                                                               |  |              |         |      |   |         |  
|Liabilities                                                                                    |  |              |         |      |   |         |  
|Deposits:                                                                                      |  |              |         |      |   |         |  
|Noninterest-bearing                                                                            |  | $            | 29,523  |      | $ | 22,538  |  
|Interest-bearing                                                                               |  |              | 232,684 |      |   | 216,821 |  
|                                                                                               |  |              |         |      |   |         |  
|Total deposits                                                                                 |  |              | 262,207 |      |   | 239,359 |  
|                                                                                               |  |             
|Short-term borrowings                                                                          |  |              | 11,800  |      |   | 8,928   |  
|Other borrowed funds                                                                           |  |              | 1,000   |      |   | 4,000   |  
|Accrued interest payable                                                                       |  |              | 678     |      |   | 842     |  
|Other liabilities                                                                              |  |              | 1,311   |      |   | 3,304   |  
|                                                                                               |  |              |         |      |   |         |  
|TOTAL LIABILITIES                                                                              |  |              | 276,996 |      |   | 256,433 |  
|                                                                                               |  |              |         |      |   |         |  
|Stockholders Equity                                                                           |  |              |         |      |   |         |  
|Common stock, $.50 par value; 3,000,000 shares authorized; 1,526,134 and 754,479 shares issued |  |              | 763     |      |   | 377     |  
|Capital surplus                                                                                |  |              | 3,973   |      |   | 3,648   |  
|Retained earnings                                                                              |  |              | 22,038  |      |   | 19,908  |  
|Accumulated other comprehensive income                                                         |  |              | 534     |      |   | 624     |  
|Treasury stock, at cost (879 shares)                                                           |  |              |        |      |   | (38     | )
|                                                                                               |  |              |         |      |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                     |  |              | 27,308  |      |   | 24,519  |  
|                                                                                               |  |              |         |      |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                     |  | $            | 304,304 |      | $ | 280,952 |  
|                                                                                               |  |              |         |      |   |         |  



The accompanying notes are an integral
part of these consolidated financial statements.



2



---

DIMECO, INC.

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share data)



|                                                    |  |                         |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | Year Ended December 31,
|                                                    |  | 2003                    |        | 2002 |   | 2001  
|Interest Income                                     |  |                         |        |      |   |        |  |   |       
|Interest and fees on loans                          |  | $                       | 12,864 |      | $ | 12,472 |  | $ | 13,948
|Interest-bearing deposits in other banks            |  |                         | 1      |      |   | 34     |  |   | 67    
|Federal funds sold                                  |  |                         | 30     |      |   | 81     |  |   | 168   
|Investment securities:                              |  |                         |        |      |   |        |  |   |       
|Taxable                                             |  |                         | 2,131  |      |   | 2,571  |  |   | 2,879 
|Exempt from federal income tax                      |  |                         | 295    |      |   | 310    |  |   | 258   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest income                               |  |                         | 15,321 |      |   | 15,468 |  |   | 17,320
|                                                    |  |                         |        |      |   |        |  |   |       
|Interest Expense                                    |  |                         |        |      |   |        |  |   |       
|Deposits                                            |  |                         | 4,385  |      |   | 5,207  |  |   | 7,447 
|Short-term borrowings                               |  |                         | 112    |      |   | 143    |  |   | 178   
|Other borrowed funds                                |  |                         | 202    |      |   | 268    |  |   | 268   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest expense                              |  |                         | 4,699  |      |   | 5,618  |  |   | 7,893 
|                                                    |  |                         |        |      |   |        |  |   |       
|Net Interest Income                                 |  |                         | 10,622 |      |   | 9,850  |  |   | 9,427 
|                                                    |  |                         |       
|Provision for loan losses                           |  |                         | 960    |      |   | 675    |  |   | 867   
|                                                    |  |                         |        |      |   |        |  |   |       
|Net Interest Income After Provision for Loan Losses |  |                         | 9,662  |      |   | 9,175  |  |   | 8,560 
|                                                    |  |                         |        |      |   |        |  |   |       
|Noninterest Income                                  |  |                         |        |      |   |        |  |   |       
|Service charges on deposit accounts                 |  |                         | 1,056  |      |   | 600    |  |   | 564   
|Mortgage loans held for sale gains, net             |  |                         | 834    |      |   | 451    |  |   | 286   
|Investment securities gains                         |  |                         | 13     |      |   | 12     |  |   | 37    
|Other income                                        |  |                         | 792    |      |   | 656    |  |   | 674   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest income                            |  |                         | 2,695  |      |   | 1,719  |  |   | 1,561 
|                                                    |  |                         |        |      |   |        |  |   |       
|Noninterest Expense                                 |  |                         |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |                         | 3,524  |      |   | 3,004  |  |   | 2,955 
|Occupancy expense, net                              |  |                         | 595    |      |   | 539    |  |   | 532   
|Furniture and equipment expense                     |  |                         | 448    |      |   | 469    |  |   | 446   
|Professional fees                                   |  |                         | 469    |      |   | 314    |  |   | 253   
|Data processing expense                             |  |                         | 290    |      |   | 268    |  |   | 293   
|Other expense                                       |  |                         | 1,477  |      |   | 1,380  |  |   | 1,350 
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest expense                           |  |                         | 6,803  |      |   | 5,974  |  |   | 5,829 
|                                                    |  |                         |        |      |   |        |  |   |       
|Income before income taxes                          |  |                         | 5,554  |      |   | 4,920  |  |   | 4,292 
|Income taxes                                        |  |                         | 1,700  |      |   | 1,549  |  |   | 1,353 
|                                                    |  |                         |        |      |   |        |  |   |       
|NET INCOME                                          |  | $                       | 3,854  |      | $ | 3,371  |  | $ | 2,939 
|                                                    |  |                         |        |      |   |        |  |   |       
|Earnings Per Share                                  |  |                         |        |      |   |        |  |   |       
|Basic                                               |  | $                       | 2.54   |      | $ | 2.24   |  | $ | 1.98  
|Diluted                                             |  | $                       | 2.45   |      | $ | 2.19   |  | $ | 1.95  



The accompanying notes are an integral
part of these consolidated financial statements.



3



---

DIMECO, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(In thousands, except per share data)



|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | -------------- | - | ---------------- |  | - | ----------------------------------- | - |  | ------------- | --- | - | ------------------------ | - | ---- | ------------------- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                |  | CommonStock |     | CapitalSurplus |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TreasuryStock |     |   | TotalStockholdersEquity |   |      | ComprehensiveIncome | 
|Balance, December 31, 2000                                                                                      |  | $           | 371 |                | $ | 3,182            |  | $ | 15,903                              |   |  | $             | 153 |   |                          | $ | (72  | )                   |  | $ | 19,537 |   |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  | 
|Net income                                                                                                      |  |             |     |                |   |                  |  |   | 2,939                               |   |  |               |     |   |                          |   |      |                     |  |   | 2,939  |   |  | $ | 2,939 |  
|Other comprehensive income:                                                                                     |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized gain on available-for-sale securities, net of reclassification adjustment, net of taxes of $171      |  |             |     |                |   |                  |  |   |                                     |   |  |               | 331 |   |                          |   |      |                     |  |   | 331    |   |  |   | 331   |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                            |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  | $ | 3,270 |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Dividend reinvestment plan                                                                                      |  |             | 3   |                |   | 167              |  |   |                                     |   |  |               |     |   |                          |   | 257  |                     |  |   | 427    |   |  |   |       |  
|Purchase treasury stock                                                                                         |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   | (203 | )                   |  |   | (203   | ) |  |   |       |  
|Cash dividends ($.73 per share)                                                                                 |  |             |     |                |   |                  |  |   | (1,080                              | ) |  |               |     |   |                          |   |      |                     |  |   | (1,080 | ) |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2001                                                                                      |  |             | 374 |                |   | 3,349            |  |   | 17,762                              |   |  |               | 484 |   |                          |   | (18  | )                   |  |   | 21,951 |   |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  | 
|Net income                                                                                                      |  |             |     |                |   |                  |  |   | 3,371                               |   |  |               |     |   |                          |   |      |                     |  |   | 3,371  |   |  | $ | 3,371 |  
|Other comprehensive income:                                                                                     |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized gain on available-for-sale securities, net of reclassification adjustment, net of taxes of $72       |  |             |     |                |   |                  |  |   |                                     |   |  |               | 140 |   |                          |   |      |                     |  |   | 140    |   |  |   | 140   |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                            |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  | $ | 3,511 |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Dividend reinvestment plan                                                                                      |  |             | 3   |                |   | 286              |  |   |                                     |   |  |               |     |   |                          |   | 211  |                     |  |   | 500    |   |  |   |       |  
|Purchase treasury stock                                                                                         |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   | (231 | )                   |  |   | (231   | ) |  |   |       |  
|Exercise of stock options                                                                                       |  |             |     |                |   | 13               |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   | 13     |   |  |   |       |  
|Cash dividends ($.82 per share)                                                                                 |  |             |     |                |   |                  |  |   | (1,225                              | ) |  |               |     |   |                          |   |      |                     |  |   | (1,225 | ) |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2002                                                                                      |  |             | 377 |                |   | 3,648            |  |   | 19,908                              |   |  |               | 624 |   |                          |   | (38  | )                   |  |   | 24,519 |   |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  | 
|Net income                                                                                                      |  |             |     |                |   |                  |  |   | 3,854                               |   |  |               |     |   |                          |   |      |                     |  |   | 3,854  |   |  | $ | 3,854 |  
|Other comprehensive loss:                                                                                       |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized loss on available-for-sale securities, net of reclassification adjustment, net of tax benefit of $46 |  |             |     |                |   |                  |  |   |                                     |   |  |               | (90 | ) |                          |   |      |                     |  |   | (90    | ) |  |   | (90   | )
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                            |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  | $ | 3,764 |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Dividend reinvestment plan                                                                                      |  |             | 2   |                |   | 209              |  |   |                                     |   |  |               |     |   |                          |   | 80   |                     |  |   | 291    |   |  |   |       |  
|Purchase treasury stock                                                                                         |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   | (114 | )                   |  |   | (114   | ) |  |   |       |  
|Exercise of stock options                                                                                       |  |             | 3   |                |   | 116              |  |   | (23                                 | ) |  |               |     |   |                          |   | 72   |                     |  |   | 168    |   |  |   |       |  
|100 % stock split effected in the form of a stock dividend                                                      |  |             | 381 |                |   |                  |  |   | (381                                | ) |  |               |     |   |                          |   |      |                     |  |   |       |   |  |   |       |  
|Cash dividends ($.87 per share)                                                                                 |  |             |     |                |   |                  |  |   | (1,320                              | ) |  |               |     |   |                          |   |      |                     |  |   | (1,320 | ) |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2003                                                                                      |  | $           | 763 |                | $ | 3,973            |  | $ | 22,038                              |   |  | $             | 534 |   |                          | $ |     |                     |  | $ | 27,308 |   |  |   |       |  
|                                                                                                                |  |             |     |                |   |                  |  |   |                                     |   |  |               |     |   |                          |   |      |                     |  |   |        |   |  |   |       |  



|                                                                                 |  |      |     |   |      |   |     |      |  |   |     |  
|-------------------------------------------------------------------------------- |  | ---- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                                                 |  |      |    
|                                                                                 |  | 2003 |     |   | 2002 |   |     | 2001 | 
|Components of other comprehensive income (loss):                                 |  |      |     |   |      |   |     |      |  |   |     |  
|Change in net unrealized gain (loss) on investment securities available for sale |  | $    | (81 | ) |      | $ | 148 |      |  | $ | 355 |  
|Realized gains included in net income, net of taxes of $4, $4, and $13           |  |      | (9  | ) |      |   | (8  | )    |  |   | (24 | )
|                                                                                 |  |      |     |   |      |   |     |      |  |   |     |  
|Total                                                                            |  | $    | (90 | ) |      | $ | 140 |      |  | $ | 331 |  
|                                                                                 |  |      |     |   |      |   |     |      |  |   |     |  



The accompanying notes are an integral
part of these consolidated financial statements.



4



---

DIMECO, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Year Ended December 31, |         
|                                                                                  |  | 2003                    |          |   | 2002 |   |          | 2001 | 
|Operating Activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                       | 3,854    |   |      | $ | 3,371    |      |  | $ | 2,939    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                         |  |                         | 960      |   |      |   | 675      |      |  |   | 867      |  
|Depreciation and amortization                                                     |  |                         | 576      |   |      |   | 553      |      |  |   | 571      |  
|Amortization of premium and discount on investment securities, net                |  |                         | (235     | ) |      |   | (696     | )    |  |   | (940     | )
|Amortization of net deferred loan origination fees                                |  |                         | (88      | ) |      |   | (604     | )    |  |   | (40      | )
|Investment securities gains                                                       |  |                         | (13      | ) |      |   | (12      | )    |  |   | (37      | )
|Origination of loans held for sale                                                |  |                         | (29,081  | ) |      |   | (18,046  | )    |  |   | (14,400  | )
|Proceeds from sale of loans                                                       |  |                         | 30,034   |   |      |   | 17,607   |      |  |   | 14,235   |  
|Mortgage loans sold gains, net                                                    |  |                         | (834     | ) |      |   | (451     | )    |  |   | (286     | )
|Decrease (increase) in accrued interest receivable                                |  |                         | (71      | ) |      |   | 33       |      |  |   | 257      |  
|Decrease in accrued interest payable                                              |  |                         | (164     | ) |      |   | (324     | )    |  |   | (607     | )
|Deferred federal income taxes                                                     |  |                         | 6        |   |      |   | (249     | )    |  |   | (38      | )
|Other, net                                                                        |  |                         | (120     | ) |      |   | 320      |      |  |   | (357     | )
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                         | 4,824    |   |      |   | 2,177    |      |  |   | 2,164    |  
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Investing Activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Investment securities available for sale:                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from sales                                                               |  |                         | 33       |   |      |   | 7        |      |  |   | 70       |  
|Proceeds from maturities or paydown                                               |  |                         | 165,449  |   |      |   | 220,351  |      |  |   | 132,127  |  
|Purchases                                                                         |  |                         | (152,840 | ) |      |   | (228,277 | )    |  |   | (151,266 | )
|Investment securities held to maturity:                                           |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturities or paydown                                               |  |                         | 230      |   |      |   |         |      |  |   | 100      |  
|Net increase in loans                                                             |  |                         | (32,953  | ) |      |   | (25,262  | )    |  |   | (7,780   | )
|Purchase of bank-owned life insurance                                             |  |                         | (3,000   | ) |      |   | (200     | )    |  |   |         |  
|Purchase of premises and equipment                                                |  |                         | (560     | ) |      |   | (782     | )    |  |   | (280     | )
|Proceeds from the sale of other real estate                                       |  |                         | 33       |   |      |   | 123      |      |  |   | 509      |  
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash used for investing activities                                            |  |                         | (23,608  | ) |      |   | (34,040  | )    |  |   | (26,520  | )
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Financing Activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net increase in deposits                                                          |  |                         | 22,848   |   |      |   | 28,974   |      |  |   | 26,080   |  
|Increase in short-term borrowings                                                 |  |                         | 2,872    |   |      |   | 676      |      |  |   | 4,095    |  
|Repayment of other borrowed funds                                                 |  |                         | (3,000   | ) |      |   |         |      |  |   |         |  
|Proceeds from dividend reinvestment and stock purchase plan                       |  |                         | 291      |   |      |   | 500      |      |  |   | 427      |  
|Purchase of treasury stock                                                        |  |                         | (114     | ) |      |   | (231     | )    |  |   | (203     | )
|Proceeds from exercise of stock options                                           |  |                         | 168      |   |      |   | 13       |      |  |   |         |  
|Cash dividends paid                                                               |  |                         | (1,301   | ) |      |   | (1,199   | )    |  |   | (1,039   | )
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                         |  |                         | 21,764   |   |      |   | 28,733   |      |  |   | 29,360   |  
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | 2,980    |   |      |   | (3,130   | )    |  |   | 5,004    |  
|Cash and cash equivalents at beginning of year                                    |  |                         | 7,230    |   |      |   | 10,360   |      |  |   | 5,356    |  
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                       | 10,210   |   |      | $ | 7,230    |      |  | $ | 10,360   |  
|                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  



The accompanying notes are an integral
part of these consolidated financial statements.





5



---

DIMECO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



Nature of Operations and Basis of Presentation



Dimeco, Inc. (the Company) is a Pennsylvania company organized as the holding company of The Dime Bank (the Bank) and its wholly owned subsidiary,
TDB Insurance Services LLC. The Bank is a state-chartered bank and operates from four locations in Northeastern Pennsylvania. The Company and its subsidiary derive substantially all of their income from banking and bank-related services which
include interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earnings on investment securities. The Company provides deposit services including checking, savings, and certificate
of deposit accounts and investment and trust services. The Company is supervised by the Federal Reserve Board, while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of
Banking.



The consolidated financial statements of the Company include its
wholly owned subsidiary, the Bank. All inter-company items have been eliminated in preparing the consolidated financial statements. The investment in subsidiary on the parent company financial statements is carried at the parent companys
equity in the underlying net assets of the Bank.



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 intention and ability, as securities held to maturity or securities available for
sale. Debt securities acquired with the intent and ability 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. Certain other debt and equity securities have been classified as available for sale to serve principally as a source of liquidity. 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 Atlantic Central
Bankers Bank represents ownership in institutions which are wholly owned by other financial institutions. These securities are accounted for at cost and are classified with other assets.



Mortgage Loans Held for Sale



In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at the aggregate lower of cost or market. Such loans sold are
generally serviced by the Bank.



6



---

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



Loans



Loans are stated at the principal amount outstanding, net of any unearned income, deferred loan fees, and the allowance for loan losses. Interest on consumer loans is credited to operations over the term of each loan
using a method which results in a level yield or the simple interest method. Interest income on mortgage loans is accrued on the amortized balance. Interest income on other loans is accrued on the principal amount outstanding. Loan fees which
represent an adjustment to interest yield are deferred and amortized over the life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued
when it is determined that a reasonable doubt exists as to the collectibility of additional interest. When a loan is placed on nonaccrual status, unpaid interest is charged against income. Payments received on nonaccrual loans are either applied to
principal or reported as interest income according to managements judgment as to the collectibility of principal. Loans are returned to accrual status when past due interest is collected and the collection of principal is probable.



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, as of the balance sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it.
The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on managements periodic evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans,
are particularly susceptible to changes in the near term.



Impaired loans are
commercial and commercial real estate loans for which it is probable that 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 if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and
its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair
value of the collateral.



Mortgage loans on one-to-four family properties and
all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all of the circumstances surrounding the loan and the borrower including the length of the delay, the borrowers prior payment
record, and the amount of shortfall in relation to the principal and interest owed.



Premises and Equipment



Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to twenty years for furniture and equipment and five to
thirty-one years for office buildings and improvements. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from five to twenty years. Expenditures for maintenance and
repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.



7



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Other Real Estate



Real estate acquired by foreclosure is classified on the Consolidated Balance Sheet at the
lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition, are included as other expense.



Income Taxes



The Company and the Bank file a consolidated federal income tax return. Deferred tax assets or liabilities are computed based on the difference between the financial
statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.



Earnings Per Share



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



Stock
Options



The Company maintains stock option plans for key officers and
non-employee directors.



The Company accounts for its stock option plan under
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under this opinion, no compensation expense has been recognized with respect to the plans because the exercise price of the
Companys employee stock options equals the market price of the underlying stock on the grant date.



8



---

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



Stock Options(Continued)



Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-based Compensation, net income applicable to common stock and basic and diluted net income per common share for the years ended December 31 would have been as follows (in thousands, except per share data):



|                                          |  |      |       |      |   |       |  |   |      
|----------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                          |  | 2003 |       | 2002 |   | 2001 
|Net income as reported                    |  | $    | 3,854 |      | $ | 3,371 |  | $ | 2,939
|Less pro forma expense related to options |  |      | 38    |      |   | 39    |  |   | 36   
|                                          |  |      |       |      |   |       |  |   |      
|Pro forma net income                      |  | $    | 3,816 |      | $ | 3,332 |  | $ | 2,903
|                                          |  |      |       |      |   |       |  |   |      
|Basic net income per common share:        |  |      |       |      |   |       |  |   |      
|As reported                               |  | $    | 2.54  |      | $ | 2.24  |  | $ | 1.98 
|Pro forma                                 |  | $    | 2.52  |      | $ | 2.22  |  | $ | 1.95 
|Diluted net income per common share       |  |      |       |      |   |       |  |   |      
|As reported                               |  | $    | 2.45  |      | $ | 2.19  |  | $ | 1.95 
|Pro forma                                 |  | $    | 2.42  |      | $ | 2.16  |  | $ | 1.92 



For purposes of computing pro forma
results, the Company estimated fair values of stock options using the Black-Scholes option-pricing model. The model requires use of subjective assumptions which can materially affect fair value estimates. Therefore, the pro forma results are
estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 2003, 2002, and
2001, respectively: (1) expected dividend yields of 2.53 percent, 3.81 percent, and 4.24 percent; (2) risk-free interest rates of 3.91 percent, 3.78 percent, and 5.47 percent; (3) expected volatility of 25 percent, 17 percent, and 12 percent; and
(4) expected lives of options of 6.6, 7.8, and 8.8 years.



Mortgage
Servicing Rights (MSRs)



The Company has agreements for
the express purpose of selling loans in the secondary market. The Company maintains servicing rights for most of these loans. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their
relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. MSRs are a component of other assets on the Consolidated Balance Sheet.



Comprehensive Income



The Company is required to present comprehensive income in a full set of general-purpose
financial statements for all periods presented. Other comprehensive income is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio. The Company has elected to report the effects of other comprehensive income
as part of the Consolidated Statement of Changes in Stockholders Equity.



9



---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Cash Flows



The Company has defined cash and cash equivalents as cash and due from banks, interest-bearing deposits in other banks, and federal funds
sold.



Amounts paid for interest and income taxes are as follows (in
thousands):



|                        |  |              |       |                          |   |      
|----------------------- |  | ------------ | ----- | ------------------------ | - | -----
|                        |  | InterestPaid |       | Federal IncomeTaxes Paid
|Year Ended December 31, |  |              |       |                          |   |      
|2003                    |  | $            | 4,863 |                          | $ | 1,973
|2002                    |  | $            | 5,942 |                          | $ | 1,616
|2001                    |  | $            | 8,501 |                          | $ | 1,353



Recent Accounting Pronouncements



In August 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability
be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which was effective January 1, 2003, did not have a material effect on the Companys financial
position or results of operations.



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



On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about
the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a
ramp-up effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in



10



---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Recent Accounting Pronouncements (Continued)



reported results. To address that concern, FAS No. 148 provides two additional methods of
transition that reflect an entitys full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma
effects of using the fair value based method of accounting for stock-based compensation for all companiesregardless of the accounting method usedby requiring that the data be presented more prominently and in a more user-friendly format
in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and
annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.



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



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



11



---

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



In December 2003, the FASB issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established
standards for identifying a variable interest entity (VIE) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods
ending after March 15, 2004. Small business issuers must apply this interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. The adoption of this interpretation has not and is not expected to
have a material effect on the Companys financial position or results of operations.



Reclassification of Comparative Amounts



Certain comparative amounts for prior years have been reclassified to conform with current year presentations. The reclassified amounts did not affect net income or stockholders equity.



12



---

NOTE 2 - EARNINGS PER SHARE



There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share
computation.



|                                                                                                         |  |           |   |  |           |   |  |           |  
|-------------------------------------------------------------------------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                                                                                         |  | 2003      |   |  | 2002      |   |  | 2001      |  
|Weighted-average common shares outstanding                                                               |  | 1,515,596 |   |  | 1,504,376 |   |  | 1,489,584 |  
|Average treasury stock shares                                                                            |  | (579      | ) |  | (2,076    | ) |  | (740      | )
|                                                                                                         |  |           |   |  |           |   |  |           |  
|Weighted-average common shares and common stock equivalents used to calculate basic earnings per share   |  | 1,515,017 |   |  | 1,502,300 |   |  | 1,488,844 |  
|Additional common stock equivalents (stock options) used to calculate diluted earnings per share         |  | 59,578    |   |  | 40,336    |   |  | 22,468    |  
|                                                                                                         |  |           |   |  |           |   |  |           |  
|Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share |  | 1,574,595 |   |  | 1,542,636 |   |  | 1,511,312 |  
|                                                                                                         |  |           |   |  |           |   |  |           |  



NOTE 3  STOCK DIVIDEND



On November 6, 2003, the Board of Directors approved a 100 percent stock
split effected in the form of a dividend, payable December 1, 2003, to stockholders of record on November 14, 2003. Average shares outstanding and all per share amounts included in the consolidated financial statements are based on the increased
number of shares giving retroactive effect to the stock split effected in the form of a dividend.



13



---

NOTE 4 - INVESTMENT SECURITIES



The amortized costs and estimated market value of investment securities are summarized as follows (in thousands):



|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|------------------------------------------------- |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | - | ---------------------- | - |  | - | ------
|                                                  |  | 2003          
|                                                  |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Market Value
|AVAILABLE FOR SALE                                |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|U.S. Government agency securities                 |  | $              | 34,749 |                        | $ | 109                     |  | $ | (55                    | ) |  | $ | 34,803
|Mortgage-backed securities                        |  |                | 122    |                        |   |                        |  |   | (4                     | ) |  |   | 118   
|Obligations of states and political subdivisions: |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Taxable                                           |  |                | 1,993  |                        |   |                        |  |   | (8                     | ) |  |   | 1,985 
|Tax-exempt                                        |  |                | 6,449  |                        |   | 163                     |  |   | (6                     | ) |  |   | 6,606 
|Corporate securities                              |  |                | 9,959  |                        |   | 473                     |  |   | (4                     | ) |  |   | 10,428
|Commercial paper                                  |  |                | 9,989  |                        |   |                        |  |   |                       |   |  |   | 9,989 
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Total debt securities                             |  |                | 63,261 |                        |   | 745                     |  |   | (77                    | ) |  |   | 63,929
|                                                  |  |                |        |                       
|Equity securities                                 |  |                | 286    |                        |   | 144                     |  |   | (2                     | ) |  |   | 428   
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Total                                             |  | $              | 63,547 |                        | $ | 889                     |  | $ | (79                    | ) |  | $ | 64,357
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       



|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|------------------------------------------------- |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | - | ---------------------- | - |  | - | ------
|                                                  |  | 2002          
|                                                  |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Market Value
|AVAILABLE FOR SALE                                |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|U.S. Government agency securities                 |  | $              | 27,732 |                        | $ | 121                     |  | $ | (8                     | ) |  | $ | 27,845
|Mortgage-backed securities                        |  |                | 169    |                        |   |                        |  |   | (2                     | ) |  |   | 167   
|Obligations of states and political subdivisions: |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Taxable                                           |  |                | 1,884  |                        |   |                        |  |   |                       |   |  |   | 1,884 
|Tax-exempt                                        |  |                | 6,796  |                        |   | 236                     |  |   | (10                    | ) |  |   | 7,022 
|Corporate securities                              |  |                | 11,083 |                        |   | 569                     |  |   | (1                     | ) |  |   | 11,651
|Commercial paper                                  |  |                | 29,966 |                        |   | 2                       |  |   | (1                     | ) |  |   | 29,967
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Total debt securities                             |  |                | 77,630 |                        |   | 928                     |  |   | (22                    | ) |  |   | 78,536
|                                                  |  |                |        |                       
|Equity securities                                 |  |                | 306    |                        |   | 58                      |  |   | (20                    | ) |  |   | 344   
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       
|Total                                             |  | $              | 77,936 |                        | $ | 986                     |  | $ | (42                    | ) |  | $ | 78,880
|                                                  |  |                |        |                        |   |                         |  |   |                        |   |  |   |       



14



---

NOTE 4 - INVESTMENT SECURITIES (Continued)



|                                                              |  |                |     |                        |   |                         |  |                        |   |  |   |    
|------------------------------------------------------------- |  | -------------- | --- | ---------------------- | - | ----------------------- |  | ---------------------- | - |  | - | ---
|                                                              |  | 2003          
|                                                              |  | Amortized Cost |     | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Market Value
|HELD TO MATURITY                                              |  |                |     |                        |   |                         |  |                        |   |  |   |    
|Obligations of states and political subdivisions - tax-exempt |  | $              | 197 |                        | $ | 31                      |  | $                      |  |  | $ | 228
|                                                              |  |                |     |                        |   |                         |  |                        |   |  |   |    
|                                                              | 
|                                                              |  | 2002          
|                                                              |  | Amortized Cost |     | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Market Value
|HELD TO MATURITY                                              |  |                |     |                        |   |                         |  |                        |   |  |   |    
|Obligations of states and political subdivisions - tax-exempt |  | $              | 426 |                        | $ | 36                      |  | $                      |  |  | $ | 462
|                                                              |  |                |     |                        |   |                         |  |                        |   |  |   |    



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



|                                                 |  |                         |       |                          |   |                        |  |                         |     |                        |   |                         |  |   |       |  |   |   
|------------------------------------------------ |  | ----------------------- | ----- | ------------------------ | - | ---------------------- |  | ----------------------- | --- | ---------------------- | - | ----------------------- |  | - | ----- |  | - | --
|                                                 |  | Less than Twelve Months |       | Twelve Months or Greater |   | Total                 
|                                                 |  | Estimated Market Value  |       | Gross Unrealized Losses  |   | Estimated Market Value |  | Gross Unrealized Losses |     | Estimated Market Value |   | Gross Unrealized Losses
|U.S. Government agencies                         |  | $                       | 7,499 |                          | $ | 55                     |  | $                       |    |                        | $ |                        |  | $ | 7,499 |  | $ | 55
|Obligations of states and political subdivisions |  |                         | 1,330 |                          |   | 14                     |  |                         |    |                        |   |                        |  |   | 1,330 |  |   | 14
|Mortgage-backed securities                       |  |                         |      |                          |   |                       |  |                         | 118 |                        |   | 4                       |  |   | 118   |  |   | 4 
|Corporate securities                             |  |                         | 389   |                          |   | 4                      |  |                         |    |                        |   |                        |  |   | 389   |  |   | 4 
|                                                 |  |                         |       |                          |   |                        |  |                         |     |                        |   |                         |  |   |       |  |   |   
|Total debt securities                            |  |                         | 9,218 |                          |   | 73                     |  |                         | 118 |                        |   | 4                       |  |   | 9,336 |  |   | 77
|Equity securities                                |  |                         |      |                          |   |                       |  |                         | 40  |                        |   | 2                       |  |   | 40    |  |   | 2 
|                                                 |  |                         |       |                          |   |                        |  |                         |     |                        |   |                         |  |   |       |  |   |   
|Total                                            |  | $                       | 9,218 |                          | $ | 73                     |  | $                       | 158 |                        | $ | 6                       |  | $ | 9,376 |  | $ | 79
|                                                 |  |                         |       |                          |   |                        |  |                         |     |                        |   |                         |  |   |       |  |   |   



The Companys investment
portfolio contains unrealized losses of direct obligations of U.S. Government securities, including mortgage-related instruments, issued or backed by the full faith and credit of the U.S. Government or are generally viewed as having the implied
guarantee of the U.S. Government and debt obligations of a U.S. state or political subdivision, and equity securities of financial institutions.



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



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



15



---

NOTE 4 - INVESTMENT SECURITIES (Continued)



The amortized cost and estimated market values of debt securities at December 31, 2003, by contractual maturity, are shown below. Expected
maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).



|                                       |  |                    |        |                        |   |                |  |                        |     |  |   |    
|-------------------------------------- |  | ------------------ | ------ | ---------------------- | - | -------------- |  | ---------------------- | --- |  | - | ---
|                                       |  | Available for Sale |        | Held to Maturity      
|                                       |  | Amortized Cost     |        | Estimated Market Value |   | Amortized Cost |  | Estimated Market Value
|Due in one year or less                |  | $                  | 13,131 |                        | $ | 13,230         |  | $                      |    |  | $ |   
|Due after one year through five years  |  |                    | 12,438 |                        |   | 12,840         |  |                        | 197 |  |   | 228
|Due after five years through ten years |  |                    | 15,539 |                        |   | 15,661         |  |                        |    |  |   |   
|Due after ten years                    |  |                    | 22,153 |                        |   | 22,198         |  |                        |    |  |   |   
|                                       |  |                    |        |                        |   |                |  |                        |     |  |   |    
|Total debt securities                  |  | $                  | 63,261 |                        | $ | 63,929         |  | $                      | 197 |  | $ | 228
|                                       |  |                    |        |                        |   |                |  |                        |     |  |   |    



Proceeds from sales of investment
securities during 2003 were $33, and the resulting gross and net gains of $13 were realized. In 2002, the Company recorded an investment security gain of $12 resulting from a business combination where the Company received a combination of the
common stock of the acquirer in a non-monetary exchange and cash proceeds of $7. Proceeds from sales of investment securities during 2001 were $70. Gross and net gains of $17 were realized on those sales. In 2001, the Company recorded an investment
security gain of $20 resulting from a business combination where the Company received the common stock of the acquirer in a non-monetary exchange.



Investment securities with an amortized cost of $45,969 and $47,545 and estimated market values of $46,633 and $48,296 at December 31, 2003 and 2002, respectively, were
pledged to secure deposits, short-term borrowings, and for other purposes as required by law.



16



---

NOTE 5 - LOANS



Major classifications of loans are as follows (in thousands):



|                                                                             |  |      |         |      |   |        
|---------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                             |  | 2003 |         | 2002
|Loans secured by real estate:                                                |  |      |         |      |   |        
|Construction and development                                                 |  | $    | 396     |      | $ | 111    
|Secured by farmland                                                          |  |      | 1,644   |      |   | 1,978  
|Secured by 1 - 4 family residential properties:                              |  |      |         |      |   |        
|Revolving, open-end loans secured by 1 - 4 family residential properties     |  |      | 1,367   |      |   | 1,402  
|All other loans secured by 1 - 4 family residential properties               |  |      | 50,986  |      |   | 48,980 
|Secured by nonfarm, nonresidential properties                                |  |      | 112,443 |      |   | 88,960 
|Commercial and industrial loans                                              |  |      | 32,263  |      |   | 28,437 
|Loans to individuals for household, family, and other personal expenditures: |  |      |         |      |   |        
|Ready credit loans                                                           |  |      | 292     |      |   | 141    
|Other installment loans                                                      |  |      | 19,349  |      |   | 16,755 
|Other loans:                                                                 |  |      |         |      |   |        
|Agricultural loans                                                           |  |      | 470     |      |   | 705    
|All other loans                                                              |  |      | 1,140   |      |   | 638    
|                                                                             |  |      |         |      |   |        
|Total loans                                                                  |  |      | 220,350 |      |   | 188,107
|Less unearned income                                                         |  |      | 741     |      |   | 746    
|                                                                             |  |      |         |      |   |        
|Loans, net of unearned income                                                |  | $    | 219,609 |      | $ | 187,361
|                                                                             |  |      |         |      |   |        



Real estate loans serviced for others,
which are not included in the Consolidated Balance Sheet totaled $69,382 and $57,108 at December 31, 2003 and 2002, respectively.



Nonperforming loans are comprised of commercial, mortgage, and consumer loans which are on a nonaccrual basis or contractually past due 90 days or more as to interest or
principal payment but are not on nonaccrual status because they are well secured or in process of collection or identified by management to meet the definition of an impaired loan. The following table presents information concerning nonperforming
loans (in thousands):



|                                                   |  |      |       |      |   |      
|-------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                   |  | 2003 |       | 2002
|Ninety days or more past due and accruing interest |  | $    | 175   |      | $ | 92   
|Nonaccrual                                         |  |      | 316   |      |   | 602  
|Impaired loans                                     |  |      | 2,530 |      |   | 3,025
|                                                   |  |      |       |      |   |      
|Total nonperforming loans                          |  | $    | 3,021 |      | $ | 3,719
|                                                   |  |      |       |      |   |      



Interest income on loans would have
been increased by $57, $11, and $30 during 2003, 2002, and 2001, respectively, if nonaccrual loans had performed in accordance with their original terms.



The Company had impaired loans of $2,530 and $3,025 as of December 31, 2003 and 2002, respectively, with related allowance for loan losses of $37 and $528, respectively.
The decline in the related allowance for loan losses on impaired loans is the result of the Company recording charge-offs to reflect the impaired loans at their fair market value at 2003. For the years ended December 31, 2003, 2002, and 2001,
average impaired loans were $2,575, $705, and $531, respectively. Interest recognized on impaired loans for the years ended December 31, 2003, 2002, and 2001, was $66, $20, and $21, respectively.



17



---

NOTE 5 - LOANS (Continued)



Changes in the allowance for loan losses are as follows (in thousands):



|                                 |  |      |       |   |      |   |       |      |  |   |       |  
|-------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                 |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Balance, beginning of year       |  | $    | 2,818 |   |      | $ | 2,373 |      |  | $ | 2,088 |  
|Provision charged to operations  |  |      | 960   |   |      |   | 675   |      |  |   | 867   |  
|Recoveries credited to allowance |  |      | 58    |   |      |   | 69    |      |  |   | 43    |  
|Losses charged to allowance      |  |      | (822  | ) |      |   | (299  | )    |  |   | (625  | )
|                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Balance, end of year             |  | $    | 3,014 |   |      | $ | 2,818 |      |  | $ | 2,373 |  
|                                 |  |      |       |   |      |   |       |      |  |   |       |  



In the normal course of business,
loans are extended to officers, directors, and corporations in which they are beneficially interested as stockholders, officers, or directors. A summary of loan activity for those officers and directors with aggregate loan balances in excess of
$60,000 for the year ended December 31, 2003, is as follows (in thousands):



|           |  |           |       |                   |   |       |  |   |      
|---------- |  | --------- | ----- | ----------------- | - | ----- |  | - | -----
|2002       |  | Additions |       | Amounts Collected |   | 2003 
|$    7,098 |  | $         | 1,754 |                   | $ | 2,693 |  | $ | 6,159



The Companys primary business
activity is with customers located within its local trade area. Generally, the Company grants commercial, residential, and personal loans. The Company also selectively funds and purchases commercial and residential loans outside of its local trade
area provided such loans meet the Companys credit policy guidelines. At December 31, 2003 and 2002, the Company had approximately $38 million and $29 million, respectively, of outstanding loans to summer camps and recreational facilities in
the northeastern United States. Although the Company has a diversified loan portfolio at December 31, 2003 and 2002, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.



NOTE 6 - PREMISES AND EQUIPMENT



A summary by asset classification is as follows (in thousands):



|                                               |  |      |       |      |   |      
|---------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                               |  | 2003 |       | 2002
|Land                                           |  | $    | 433   |      | $ | 277  
|Premises and improvements                      |  |      | 3,682 |      |   | 3,657
|Leasehold improvements                         |  |      | 1,411 |      |   | 1,359
|Furniture and equipment                        |  |      | 2,843 |      |   | 2,745
|                                               |  |      |       |      |   |      
|Total, at cost                                 |  |      | 8,369 |      |   | 8,038
|Less accumulated depreciation and amortization |  |      | 4,190 |      |   | 3,776
|                                               |  |      |       |      |   |      
|Net premises and equipment                     |  | $    | 4,179 |      | $ | 4,262
|                                               |  |      |       |      |   |      



Depreciation and amortization expense
was $463, $454, and $443, in 2003, 2002, and 2001, respectively.



18



---

NOTE 7 - DEPOSITS



Deposits are summarized as follows (in thousands):



|                                  |  |      |         |      |   |        
|--------------------------------- |  | ---- | ------- | ---- | - | -------
|                                  |  | 2003 |         | 2002
|Demand - noninterest-bearing      |  | $    | 29,523  |      | $ | 22,538 
|Demand - interest-bearing         |  |      | 37,645  |      |   | 37,932 
|Money market                      |  |      | 17,087  |      |   | 3,155  
|Savings                           |  |      | 41,607  |      |   | 40,969 
|Time deposits of $100,000 or more |  |      | 48,384  |      |   | 45,460 
|Other time deposits               |  |      | 87,961  |      |   | 89,305 
|                                  |  |      |         |      |   |        
|Total                             |  | $    | 262,207 |      | $ | 239,359
|                                  |  |      |         |      |   |        



The following table summarizes the
maturity distribution of time deposits (in thousands):



|      |  |   |        
|----- |  | - | -------
|2004  |  | $ | 86,139 
|2005  |  |   | 32,624 
|2006  |  |   | 5,322  
|2007  |  |   | 6,486  
|2008  |  |   | 5,774  
|      |  |   |        
|Total |  | $ | 136,345
|      |  |   |        



The following table summarizes the
maturity distribution of certificates of deposit of $100,000 or more (in thousands):



|                            |  |      |       
|--------------------------- |  | ---- | ------
|                            |  | 2003
|Three months or less        |  | $    | 16,896
|Four through six months     |  |      | 11,610
|Seven through twelve months |  |      | 6,164 
|Over twelve months          |  |      | 13,714
|                            |  |      |       
|Total                       |  | $    | 48,384
|                            |  |      |       



Interest expense on certificates of
deposit of $100,000 or more amounted to $1,081, $1,330, and $2,043, for the years ended December 31, 2003, 2002, and 2001, respectively.



NOTE 8 - SHORT-TERM BORROWINGS



Short-term borrowings consist of borrowings from the FHLB of Pittsburgh and securities sold under agreements to repurchase. Average amounts outstanding during the year
represent daily average balances, and average interest rates represent interest expense divided by the related average balance.



19



---

NOTE 8 - SHORT-TERM BORROWINGS (Continued)



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



|                                            |  |        |        |      |      |   |        |   |        |  |      |  
|------------------------------------------- |  | ------ | ------ | ---- | ---- | - | ------ | - | ------ |  | ---- | -
|                                            |  | 2003   |        |      | 2002 |  
|                                            |  | Amount |        | Rate |      |   | Amount |   | Rate   | 
|Balance at year-end                         |  | $      | 11,800 |      | 0.89 | % |        | $ | 8,928  |  | 1.00 | %
|Average balance outstanding during the year |  |        | 11,369 |      | 0.98 |   |        |   | 10,886 |  | 1.32 |  
|Maximum amount outstanding at any month-end |  |        | 15,142 |      |      |   |        |   | 15,552 |  |      |  



The Bank has pledged, as collateral
for the borrowings from the FHLB, all stock in the FHLB and certain other qualifying collateral. Investment securities with amortized costs of $17,823 and $21,218 and market values of $18,148 and $21,493, respectively, at December 31, 2003 and 2002,
were pledged as collateral for the securities sold under agreements to repurchase.



The Bank has the capability to borrow additional funds through their credit arrangement with the FHLB. The FHLB borrowings are subject to annual renewal, incur no service charges, and are secured by a blanket security agreement on certain
investment securities, qualifying residential mortgages, and the Banks investment in FHLB stock. At December 31, 2003, the Banks remaining borrowing capacity with the FHLB was approximately $54 million.



NOTE 9 - OTHER BORROWED FUNDS



FHLB advances consist of separate fixed rate and convertible select-fixed to float rate
loans as follows (in thousands):



|                  |  |      |   |  |      |       |      |   |      
|----------------- |  | ---- | - |  | ---- | ----- | ---- | - | -----
|Maturity          |  | Rate |   |  | 2003 |       | 2002
|September 8, 2003 |  | 6.85 | % |  | $    |      |      | $ | 3,000
|February 18, 2010 |  | 5.91 | % |  |      | 1,000 |      |   | 1,000
|                  |  |      |   |  |      |       |      |   |      
|Total             |  |      |   |  | $    | 1,000 |      | $ | 4,000
|                  |  |      |   |  |      |       |      |   |      



The advance maturing in 2010 is
convertible to a variable rate advance on specific dates at the discretion of the FHLB. Should the FHLB convert this advance, the Bank has the option of accepting the variable rate or repaying the advance without penalty.



NOTE 10 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN



The Company maintains a Dividend Reinvestment and Stock Purchase Plan (the
Plan). Participation is available to all common stockholders. The Plan provides each participant with a simple and convenient method of purchasing additional common shares without payment of any brokerage commission or other service
fees.



A participant in the Plan may elect to reinvest dividends on all or part
of his or her shares to acquire additional common stock. A participant may withdraw from the Plan at any time. Stockholders purchased 18,958 shares in 2003 and 24,704 shares in 2002 through the Plan.



20



---

NOTE 11 - EMPLOYEE BENEFITS



Retirement Plan



The Bank maintains a section 401(k) employee savings and investment plan for substantially all employees and officers of the Bank. The Banks contribution to the
plan is based on 100 percent matching of voluntary contributions up to 3 percent and 50 percent matching on the next 2 percent of individual compensation. Additionally, the Bank may contribute a discretionary amount each year. For each of the years
of 2003, 2002, and 2001, the Board of Directors authorized an additional 5 percent, 4 percent, and 4 percent of each eligible employees compensation, respectively. Employee contributions are vested at all times, and Bank contributions are
fully vested after five years. Contributions for 2003, 2002, and 2001 to this plan amounted to $182, $142, and $152, respectively.



Supplemental Retirement Plan



The Bank maintains a Salary Continuation Plan for the executive officers of the Bank to provide guaranteed consecutive post-retirement payments totaling a pre-determined
amount over a ten-year period based on a five-year vesting schedule beginning the date of the agreement between the Bank and the executive. Expenses for the years ended December 31, 2003, 2002, and 2001, amounted to $70, $59, and $55, respectively,
and are included as a component of salaries and employee benefits. An assumption of 8.5 percent was used as the discount rate in determining the present value of the estimated liability or the Salary Continuation Plan.



Stock Option Plan



The Company maintains a stock incentive plan and a stock option plan that provide for
granting incentive stock options to key officers and other employees of the Company and Bank, as determined by the Stock Option Committee, and nonqualified stock options to nonemployee directors of the Company. A total of 120,000 and 50,000 shares,
respectively, of either authorized and unissued shares, or authorized shares, issued by and subsequently reacquired by the Company as treasury stock shall be issuable under the plans. The plans shall terminate after the tenth anniversary of the date
of shareholder ratification. The per share exercise price of any option granted will not be less than the fair market value of a share of common stock on the date the option is granted. The options granted are primarily vested 33 percent after one
year, 33 percent after two years, and 34 percent after three years.



The
following table presents share data related to the stock option plans:



|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|----------------------- |  | ------- | - |  | ------------------------------ | ----- | ---- | ------- | - | ------------------------------ | - | -----
|                        |  | 2003    |   |  | Weighted-averageExercise Price |       | 2002 |         |   | Weighted-averageExercise Price
|Outstanding, beginning  |  | 127,000 |   |  | $                              | 13.58 |      | 126,000 |   |                                | $ | 13.33
|Granted                 |  | 7,000   |   |  |                                | 27.01 |      | 4,000   |   |                                |   | 21.30
|Exercised               |  | (12,470 | ) |  |                                | 13.23 |      | (1,000  | ) |                                |   | 13.25
|Forfeited               |  |        |   |  |                                |      |      | (2,000  | ) |                                |   | 13.25
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|Outstanding, ending     |  | 121,530 |   |  | $                              | 14.39 |      | 127,000 |   |                                | $ | 13.58
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|Exercisable at year-end |  | 109,810 |   |  | $                              | 13.38 |      | 78,860  |   |                                | $ | 13.25
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      



21



---

NOTE 11 - EMPLOYEE BENEFITS (Continued)



Stock Option Plan(Continued)



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



|               |  |             |  |             |  |                      |       |        |         |                      |   |      
|-------------- |  | ----------- |  | ----------- |  | -------------------- | ----- | ------ | ------- | -------------------- | - | -----
|               |  | Outstanding |  | Exercisable
|Exercise Price |  | Shares      |  | AverageLife |  | AverageExercisePrice |       | Shares |         | AverageExercisePrice
|$    13.00     |  | 39,000      |  | 6.21        |  | $                    | 13.00 |        | 39,000  |                      | $ | 13.00
|$    13.25     |  | 65,530      |  | 6.21        |  | $                    | 13.25 |        | 65,530  |                      | $ | 13.25
|$    16.50     |  | 6,000       |  | 6.21        |  | $                    | 16.50 |        | 3,960   |                      | $ | 16.50
|$    21.30     |  | 4,000       |  | 6.21        |  | $                    | 21.30 |        | 1,320   |                      | $ | 21.30
|$    23.00     |  | 2,000       |  | 6.21        |  | $                    | 23.00 |        |        |                      | $ |     
|$    25.75     |  | 2,000       |  | 6.21        |  | $                    | 25.75 |        |        |                      | $ |     
|$    26.50     |  | 1,000       |  | 6.21        |  | $                    | 26.50 |        |        |                      | $ |     
|$    32.55     |  | 2,000       |  | 9.83        |  | $                    | 32.55 |        |        |                      | $ |     
|               |  |             |  |             |  |                      |       |        |         |                      |   |      
|Total          |  | 121,530     |  |             |  |                      |       |        | 109,810 |                      |   |      
|               |  |             |  |             |  |                      |       |        |         |                      |   |      



NOTE 12 - INCOME TAXES



Federal income tax expense consists of the following (in thousands):



|                  |  |      |       |      |   |       |      |  |   |       |  
|----------------- |  | ---- | ----- | ---- | - | ----- | ---- |  | - | ----- | -
|                  |  | 2003 |       | 2002 |   |       | 2001 | 
|Currently payable |  | $    | 1,694 |      | $ | 1,798 |      |  | $ | 1,391 |  
|Deferred taxes    |  |      | 6     |      |   | (249  | )    |  |   | (38   | )
|                  |  |      |       |      |   |       |      |  |   |       |  
|Total provision   |  | $    | 1,700 |      | $ | 1,549 |      |  | $ | 1,353 |  
|                  |  |      |       |      |   |       |      |  |   |       |  



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



|                                         |  |      |     |      |   |    
|---------------------------------------- |  | ---- | --- | ---- | - | ---
|                                         |  | 2003 |     | 2002
|Deferred tax assets:                     |  |      |     |      |   |    
|Allowance for loan losses                |  | $    | 807 |      | $ | 777
|Deferred compensation                    |  |      | 7   |      |   | 10 
|Allowance for loss on other real estate  |  |      |    |      |   | 2  
|Salary continuation plan                 |  |      | 139 |      |   | 115
|Mortgage servicing rights                |  |      | 24  |      |   | 4  
|                                         |  |      |     |      |   |    
|Total                                    |  |      | 977 |      |   | 908
|                                         |  |      |     |      |   |    
|Deferred tax liabilities:                |  |      |     |      |   |    
|Premises and equipment                   |  |      | 314 |      |   | 254
|Deferred loan origination fees, net      |  |      | 179 |      |   | 162
|Unrealized gain on nonmonetary exchange  |  |      | 3   |      |   | 5  
|Unrealized gain on investment securities |  |      | 275 |      |   | 321
|                                         |  |      |     |      |   |    
|Total                                    |  |      | 771 |      |   | 742
|                                         |  |      |     |      |   |    
|Net deferred tax assets                  |  | $    | 206 |      | $ | 166
|                                         |  |      |     |      |   |    



No valuation allowance was established
at December 31, 2003 and 2002, in view of the Companys ability to carry back taxes paid in previous years and certain tax strategies and anticipated future taxable income as evidenced by the Companys earnings potential.



22



---

NOTE 12 - INCOME TAXES (Continued)



A reconciliation between the expected statutory income tax rate and the effective income tax rate follows (in thousands):



|                              |  |        |       |   |                   |      |   |        |   |       |                   |  |      |        |  |   |                   |   |  |      |  
|----------------------------- |  | ------ | ----- | - | ----------------- | ---- | - | ------ | - | ----- | ----------------- |  | ---- | ------ |  | - | ----------------- | - |  | ---- | -
|                              |  | 2003   |       |   | 2002              |      |   | 2001   |  
|                              |  | Amount |       |   | % ofPre-taxIncome |      |   | Amount |   |       | % ofPre-taxIncome |  |      | Amount |  |   | % ofPre-taxIncome |  
|Provision at statutory rate   |  | $      | 1,888 |   |                   | 34.0 | % |        | $ | 1,673 |                   |  | 34.0 | %      |  | $ | 1,459             |   |  | 34.0 | %
|Tax-exempt income             |  |        | (112  | ) |                   | (2.0 | ) |        |   | (110  | )                 |  | (2.2 | )      |  |   | (97               | ) |  | (2.3 | )
|BOLI earnings                 |  |        | (52   | ) |                   | (0.9 | ) |        |   | (30   | )                 |  | (0.6 | )      |  |   | (28               | ) |  | (0.6 | )
|Nondeductible interest        |  |        | 8     |   |                   | 0.1  |   |        |   | 10    |                   |  | 0.2  |        |  |   | 14                |   |  | 0.3  |  
|Other, net                    |  |        | (32   | ) |                   | (0.6 | ) |        |   | 6     |                   |  | 0.1  |        |  |   | 5                 |   |  | 0.1  |  
|                              |  |        |       |   |                   |      |   |        |   |       |                   |  |      |        |  |   |                   |   |  |      |  
|Effective income tax and rate |  | $      | 1,700 |   |                   | 30.6 | % |        | $ | 1,549 |                   |  | 31.5 | %      |  | $ | 1,353             |   |  | 31.5 | %
|                              |  |        |       |   |                   |      |   |        |   |       |                   |  |      |        |  |   |                   |   |  |      |  



NOTE 13 - COMMITMENTS AND
CONTINGENT LIABILITIES



Commitments



In the normal course of business, there are outstanding commitments and contingent
liabilities such as commit-ments to extend credit, financial guarantees, and letters of credit which are not reflected in the accompanying consolidated financial statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in the particular classes of financial instruments.



Financial instruments whose contract amounts represent credit risk are as follows (in thousands):



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2003 |        | 2002
|Commitments to extend credit |  | $    | 23,581 |      | $ | 25,016
|Standby letters of credit    |  | $    | 2,807  |      | $ | 5,669 



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.



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. Fees earned from the issuance of these
letters are recognized at the expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments.



23



---

NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)



Commitments (Continued)



At December 31, 2003, the minimum rental commitments for all noncancelable leases are as
follows (in thousands):



|                    |  |   |      
|------------------- |  | - | -----
|2004                |  | $ | 202  
|2005                |  |   | 212  
|2006                |  |   | 168  
|2007                |  |   | 147  
|2008                |  |   | 77   
|2009 and thereafter |  |   | 225  
|                    |  |   |      
|Total               |  | $ | 1,031
|                    |  |   |      



Contingent Liabilities



The Company and its subsidiary are involved in various legal actions from
the normal course of business activities. Management believes the liability, if any, arising from such actions will not have a material adverse effect on the Companys financial position.



NOTE 14 - REGULATORY RESTRICTIONS



Cash and Due from Banks



The district Federal Reserve Bank requires the Bank to maintain certain average reserve
balances. As of December 31, 2003 and 2002, the Bank had required reserves of $2,368 and $2,700, respectively, comprised of vault cash and a depository amount held directly with a correspondent bank.



Dividends



The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks to the
surplus of the Bank. Accordingly, at December 31, 2003 the balance in the capital surplus account totaling approximately $1,756 is unavailable for dividends.



24



---

NOTE 15 - REGULATORY CAPITAL REQUIREMENTS



Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain
certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.



In addition to the capital requirements, the 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, 2003 and 2002, the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least 10 percent,
6 percent, and 5 percent, respectively.



The Companys actual capital
ratios are presented in the following table, which shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Companys (in thousands).



|                                         |  |        |        |       |       |   |        |   |        |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | ----- | - | ------ | - | ------ |  | ----- | -
|                                         |  | 2003   |        |       | 2002  |  
|                                         |  | Amount |        | Ratio |       |   | Amount |   | Ratio  | 
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |       |   |        |   |        |  |       |  
|                                         |  |        |        |      
|Actual                                   |  | $      | 29,771 |       | 12.43 | % |        | $ | 26,699 |  | 11.75 | %
|For Capital Adequacy Purposes            |  |        | 19,163 |       | 8.00  |   |        |   | 18,184 |  | 8.00  |  
|To Be Well Capitalized                   |  |        | 23,954 |       | 10.00 |   |        |   | 22,730 |  | 10.00 |  
|                                         |  |        |        |      
|Tier I Capital (to Risk-Weighted Assets) |  |        |        |       |       |   |        |   |        |  |       |  
|                                         |  |        |        |      
|Actual                                   |  | $      | 26,712 |       | 11.15 | % |        | $ | 23,864 |  | 10.50 | %
|For Capital Adequacy Purposes            |  |        | 9,582  |       | 4.00  |   |        |   | 9,092  |  | 4.00  |  
|To Be Well Capitalized                   |  |        | 14,372 |       | 6.00  |   |        |   | 13,638 |  | 6.00  |  
|                                         |  |        |        |      
|Tier I Capital (to Average Assets)       |  |        |        |       |       |   |        |   |        |  |       |  
|                                         |  |        |        |      
|Actual                                   |  | $      | 26,712 |       | 9.31  | % |        | $ | 23,864 |  | 9.21  | %
|For Capital Adequacy Purposes            |  |        | 11,476 |       | 4.00  |   |        |   | 10,367 |  | 4.00  |  
|To Be Well Capitalized                   |  |        | 14,346 |       | 5.00  |   |        |   | 12,958 |  | 5.00  |  



25



---

NOTE 16 - FAIR VALUE DISCLOSURE



The estimated fair values of the Companys financial instruments are as follows (in thousands):



|                             |  |               |         |            |   |               |  |            |         |  |   |        
|---------------------------- |  | ------------- | ------- | ---------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                             |  | 2003          |         | 2002      
|                             |  | CarryingValue |         | Fair Value |   | CarryingValue |  | Fair Value
|Financial assets:            |  |               |         |            |   |               |  |            |         |  |   |        
|Cash and cash equivalents    |  | $             | 10,210  |            | $ | 10,210        |  | $          | 7,230   |  | $ | 7,230  
|Mortgage loans held for sale |  |               | 654     |            |   | 662           |  |            | 1,195   |  |   | 1,199  
|Investment securities:       |  |               |         |            |   |               |  |            |         |  |   |        
|Available for sale           |  |               | 64,357  |            |   | 64,357        |  |            | 78,880  |  |   | 78,880 
|Held to maturity             |  |               | 197     |            |   | 228           |  |            | 426     |  |   | 462    
|Net loans                    |  |               | 216,595 |            |   | 223,506       |  |            | 184,543 |  |   | 194,601
|Accrued interest receivable  |  |               | 1,295   |            |   | 1,295         |  |            | 1,224   |  |   | 1,224  
|Regulatory stock             |  |               | 528     |            |   | 528           |  |            | 530     |  |   | 530    
|Bank-owned life insurance    |  |               | 4,861   |            |   | 4,861         |  |            | 1,725   |  |   | 1,725  
|                             |  |               |         |           
|Financial liabilities:       |  |               |         |            |   |               |  |            |         |  |   |        
|Deposits                     |  | $             | 262,207 |            | $ | 263,551       |  | $          | 239,359 |  | $ | 241,756
|Short-term borrowings        |  |               | 11,800  |            |   | 11,800        |  |            | 8,928   |  |   | 8,928  
|Other borrowed funds         |  |               | 1,000   |            |   | 1,006         |  |            | 4,000   |  |   | 4,006  
|Accrued interest payable     |  |               | 678     |            |   | 678           |  |            | 842     |  |   | 842    



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



Fair value is defined as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of
the instrument.



If no readily available market exists, the fair value
estimates for financial instruments should be based upon managements judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option
pricing formulas or simulation modeling. 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 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.



26



---

NOTE 16 - FAIR VALUE DISCLOSURE (Continued)



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



Cash and Cash
Equivalents, Accrued Interest Receivable, Regulatory Stock, Short-Term Borrowings, and Accrued Interest Payable



The fair value is equal to the current carrying value.



Mortgage Loans Held for Sale



The fair value of mortgage loans held for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the
quoted market price for similar securities.



Investment Securities



The fair value of investment securities available for sale and held to
maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.



Loans, Deposits, and Other Borrowed Funds



The fair value for loans is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based
upon rates generally charged for such loans with similar characteristics. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end. Fair values for time deposits and other borrowed funds 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.



Bank-Owned Life Insurance



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



Commitments to Extend Credit and Standby 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.



27



---

|NOTE | 17 - PARENT COMPANY
|---- | -------------------



Following are condensed financial statements for the parent company:



CONDENSED BALANCE SHEET

(In thousands)



|                                           |  |              |        |      |   |       
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                           |  | December 31,
|                                           |  | 2003         |        | 2002
|Assets                                     |  |              |        |      |   |       
|Cash and due from banks                    |  | $            | 917    |      | $ | 734   
|Investment securities available for sale   |  |              | 428    |      |   | 344   
|Investment in bank subsidiary              |  |              | 26,009 |      |   | 23,572
|Other assets                               |  |              | 356    |      |   | 212   
|                                           |  |              |        |      |   |       
|Total Assets                               |  | $            | 27,710 |      | $ | 24,862
|                                           |  |              |        |      |   |       
|Liabilities                                |  |              |        |      |   |       
|Dividends payable                          |  | $            | 343    |      | $ | 324   
|Other liabilities                          |  |              | 59     |      |   | 19    
|                                           |  |              |        |      |   |       
|Total Liabilities                          |  |              | 402    |      |   | 343   
|Stockholders equity                       |  |              | 27,308 |      |   | 24,519
|                                           |  |              |        |      |   |       
|Total Liabilities and Stockholders Equity |  | $            | 27,710 |      | $ | 24,862
|                                           |  |              |        |      |   |       



CONDENSED STATEMENT OF
INCOME

(In thousands)



|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                             |  | Year Ended December 31, |      
|                                                                             |  | 2003                    |       |   | 2002 |   |       | 2001 | 
|Dividends from bank subsidiary                                               |  | $                       | 1,300 |   |      | $ | 1,131 |      |  | $ | 1,418 |  
|Dividends on investment securities                                           |  |                         | 12    |   |      |   | 12    |      |  |   | 9     |  
|Investment securities gains                                                  |  |                         | 13    |   |      |   | 12    |      |  |   | 37    |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Total income                                                                 |  |                         | 1,325 |   |      |   | 1,155 |      |  |   | 1,464 |  
|                                                                             |  |                         |      
|Other noninterest expense                                                    |  |                         | 91    |   |      |   | 75    |      |  |   | 63    |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Net income before undistributed earnings of bank subsidiary and income taxes |  |                         | 1,234 |   |      |   | 1,080 |      |  |   | 1,401 |  
|Undistributed earnings of bank subsidiary                                    |  |                         | 2,595 |   |      |   | 2,271 |      |  |   | 1,530 |  
|Income tax benefit                                                           |  |                         | (25   | ) |      |   | (20   | )    |  |   | (8    | )
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Net Income                                                                   |  | $                       | 3,854 |   |      | $ | 3,371 |      |  | $ | 2,939 |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  



28



---

NOTE 17 - PARENT COMPANY (Continued)



CONDENSED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Year Ended December 31, |       
|                                                                                  |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|Operating Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                       | 3,854  |   |      | $ | 3,371  |      |  | $ | 2,939  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |        |   |      |   |        |      |  |   |        |  
|Undistributed earnings of bank subsidiary                                         |  |                         | (2,595 | ) |      |   | (2,271 | )    |  |   | (1,530 | )
|Investment securities gains                                                       |  |                         | (13    | ) |      |   | (12    | )    |  |   | (37    | )
|Other, net                                                                        |  |                         | (140   | ) |      |   | (180   | )    |  |   | (14    | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                         | 1,106  |   |      |   | 908    |      |  |   | 1,358  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Investing Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Purchases of investment securities                                                |  |                         |       |   |      |   | (126   | )    |  |   | (54    | )
|Proceeds from sales of investment securities                                      |  |                         | 33     |   |      |   | 7      |      |  |   | 70     |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used for) investing activities                              |  |                         | 33     |   |      |   | (119   | )    |  |   | 16     |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Financing Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash dividends paid                                                               |  |                         | (1,301 | ) |      |   | (1,199 | )    |  |   | (1,039 | )
|Purchase of treasury stock                                                        |  |                         | (114   | ) |      |   | (231   | )    |  |   | (203   | )
|Proceeds from exercise of stock options                                           |  |                         | 168    |   |      |   | 13     |      |  |   |       |  
|Proceeds from dividend reinvestment and stock purchase plan                       |  |                         | 291    |   |      |   | 500    |      |  |   | 427    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash used for financing activities                                            |  |                         | (956   | ) |      |   | (917   | )    |  |   | (815   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | 183    |   |      |   | (128   | )    |  |   | 559    |  
|Cash at beginning of year                                                         |  |                         | 734    |   |      |   | 862    |      |  |   | 303    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash at end of year                                                               |  | $                       | 917    |   |      | $ | 734    |      |  | $ | 862    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  



29



---

NOTE 18  QUARTERLY DATA (Unaudited)



The Companys selected quarterly financial data is presented in the following tables (in thousands):



|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | -------------- |  | ------------- | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March 2003         |           | June 2003 |   | September 2003 |  | December 2003
|Total interest income                               |  | $                  | 3,789     |           | $ | 3,884          |  | $             | 3,838     |  | $ | 3,810    
|Total interest expense                              |  |                    | 1,247     |           |   | 1,225          |  |               | 1,157     |  |   | 1,070    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income                                 |  |                    | 2,542     |           |   | 2,659          |  |               | 2,681     |  |   | 2,740    
|Provision for loan losses                           |  |                    | 192       |           |   | 257            |  |               | 230       |  |   | 281      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 2,350     |           |   | 2,402          |  |               | 2,451     |  |   | 2,459    
|                                                    |  |                    |           |          
|Total noninterest income                            |  |                    | 611       |           |   | 569            |  |               | 700       |  |   | 815      
|Total noninterest expense                           |  |                    | 1,596     |           |   | 1,632          |  |               | 1,732     |  |   | 1,843    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Income before income taxes                          |  |                    | 1,365     |           |   | 1,339          |  |               | 1,419     |  |   | 1,431    
|Income taxes                                        |  |                    | 436       |           |   | 423            |  |               | 399       |  |   | 442      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  | $                  | 929       |           | $ | 916            |  | $             | 1,020     |  | $ | 989      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Per share data:                                     |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  | $                  | 0.62      |           | $ | 0.61           |  | $             | 0.67      |  | $ | 0.64     
|Diluted                                             |  | $                  | 0.60      |           | $ | 0.56           |  | $             | 0.63      |  | $ | 0.62     
|Weighted-average shares outstanding                 |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  |                    | 1,510,170 |           |   | 1,511,450      |  |               | 1,513,312 |  |   | 1,521,423
|Diluted                                             |  |                    | 1,559,808 |           |   | 1,623,566      |  |               | 1,625,430 |  |   | 1,592,154



30



---

NOTE 18  QUARTERLY DATA (Unaudited) (Continued)



|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | -------------- |  | ------------- | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March 2002         |           | June 2002 |   | September 2002 |  | December 2002
|Total interest income                               |  | $                  | 3,867     |           | $ | 3,855          |  | $             | 3,817     |  | $ | 3,929    
|Total interest expense                              |  |                    | 1,480     |           |   | 1,418          |  |               | 1,353     |  |   | 1,367    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income                                 |  |                    | 2,387     |           |   | 2,437          |  |               | 2,464     |  |   | 2,562    
|Provision for loan losses                           |  |                    | 224       |           |   | 205            |  |               | 146       |  |   | 100      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 2,163     |           |   | 2,232          |  |               | 2,318     |  |   | 2,462    
|                                                    |  |                    |           |          
|Total noninterest income                            |  |                    | 405       |           |   | 373            |  |               | 381       |  |   | 560      
|Total noninterest expense                           |  |                    | 1,467     |           |   | 1,468          |  |               | 1,504     |  |   | 1,535    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Income before income taxes                          |  |                    | 1,101     |           |   | 1,137          |  |               | 1,195     |  |   | 1,487    
|Income taxes                                        |  |                    | 350       |           |   | 354            |  |               | 376       |  |   | 469      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  | $                  | 751       |           | $ | 783            |  | $             | 819       |  | $ | 1,018    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Per share data:                                     |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  | $                  | 0.50      |           | $ | 0.52           |  | $             | 0.54      |  | $ | 0.68     
|Diluted                                             |  | $                  | 0.49      |           | $ | 0.51           |  | $             | 0.53      |  | $ | 0.66     
|Weighted-average shares outstanding                 |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  |                    | 1,499,856 |           |   | 1,501,658      |  |               | 1,503,456 |  |   | 1,503,992
|Diluted                                             |  |                    | 1,532,208 |           |   | 1,544,458      |  |               | 1,545,698 |  |   | 1,547,894



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