Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

     The aggregate market value of the voting stock held by non-affiliates computed by reference to the price as of June 30, 2003, was $39,132,454.

     The number of shares outstanding of the issuer's Common Stock, as of March 8, 2004, was 2,732,112 shares of Common Stock, par value $0.25 per share.

Parts II and IV - Annual Report to Shareholders for Fiscal year Ended December 31, 2003

Part III - Proxy statement for the 2004 Annual Meeting of shareholders to be held April 20, 2004

1

Index to Exhibits

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Slippery Rock Financial Corporation (the "Company") including statements preceded by, followed by or that include the words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue," "remain," "pattern" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) prepayment speeds, loan sale volumes, charge-offs and loan loss provisions; (4) general economic conditions, either national or in the Commonwealth of Pennsylvania, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal proceedings. The Company undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.

Slippery Rock Financial Corporation is a one bank holding company organized under the laws of the Commonwealth of Pennsylvania. In addition, the Company is registered with and supervised by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The Company's primary business is the holding of all of the outstanding common shares of its wholly owned subsidiary, The First National Bank of Slippery Rock ("Bank"). The Company's primary source of income has been dividends paid by the Bank.

The Bank is nationally chartered and is a member of the Federal Reserve System. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC), up to regulatory limits, and is a full-service institution that offers various demand and time deposit products and originates secured and unsecured commercial, consumer and mortgage loans.

The Bank has two full service offices and a grocery store office located in Slippery Rock, Pennsylvania and one full service office in each of the following communities; Prospect, Portersville, Grove City, Harrisville, New Wilmington, and Hickory Township, Pennsylvania. The Bank's Wealth Management Group operates from a separate freestanding facility, which also is located in Slippery Rock. In addition to its retail locations, the Bank has an operations center located in Slippery Rock Township.

The Company is subject to the jurisdiction of the Securities and Exchange Commission ("SEC"). In addition, the Company is also subject to the provisions of the Bank Holding Company Act of 1956 as amended ("Bank Holding Company Act") and to the supervision of the Federal Reserve Board ("FRB"). The Bank Holding Company Act requires the Company to receive prior approval of the Federal Reserve Board before it owns or controls more than 5% of the voting shares of any financial institution.

A bank holding company is prohibited from engaging in or acquiring control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board views the activities to be closely related to banking or managing or controlling banks. In addition, the Bank Holding Company Act prohibits changes in control of a bank holding company without prior notice to the Federal Reserve Board.

The Company is required to file an annual report with the Federal Reserve Board and any additional information as required. The Federal Reserve Board may also require examinations of the Company or any or all of its subsidiaries.

The Federal Reserve Act applies certain restrictions on a bank subsidiary of a bank holding company regarding extensions of credit to the bank holding company or any of its other subsidiaries, investments in stocks or other securities of the bank holding company or the use of such stocks or securities as collateral to any borrower.

As a national banking association, the Bank is subject to primary supervision, examination, and regulation by the Office of the Comptroller of the Currency (the "OCC"). The Corporation is also subject to regulations of the FDIC as administrator of the Bank Insurance Fund ("BIF") and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Corporation's operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin "unsafe or unsound practices," to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank's growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank's deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, are engaging in unsafe or unsound activities, or that the Corporation's conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.

On October 18, 2002, the Company announced that the Bank had entered into an agreement with the OCC. The agreement is designed to evaluate and enhance certain areas of the Bank's operations, including management, credit administration, audit, information technology and regulatory compliance. There are no stipulations that limit or restrict the Bank's ability to pay dividends or require the Bank to increase its capital position. The Company has incurred additional operating expenses in connection with complying with the agreement, including staffing levels, legal and consulting fees and higher deposit insurance premiums. The Company continues to work with the OCC to comply with the document, including providing periodic updates. A copy of the agreement was included in a Form 8-K of the Company filed with the SEC on October 18, 2002.

The various legislative and regulatory bodies frequently make changes and proposed changes to laws and regulations applicable to banks and bank holding companies. No predictions as to the impact these changes may have on the Company or its subsidiary can be made.

The Company follows the guidelines of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"). Under the Interstate Banking Act, the Federal Reserve Board, subsequent to analytical review, may approve an application by the Company to acquire all or substantially all of the assets of a bank located outside of the Commonwealth of Pennsylvania regardless of whether such a transaction is prohibited under the law of any state. In addition, the Interstate Banking Act provides that federal supervisory agencies may approve a merger of the Bank with another bank located in a different state or the establishment of a new branch office either by acquisition or "de novo" unless the Commonwealth of Pennsylvania enacts legislation prior to that date which specifically allows or prohibits a merger with a financial institution in another state. Management currently has no plans to engage in interstate banking activities.

On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This new legislation addresses accounting oversight and corporate governance matters, including:

The new legislation and its implementing regulations will result in increased costs of compliance, including certain outside professional costs.

The USA Patriot Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws, including:

In December, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act ("FACT Act") which sets new obligations for financial firms to help deter identity theft and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. The FRB and the Federal Trade Commission ("FTC") are required to draft regulations to implement the FACT Act. It is not possible at this time to determine the impact of such regulations that are to be drafted; however, the FRB and FTC recently announced that businesses will have until December 1, 2004 to comply with the new initiatives.

Financial institutions may be affected by legislative changes and by the monetary and fiscal policies of various legislative and regulatory bodies. A primary function of the Federal Reserve Board is to promote economic growth by influencing interest rates and the national supply of money and credit. The Federal Reserve Board accomplishes this through the use of open market activities of the buying and selling of U. S. Government securities, by changing the discount rate on bank borrowings and by changing the level of reserve requirements on bank deposits.

All of these instruments of monetary policy are used in various combinations to influence the volume of bank lending activity, the volume of investment and deposit activity and the interest rates charged on loans and paid on deposits. Because these instruments significantly influence short-term interest rates, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future.

The Bank's headquarters are located at 100 South Main Street, Slippery Rock, Pennsylvania 16057. The Bank had total assets, total liabilities, and total equity of $335,004,000, $303,789,000 and $31,215,000 respectively at December 31, 2003.

The Bank is a full service financial institution, whose products and services include the accepting of time and demand deposits, and the origination of secured and unsecured commercial, mortgage and consumer loans. In addition to these services, the Bank also has a full service trust division that not only offers traditional trust services, but the sale of mutual funds, annuities and other insurance products as well. The Bank's business is not seasonal in nature.

At December 31, 2003, the Bank had 134 full-time employees and 28 part-time employees.

The Bank competes with other area commercial banks, savings and loan institutions and credit unions. In addition, the Bank competes with major regional financial institutions headquartered in other areas of Pennsylvania. The Bank also competes for deposits with other non-financial institutions such as those firms that offer mutual funds or insurance annuities. Interest charged on loans, interest paid on deposits and service charges on deposit accounts are all comparable to competitors in the general market place.

The average balance sheets for each of the last three fiscal years are incorporated herein by reference to the table on page 34 of Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The analysis of net interest income and the analysis of net interest income changes are incorporated herein by reference to the tables on pages 34 and 35 of Management's Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on pages 34 through 37 of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The investment securities portfolio as of December 31 for each of the last three years as of December 31, 2003, are incorporated herein by reference to the first table on page 46 of Management's Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on page 46 of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The loan and lease portfolio as of December 31 for each of the last five years are incorporated herein by reference to the middle table on page 46 of Management's Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on pages 46 and 47 of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

Nonperforming and underperforming asset detail and related discussion are incorporated herein by reference to the Schedule of Non-performing Assets and Non-accrual/Impaired Loans sections of Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 49 and 50) of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

A summary of the activity in the reserve for credit losses as well as the elements of the reserve for credit losses for each of the last five years ended December 31 are herein incorporated by reference to the Allowance for Loan Losses section of Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 47 and 48) of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The deposits related discussion, including maturity distribution of certificates - $100,000 and over at December 31, 2003, is incorporated herein by reference to the Deposits section of Management's Discussion and Analysis of Financial Condition and Results of Operations (page 51) of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

Short-term borrowings related detail by category as of December 31 for each of the last two years is incorporated herein by reference to Note 10 (page 20) of the Notes to Consolidated Financial Statements of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The Bank has a full service drive through branch facility in addition to the Main banking facility in Slippery Rock, Pennsylvania, as well as one full service branch facility each in the communities of Prospect, Portersville, Harrisville, New Wilmington, Hickory Township, and Grove City, Pennsylvania. In October 2000, the Bank opened its first grocery store branch in Slippery Rock. The Bank also has an operations center located in Slippery Rock Township. In addition, in 1998, the Bank moved its Wealth Management Group to a freestanding facility in Slippery Rock. With the exception of the grocery store branch, the Bank owns all of its facilities, and is subject to a real estate mortgage obligation at its New Wilmington location, the details of which can be found in note 11 of the Notes to Consolidated Financial Statements on page 20 of the Company's 2003 Annual Report to Shareholders attached to this filing as Exhibit 13.

The Company's headquarters are located at the Bank's Main office facility at 100 South Main Street, Slippery Rock, Pennsylvania, 16057. The Company pays no rent or other form of consideration for the use of the facility as its corporate headquarters.

In January 2004, two lawsuits were filed by a borrower and guarantor arising out of financings by the Bank consummated in March 1998. These suits were filed in the Court of Common Pleas of Lawrence County, Pennsylvania. Todd W. Booher v. First National Bank of Slippery Rock (Case No. 10124 of 2004, C.A.) and Estate of Pansie Booher v. First National Bank of Slippery Rock (Case No. 10125 of 2004, C.A.). Among other things, the suits allege that as a result of the Bank's commercially unreasonable sale of certain collateral, the plaintiff suffered losses of approximately $1.3 million. The Corporation believes it has meritorious defenses and intends to vigorously defend. However, no assurances can be given as to the ultimate outcome of these proceedings.

(Not Applicable)

The information required by this Item pertaining to Market for Common Equity and Related Stockholder Matters is included in the Company's 2003 Annual Report on pages 51 and 52, and is incorporated herein by reference.

The following is a table showing securities authorized for issuance under equity compensation plans:

The information required by this Item pertaining to Selected Financial Data is included in the Company's 2003 Annual Report on page 1, and is incorporated herein by reference.

The information required by this Item pertaining to Management's Discussion and Analysis of Financial Condition and Results of Operations is included in the Company's 2003 Annual Report on pages 32 through 52, and is incorporated herein by reference.

The information required by this Item pertaining to Quantitative and Qualitative Disclosures About Market Risk is included in the Company's 2003 Annual Report on pages 40 through 45, and is incorporated herein by reference.

The Company's consolidated financial statements and notes thereto contained in the 2003 Annual Report are filed as Exhibit 13 hereto and are incorporated in their entirety by reference under this item.

Annual Report

(Not Applicable)

As of the year ended December 31, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected, and, thus, the Company's management cannot provide absolute assurance that the Company's disclosure controls will prevent all errors and all fraud.

The information required by this Item pertaining to directors of the Company is included in the Company's Proxy Statement for its 2004 Annual Meeting of Shareholders on pages 4, 5, 6 and 9 thereof, is incorporated herein by reference.

The Company maintains a code of ethics for its CEO and principal accounting/financial officers. Any amendments to the code must apply with applicable laws and regulations. A copy of the code is included as Exhibit 14 to this report.

The information required by this Item is included in the 2004 Proxy Statement in the Executive Compensation section on pages 9 through 12 and 14 thereof, and is incorporated herein by reference.

The information required by this Item is included in the 2004 Proxy Statement in the Voting Securities section on pages 2 and 3 thereof, and is incorporated herein by reference.

The information required by this Item is included in the 2004 Proxy Statement in the Transactions with Management section on page 14 thereof, and is incorporated herein by reference.

The information required by this Item is included in the 2004 Proxy Statement in the Transactions with Management section on page 15 thereof, and is incorporated herein by reference.

(a) The following documents were filed as part of the Form 10-K:

(1) Financial Statements - The information required by this item is set forth in Part II, Item 8 of this Report.

(2) Financial Statement Schedules - N/A

(3) Exhibits required by Item 601 of Regulation S - K:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Slippery Rock Financial Corporation

Date: March 29, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: March 29, 2004

Date: March 29, 2004

Exhibit 13

SLIPPERY ROCK FINANCIAL CORPORATION

SLIPPERY ROCK FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)

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Board of Directors and Stockholders
Slippery Rock Financial Corporation

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

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

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

/s/ S.R. Snodgrass, AC

Wexford, PA
January 30, 2004

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SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)

-3-

SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)

-4-

SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)

See accompanying notes to the consolidated financial statements.

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SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

     The consolidated financial statements include the accounts of Slippery Rock Financial Corporation (the "Company") and its wholly owned subsidiary, The First National Bank of Slippery Rock (the "Bank"). All significant intercompany transactions have been eliminated in consolidation. The investment in subsidiary on the parent company financial statements is carried at the parent company’s equity in the underlying net assets.

     The Company is a Pennsylvania corporation organized to become the holding company of the Bank. The Bank is a national bank headquartered in Slippery Rock, Pennsylvania. The Company’s principal sources of revenue emanate from interest earnings on its portfolio of residential real estate, commercial mortgage, and commercial and consumer loans as well as interest earnings on investment securities and a variety of deposit and trust services provided to its customers through nine locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency.

     The accounting principles followed by the Company and its wholly owned subsidiary, the Bank, and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and statement of income. Actual results could differ significantly from those estimates.

     Investment securities are classified at the time of purchase, based upon management’s intentions and ability, as securities held to maturity or securities available for sale. Debt securities 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 level yield interest method and recognized as adjustments of interest income. Certain other 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, if any, are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned on the accrual method.

     Common stock of the Federal Home Loan Bank ("FHLB") and Federal Reserve Bank represents ownership in institutions which are wholly owned by other financial institutions. These securities are accounted for at cost and are classified as regulatory stock in other assets.

     Loans are reported at their principal amount net of the allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company’s general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectibility of additional interest. Income is subsequently recognized only to the extent that cash payments are received and, in management’s judgment, the borrower has the ability and intent to make future interest and principal payments.

     Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans (Continued)

amortizing these amounts over the contractual lives of the related loans.

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

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

     Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired 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 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 are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which consist of three years to thirty-nine years for buildings and three years to seven years for furniture, fixtures, and equipment. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

     Real estate owned acquired by foreclosure is classified as a component of other assets 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.

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Real Estate Owned (Continued)

Operating expenses of such properties, net of related income and losses on their disposition, are included in operations of other real estate.

     Such assets are comprised of branch acquisition core deposit premiums. These core deposit premiums which were quantified by specific core deposit life studies are amortized using the straight-line method over seven years, which approximates the estimated average lives of the deposit accounts. Annual assessments of the carrying values and remaining amortization periods of intangible assets are made to determine possible carrying value impairment and appropriate adjustments as deemed necessary.

     Goodwill is the excess of the purchase price over the fair value of the assets acquired in connection with business acquisitions accounted for as purchases and was being amortized on a straight-line method over 15 years, prior to January 1, 2002. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 142, Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment-only approach. This statement eliminated the regularly scheduled amortization of goodwill and replaced this method with a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company, upon adoption of this statement, stopped amortizing existing goodwill of $1.0 million. In addition, the Company performs an annual impairment analysis of goodwill. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2003 and 2002.

     Trust Department assets (other than cash deposits) held by the Bank in fiduciary or agency capacities for its customers are not included in the consolidated balance sheet since such items are not assets of the Company. In accordance with industry practice, fees are recorded on the cash basis and approximate the fees which would have been recognized on the accrual basis.

     The Company and its subsidiary file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

     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 stock options, warrants, and convertible securities are adjusted in the denominator.

     Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of the Bank. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees and an elective contribution are made annually at the discretion of the Board of Directors.

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Options

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

     Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of FAS No. 123, Accounting for Stock-based Compensation, net income applicable to common stock 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):

     For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option pricing model. The model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 2003, 2002, and 2001: (1) expected dividend yields ranged from 3.53 percent to 3.94 percent; (2) risk-free interest rates ranged from 3.78 percent to 5.07 percent; (3) expected volatility of 15.0 to 22.0; and (4) expected lives of options ranged from 6.75 to 9.75 years.

     The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains all servicing rights for 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. Impairment is evaluated based on the fair value of the right, based on portfolio interest rates and prepayment characteristics. MSRs are a component of other assets on the Consolidated Balance Sheet.

     The Company is required to present comprehensive income in a full set of general-purpose financial statements for all periods presented. Other comprehensive income comprises unrealized holding gains (losses) on the available-for-sale securities portfolio. The Company has elected to report the effects

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

of other comprehensive income as part of the Consolidated Statement of Changes in Stockholders’ Equity.

     The Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and due from banks and Federal funds sold.

     Cash payments for interest in 2003, 2002, and 2001 were $6,545,000, $8,910,000, and $11,078,000, respectively. Cash payments for income taxes for 2003, 2002, and 2001 amounted to $1,510,000, $991,000, and $1,635,000, respectively.

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

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

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

     On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a "ramp-up" effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity’s full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

     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

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

     Certain comparative amounts for the prior year have been reclassified to conform to current year presentations. Such reclassifications had no effect on net income or stockholders’ equity.

2.  EARNINGS PER SHARE

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

     Options to purchase 116,400 shares of common stock at prices from $15.23 to $19.30 were outstanding during 2002 and options to purchase 39,050 shares of common stock at prices from $18.50 to $19.30 were outstanding during 2001, respectively, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

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3.  INVESTMENT SECURITIES

     Amortized cost and estimated market values of investment securities are summarized as follows (in thousands):

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3.  INVESTMENT SECURITIES (Continued)

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

     The total proceeds received, gross realized gains, and gross realized losses derived from the sale of securities available for sale are shown below.

       Investment securities with an amortized cost and estimated market value of $20,023,000 and $20,559,000, respectively, at December 31, 2003, and $23,135,000 and $23,779,000, respectively, at December 31, 2002, were pledged to secure public deposits and other purposes as required by law.

       The following table shows the Company’s estimated market 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).

     The Company’s investment securities portfolio contains unrealized losses of direct obligations of U.S. Government agency 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.

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3.  INVESTMENT SECURITIES (Continued)

     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 decline 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 is not expected to result in the noncollection of principal and interest.

4.  LOANS

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

     Real estate loans serviced for Freddie Mac, which are not included in the Consolidated Balance Sheet, totaled $101,789,000 and $79,046,000 at December 31, 2003 and 2002, respectively.

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

     The Company’s primary business activity is with customers located within its local trade area. Commercial, residential, personal, and agricultural loans are granted. 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 the immediate trade area.

     The Company had nonaccrual loans, inclusive of impaired loans, of $3,170,000 and $4,518,000 at December 31, 2003 and 2002, respectively. Interest income on loans would have increased by approximately $241,000 and $259,000 during 2003 and 2002, respectively, if these loans had performed in accordance with their original terms.

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4.  LOANS (Continued)

     Information with respect to impaired loans as of and for the years ended December 31 is as follows (in thousands):

5.  ALLOWANCE FOR LOAN LOSSES

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

6. PREMISES AND EQUIPMENT

     Major classifications of premises and equipment are summarized as follows (in thousands):

     Depreciation charged to operations was $893,000, $836,000, and $716,000 in 2003, 2002, and 2001, respectively.

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7. INTANGIBLE ASSETS

     A summary of core deposit intangible assets is as follows (in thousands):

     The amortization expense of amortizing intangible assets is $11,000 for the year ended December 31, 2004.

8. GOODWILL

A summary of goodwill is as follows (in thousands):

     The gross carrying amount of goodwill was tested for impairment in the fourth quarter, after the annual forecasting process. Due to an increase in overall earning asset growth, operating profits and cash flows were greater than expected. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, no goodwill loss was recognized in 2003 and 2002.

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8. GOODWILL (Continued)

    The following table sets forth a comparison of net income and basic and diluted earnings per share, adjusted for the adoption of FAS No. 142, Goodwill and OtherIntangible Assets (in thousands, except per share data).

9. DEPOSITS

    At December 31, 2003, time deposits totaled $94,419,000. Time deposits of $46,046,000, $19,454,000, $11,233,000, $9,187,000, and $8,499,000 mature during 2004, 2005, 2006, 2007, and 2008, respectively.

    Time deposits include certificates of deposit and other time deposits in denominations of $100,000 or more. Such deposits totaled $24,590,000 and $30,471,000 at December 31, 2003 and 2002, respectively. Interest expense on certificates of deposit over $100,000 amounted to $1,210,000, $1,602,000, and $2,813,000, for the years ended December 31, 2003, 2002, and 2001, respectively.

    The following table sets forth the remaining maturity of time certificates of deposit of $100,000 or more at December 31, 2003 (in thousands).

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10. SHORT-TERM BORROWINGS

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

     During 2003 and 2002, short-term borrowings consisted entirely of repurchase agreements with fixed maturities of 30 days or less. The Company pledged investment securities with a carrying value of $8,735,000 and $7,536,000 at December 31, 2003 and 2002, respectively, as collateral for the repurchase agreements.

11. OTHER BORROWINGS

     Other borrowings consist of the following (in thousands):

     The scheduled maturities of advances outstanding are as follows:

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11. OTHER BORROWINGS (Continued)

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

     Pursuant to a collateral agreement entered into with the FHLB, these advances are secured by stock in the FHLB and qualifying first mortgage loans. At December 31, 2003, the Company’s remaining borrowing capacity was $129 million.

12. INCOME TAXES

    The provision for federal income taxes consists of (in thousands):

    The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

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

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12. INCOME TAXES (Continued)

    The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows (in thousands):

13. EMPLOYEE BENEFITS

    The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates near retirement. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plan’s actuary.

Obligations and Funded Status

The following table sets forth the status at December 31 (in thousands):

    The accumulated benefit obligation for all defined benefit pension plans was $1,956 and $1,836 at December 31, 2003 and 2002, respectively.

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13. EMPLOYEE BENEFITS (Continued)

Obligations and Funded Status (Continued)

    Components of Net Periodic Benefit Cost:

Assumptions

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

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

     The expected long-term rate of return on plan assets gives consideration to returns currently being earned on plan assets, as well as future rates expected to be earned.

Plan Assets

    The Bank’s pension plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category are as follows:

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13. EMPLOYEE BENEFITS (Continued)

Plan Assets (Continued)

    The investment objective for the defined benefit pension plan is to maximize total return with tolerance for average to slightly above average risk. Asset allocation strongly favors mutual funds, as these types of investments are generally less risky in nature than equity securities.

Cash Flows

Contributions

     The Bank expects to contribute $264,000 to its pension plan in 2004.

401(k) Plan

     The Bank maintains a trusteed Section 401(k) plan. The Bank makes matching contributions of 50 percent of eligible officers’ and employees’ contributions annually, to a maximum of 2 percent of base salary. Substantially all officers and employees are eligible to participate in the plan. The Bank’s contribution to this plan was $65,000, $59,000, and $44,000 for the years ended December 31, 2003, 2002, and 2001, respectively.

14.  STOCK OPTION PLAN

     The Company maintains an Incentive Stock Option Plan ("ISOP") and a Directors Stock Option Plan ("Directors Plan"). The ISOP provides for granting up to 200,000 shares of authorized but unissued common stock to eligible salaried officers and employees. The Directors Plan provides for 72,000 authorized, but unissued, shares of common stock to be granted to nonemployee directors. The per share exercise price of an option granted cannot be less than the fair value of a share of common stock on the date the option is granted. The options granted under the Directors Plan are immediately vested while the options granted under the ISOP are not exercisable for two years and then are vested in equal installments in years three through five. The stock options typically have expiration terms of ten years subject to certain extensions and terminations. The following table presents share data related to the outstanding options.

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14.  STOCK OPTION PLAN (Continued)

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

15. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

    In the normal course of business, there are various outstanding commitments and contingent liabilities which are not reflected in the accompanying consolidated financial statements. These commitments comprised the following at December 31 (in thousands):

    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. Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements including commercial paper, bond financing, and similar transactions.

     Such commitments and standby letters of credit involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. The amount of collateral obtained, if deemed necessary by the Company, upon the extension of credit is based on management’s credit evaluation of the counterparty. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Since many of the commitments are expected

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15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

to expire without being drawn upon, the total contractual amounts do not necessarily represent future funding requirements.

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

Contingent Liabilities

     The Company is involved in various legal actions from normal business activities. Management believes that the liability, if any, arising from such litigation will not have a material adverse effect on the Company’s financial position.

16.  REGULATORY RESTRICTIONS

Cash and Due From Banks

     Included in Cash and due from banks are reserves required by the district Federal Reserve Bank of $2,189,000 and $4,118,000 at December 31, 2003 and 2002, respectively. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.

Dividends

     Under the National Bank Act, the approval of the Comptroller of the Currency is required if dividends declared by the subsidiary bank in any one year exceed the net profits of that year as defined, combined with net retained profit from the two preceding years. Using this formula, the amount available for payment of dividends in 2004, without approval of the Comptroller, will be limited to approximately $1,476,000 plus net profits in 2004 retained up to the date of the dividend declaration.

17.  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.

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17.  REGULATORY CAPITAL REQUIREMENTS (Continued)

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

18.  FAIR VALUE DISCLOSURE

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