To our Shareholders,

I am very pleased to report that 1998 was another truly outstanding year for our
bank. We achieved record asset growth with a $25,537,000 increase in assets or
20.5% over the previous year. Deposit and Loan growth were equally impressive
with respective increases of 19.4% and 17.5%. Our net profit also increased from
$1,607,801 in 1997 to $1,860,331 in 1998 or 15.7% over the previous year. This
resulted in a net increase per basic share from $2.17 to $2.50 compared to 1997.
We are particularly pleased with our strong increase in profits since this was
achieved despite added expenses as a result of hiring additional management
personnel and the opening of our newest branch office at the Pine Mall in
Wilkes-Barre.

We believe that these outstanding results had a direct impact on the price of
our stock which increased significantly during the year from $28.00 to $47.50
after adjusting for a 2 for 1 stock split on July 1, 1998. As we begin 1999 we
are hopeful that we will be able to maintain our growth rate, which should
continue to have a positive effect on earnings. We acknowledge however, that the
bank must strive to develop and introduce new income producing products in order
to offset the negative effects of shrinking net interest margins as a result of
strong competition and loan refinancing as customers take advantage of lower
interest rates now available.

We are continuing to make slow but steady progress with our Laceyville
Redevelopment project. During 1998 we fully renovated the former R. B. Learn
Insurance Agency building. This office space was then rented to a chiropractor
and his wife who appear to have established a very successful practice. This
enterprise, along with the family restaurant next door, are having a positive
impact on the Laceyville Business Community. We will continue with our efforts
to acquire a tenant for a portion of our remaining space and we are still
considering the possibility of transferring our insurance agency to this
location when it is financially practical to do so. During 1998 we also rented
the previously vacant building next to our Bowman's Creek branch office. This
has resulted in additional revenue as well as some new accounts for our bank.

We continue to believe our future prospects are excellent. We have a number of
newer branch offices which should continue to grow and produce profits for our
bank. As these branches reach maturity our net profit should increase as the
volume of new business improves our overall efficiency ratio. We also believe
that the merger and consolidation activity which has occurred at larger
institutions will continue to create new relationship opportunities which we
intend to develop whenever possible.

The Board of Directors, Management and Employees would like to express our
sincere gratitude to the shareholders for your solid support and confidence.
Please be assured that we will continue to focus on further improvement in
shareholder value as well as providing the best possible service to our
customers. It is a pleasure to serve as CEO of your bank.

Best regards
Thomas A. McCullough,
President and Chief Executive Officer


<PAGE>


                    Grange National Banc Corp. and Subsidiary

                             Selected Financial Data

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                      1998          1997          1996         1995          1994
--------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>           <C>           <C>          <C>
(In thousands except per share data)
SUMMARY OF OPERATIONS:
 Gross interest income ............     $ 10,116      $  8,798      $  7,655      $ 6,599      $ 5,296
 Gross interest expense ...........        4,452         3,788         3,245        2,858        2,093
                                        --------------------------------------------------------------
 Net interest income ..............        5,664         5,010         4,410        3,741        3,203
 Loan loss provision ..............          270           190           125          115           87
                                        --------------------------------------------------------------
 Net interest income after
  loan loss provision .............     $  5,394      $  4,820      $  4,285      $ 3,626      $ 3,116
                                        ==============================================================
 Income before income taxes .......     $  2,570      $  2,292      $  2,158      $ 1,697      $ 1,531
 Provision for income taxes .......          710           684           660          518          485
                                        --------------------------------------------------------------
 Net income .......................     $  1,860      $  1,608      $  1,498      $ 1,179      $ 1,046
                                        ==============================================================
PER SHARE DATA:
 Net income basic .................     $   2.50      $   2.17      $   2.02      $  1.59      $  1.52
 Net income diluted ...............     $   2.25      $   2.04      $   1.99      $  1.62      $  1.55
 Cash dividends ...................           --            --            --      $  0.10      $  0.21
 Stock dividends ..................     $   0.71      $   0.44      $   0.37      $  0.07           --
AVERAGE SHARES OUTSTANDING ........          744           742           740          740          687
FINANCIAL CONDITION AT YEAR END:
 Total assets .....................     $149,953      $124,417      $104,199      $91,622      $76,305  
 Total loans ......................       90,499        76,995        62,033       52,538       46,733
 Allowance for loan losses ........          940           767           623          532          479
 Total deposits ...................      129,891       108,789        91,055       79,866       67,014
 Stockholders' equity .............       14,767        12,638        10,940        9,522        8,243
RATIOS:                                 
 Based on Average Balances:             
 Return on assets .................         1.37%         1.39%         1.51%        1.40%        1.41%
 Return on equity .................        13.68         13.80         14.73        13.32        15.08
 Equity to assets .................        10.04         10.15         10.30        10.51         9.36
 Primary capital to assets ........        10.71         10.67         10.63        11.09         9.96
 Internal capital generation rate          13.47         13.50         14.56        12.43        13.05
 At Year End:                           
 Equity to assets .................         9.84         10.16         10.50        10.39        10.80
 Primary capital to assets ........        10.47         10.77         11.10        10.97        11.43
 Cash dividend payout ratio .......         1.58%         1.43%         1.20%        6.69%       13.43%
BOOK VALUE/SHARE ..................     $  19.65      $  17.40      $  15.40      $ 13.22      $ 11.93
</TABLE>                              

Note: share and per share amounts have been restated to give effect to stock
      dividends and stock splits.


                                       -2-

<PAGE>


                    Grange National Banc Corp. and Subsidiary

     Grange National Banc Corp. (Company) is a Pennsylvania bank holding
company, headquartered in Laceyville, Pennsylvania, with Grange National Bank
(Bank) as its only subsidiary. Established in 1907, the Bank provides friendly
and affordable banking, insurance and trust services to communities in Wyoming,
Susquehanna, Bradford and Luzerne counties.

     Grange National Bank's deposit services include checking, savings and money
market accounts, certificates of deposit, Individual Retirement Accounts and MAC
automated teller machine cards. Loan services include personal, business and
municipal loans, residential, commercial and municipal mortgages, Small Business
Administration loans, personal and commercial lines of credit and letters of
credit. Insurance is offered through Grange National Insurance Agency, a
subsidiary of the bank. Offerings include life and disability insurance, as well
as annuities. Grange's other services include discount brokerage, safe deposit
facilities and payroll processing.

     The Trust department offers personal and investment trusts, trusts under
will, estate administration services, living trusts and Individual Retirement
Accounts.

Highlights

     The Company reported record net income of $1,860,000 in 1998 compared to
$1,608,000 in 1997, an increase of 15.7% for the period. The returns on assets
and equity were 1.37% and 13.68%, respectively, in 1998 compared to 1.39% and
13.80% in 1997. Lower earnings ratios for 1998 result from adding additional
loan officers and the Pine Mall office in 1998. The addition of loan officers
will help generate additional loan income, and the addition of the Pine Mall
will generate additional deposits and loans. The Company's high equity to assets
ratio of 9.84% at 1998 year end continues to have an adverse effect on the
return on equity ratio, however the bank's continued growth has reduced the
ratio each year. A high equity to assets ratio while depressing the return on
equity ratio, allows the company to expand the Bank, as it has recently done
with the opening of offices in Little Meadows, Towanda, the Back Mountain and
the Pine Mall in Wilkes-Barre. The deposits these offices are attracting
continues to reduce the equity to assets ratio to a more typical level of around
8.50%, and provide the resources for increased lending and investment by the
Bank. These loans and investments in turn will enable the Bank to generate
higher future profits.

     Per share net income increased to $2.50 in 1998 from $2.17 in 1997, for an
increase of 15%. Dividends to stockholders increased from $0.44 (stock dividend)
in 1997, to $0.71 (stock dividend) in 1998, an increase of 57%. The stock
dividends declared by the Company increases the amount of stock in circulation,
while keeping capital in the Bank for future expansion needs. From the
stockholder's standpoint, they do not pay tax on the stock they receive, and
have the option of selling the stock if they do want the cash. In addition, the
Company declared a 2 for 1 stock split for stockholders of record on July 30,
1999, further increasing the shares in circulation.


                                       -3-

<PAGE>


     At year end 1998, Grange had total assets of $149,953,000, total deposits
of $129,891,000, and total shareholders' equity of $14,767,000, compared to
$124,417,000 in total assets, $108,789,000 in total deposits, and $12,638,000 in
total shareholders' equity at year end 1997, increases of 21%, 19% and 17%,
respectively. At year end the Company had approximately 830 shareholders and
eighty-five full and part-time employees. During 1998 Grange paid over
$1,835,000 in salaries and benefits to its employees and paid over $850,000 in
various taxes to the federal, state and local governments.

     1998 was a year of bolstering the bank's operational infrastructure. During
1998 we tested most of our "mission critical" systems for Year 2000 problems,
upgraded our mainframe computer, upgraded our Trust Department computer and
software, hired additional loan officers and a Trust Administrator as well as
introducing a new product for business customers. Year 2000 testing has been
successful in that we have not encountered any Year 2000 failures during the
testing. Of course the real test comes on December 31. Computer upgrades for the
Bank and Trust Department were necessary to accommodate the addition of the Pine
Mall office, as well as future growth. Additional loan officers were hired due
both to people retiring and increased loan volume. A Trust Administrator was
hired to handle the increasing needs of the Trust Department and to help expand
the Department. Lastly, the bank introduced a new product for business
customers. "Business Manager" helps business by collecting their accounts
receivable for them. This provides the business with the cash flow sooner and
helps them remain profitable.

     The Company's redevelopment project on Main Street, Laceyville has obtained
an additional tenant, a chiropractor, Dr. Eric Herman. The Bank's building in
Bowman's Creek has also obtained a tenant, Northeast Data, a communications
company.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

     The consolidated financial statements and selected financial data presented
elsewhere in this report should be read to obtain an understanding of the
following discussion and analysis.

FINANCIAL CONDITION

     The Company's primary source of profits is its activities as a financial
intermediary, using funds from customers' deposits, other borrowing sources and
shareholders' equity, to invest in loans, bonds and interest bearing deposits in
other banks. The difference between the cost of acquiring funds and the return
on investments in loans, securities and interest bearing deposits is the
Company's net interest yield. During the last three years ended December 31, net
interest yields have ranged from 4.72% in 1998 to 4.79% in 1997 and 4.87% in
1996.


                                       -4-

<PAGE>


     Interest rate risk management requires the Bank to maintain an appropriate
balance between interest sensitive assets and interest sensitive liabilities,
liquidity to meet loan demand , depositor's withdrawals, and operating expenses,
and to provide an adequate capital base for expansion and unforeseen losses. A
discussion of each of the factors relating to the financial condition of the
Company follows.

LIQUIDITY AND RATE SENSITIVITY

     The objective of liquidity management is to maintain adequate cash
resources to meet the short and long term operating requirements of the Company.
These requirements include funding for loans to customers, funding to take
advantage of prudent investment strategies, and funding for bank operations
expansion. Management continued its strategy of relying on access to the Bank's
line of credit at the Federal Home Loan Bank of Pittsburgh to fund daily cash
needs, enabling the Bank to be more fully invested in higher yielding
investments. Maturing investments and time deposits continue to provide funding
for the longer term, while the line of credit funds short term fluctuations. The
Company's "borrowing capacity" at the Federal Home Loan Bank is $50,979,000,
which had a $3,343,000 balance at December 31, 1998. The Bank's deposit balance
at FHLB was approximately $5,013,000. Investments maturing or expected to be
called in 1999 include $1,070,000 in bonds classified as held to maturity, and
$1,256,000 in bonds available for sale. In addition, the bank holds an
additional $28,316,000 in bonds, maturing in more than one year, classified as
available for sale, which can also be used to meet liquidity needs. Additional
liquidity is provided by a stable growth of core deposits. Management expects to
need more cash and liquidity than normal at the end of 1999 to provide for
possible customer demand due to Year 2000 concerns, and considers its sources of
liquidity adequate to meet these needs.

     The Company's earnings are dependent on the maintenance of an adequate net
interest yield or spread between rates earned on assets and the cost of interest
bearing liabilities. To maintain an adequate spread during both rising and
declining rate environments, interest rate sensitivity must be managed so that
the Company is positioned to respond within a reasonable period of time, to
changing interest rates and, or changing balances in interest earning assets as
compared to interest bearing liabilities. Management of the investment portfolio
requires decisions between investing in short-term investments which enhance
rate sensitivity or long-term investments which inhibit rate sensitivity but
provide higher yields. Management will invest in long term investments (i.e. 10
- 20 year maturities) when their yields are high enough to compensate for their
greater interest rate risk. Additionally, management manages the risk by the use
of a "trigger" strategy to sell certain long term bonds when they reach specific
price levels in order to minimize or preclude losses. The funds will then be
reinvested in securities at the new interest rates.

     Management of the loan portfolio has more variables than the investment
portfolio. Competition from other lenders as well as consumer's desire for
particular loan products greatly influence management's decisions regarding the
composition of the loan portfolio. The Bank is able to create loan products to
enhance its ability to react to interest rate changes, but consumers


                                       -5-

<PAGE>


will require features which will make them attractive before they will utilize
the loan products. While convenience and service are considered by the consumer,
pricing is also considered. Consumers will generally require more favorable
pricing when interest rate risk is shifted from the Bank to them. Certain
products such as fixed rate mortgages are expected by the consumer. These
products carry considerable interest rate risk because of their long term and
need to be priced accordingly. (In pricing these products, such as long term
mortgages, consideration of interest rate risk is in addition to other factors
such as collateral risk, credit risk, and repayment risks.) Competition from
other lenders greatly impacts the Bank's choices regarding pricing and terms for
loans.

     A low-risk rate sensitivity position is achieved by having a similar amount
of assets repricing, or maturing, at or about the same time as the Bank's
liabilities re-price or mature. Management measures its assets and liability
positions by use of a rate sensitivity report which categorizes the Bank's
assets and liabilities on the basis of re-pricing opportunities and maturity
dates. Rate sensitive balances are defined as those balances that mature or can
be repriced within one year. However, management recognizes certain trends and
historical experiences with respect to particular or similar products. For
example, the Bank has a number of deposit accounts, including savings, NOW
accounts and money market accounts which may be withdrawn at any time.
Management knows that while all customers in these account categories could
withdraw their funds on any given day, they will not do so, even with interest
rate changes. These accounts are core deposits and not subject to the same
pressures from interest rates as time deposits. Demand and savings deposits tend
to fluctuate based primarily on the cash flow and transaction needs of the
customer, as well as other non-interest rate factors such as account fees and
customer service. Management makes the assumption that these deposits will not
fluctuate more than 10% within three months, not more than an additional 15%
during the following three to twelve month period and not more than an
additional 30% during the following one to five years. The following table
illustrates the Bank's interest rate sensitivity positions as of December 31,
1998. The time periods used refer to the earliest possible repricing period
(with the exception of "Other Deposits"), not maturity. Management believes the
Bank has an adequately balanced position in all categories.


                                       -6-

<PAGE>


                                    Repricing

                                  Less than     Three to      One to      After
                                    three        twelve       five        five
(In thousands)                      months       months       years       year
                                  ---------------------------------------------
Assets:
 Interest bearing deposits ....   $ 5,013      $   298      $   299          --
 Investment securities:
 Available for sale ...........       500          764       11,749     $16,532
 Held to maturity .............       783          648       12,540       2,483
 Loans ........................    10,277        8,155       24,164      48,331
                                  ---------------------------------------------
Total .........................    16,573        9,865       48,752      67,346
                                  ---------------------------------------------
Liabilities:
 Time deposits ................    14,526       27,031       22,577          --
 Other deposits ...............     4,525        6,787       13,524      20,361
 Borrowed funds ...............     1,128           --        3,357          --
                                  ---------------------------------------------
Total .........................    20,179       33,818       39,508      20,361
                                  ---------------------------------------------
Gap:
 By period ....................   ($3,606)    ($23,953)     $ 9,244     $46,985
                                  =============================================
 By cumulative ................   ($3,606)    ($27,559)    ($18,315)    $28,670
                                  =============================================
 Cumulative Gap as
 Percentage of total assets....     -2.40%      -18.38%      -12.21%      19.11%

When taking advantage of repricing gaps to enhance portfolio yield, management
must have a strategy to minimize losses if interest rates become volatile and
rise too quickly. Although management expects rates to remain fairly stable with
perhaps a slight increase near the end of 1999, it has implemented a strategy to
sell longer term bonds when they reach specific price levels. This will provide
the bank with higher yields and control interest rate risk in the bond
portfolio. Management continues to take advantage of temporary volatility as
buying opportunities enhance the investment portfolio's yield.

     The Bank continues to offer adjustable rate loans and mortgages as part of
its product mix in order to reduce imbalances in its longer term GAP positions.
The Bank now purchases bonds with maturities ranging from five to twenty years.
These maturities, along with the use of the Bank's credit line at the Federal
Home Loan Bank and the ability to sell bonds in the "available for sale" portion
of the portfolio, provides adequate cash flow to respond to changing interest
rates and liquidity needs. Management continuously monitors the Bank's gap
position in order to adjust loan pricing or deposit pricing when conditions
change.


                                       -7-

<PAGE>


LOAN PORTFOLIO

     Total loans outstanding at December 31, 1998 increased by $13,504,000 or
18% to $90,499,000 from the December 31, 1997 total of $76,995,000. This
compares with a 24% increase in 1997 and a 18% increase in 1996. The average
loan balance for 1998 was $82,532,000 compared to $69,392,000 for 1997. Primary
growth occurred in one-to-four family mortgages and commercial mortgages.
One-to-four family mortgages increased by $7,492,000 or 18% to $48,731,000 at
year end 1998. Commercial mortgages increased by $4,478,000 or 47% to
$14,076,000. Most of the loan activity has come from the Towanda and Back
Mountain offices. These offices are generally competing with very large banks
and is an indication of the consumer and businessman's need for the service of a
community bank. The average interest rate on total loans decreased slightly from
9.39% for 1997 to 9.24% for 1998.

     Major classifications of loans at December 31, 1998 and 1997 are as
follows:

(In thousands)                                             1998            1997
                                                         -------         -------
Real estate mortgages:
  Agricultural .......................................   $ 1,323         $ 1,441
  Residential, 1 - 4 family ..........................    48,731          41,239
  Residential, multi-family ..........................       747             687
  Nonfarm, nonresidential properties .................    14,076           9,598
                                                         -----------------------
       Total real estate mortgages ...................    64,877          52,965
Agricultural loans ...................................       268             285
Commercial loans .....................................    13,653          12,702
Municipal loans ......................................     2,043           1.789
Consumer loans .......................................    10,086           9,979
                                                         -----------------------
Total ..........................................          90,927          77,720
Unearned income ................................             428             725
                                                         -----------------------
Total ..........................................         $90,499         $76,995
                                                         =======================


                                       -8-

<PAGE>


     Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1998 are as follows:

                                      Within      One -       After
(In thousands)                       One Year   Five Years  Five Years    Total
                                     -------------------------------------------
Real estate mortgages ............   $ 1,546     $11,103     $52,228     $64,877
Agricultural loans ...............       126         120          22         268
Commercial loans .................     3,755       3,463       6,435      13,653
Municipal loans ..................     1,342         402         299       2,043
Consumer loans ...................       674       6,581       2,831      10,086
                                     -------------------------------------------
          Total...................   $ 7,443     $21,669     $61,815     $90,927
                                     ===========================================
Loans at fixed interest rates ....   $ 3,317     $18,317     $48,512     $70,146
Loans at variable interest rates..     4,126       3,352      13,303      20,781
                                     -------------------------------------------
          Total...................   $ 7,443     $21,669     $61,815     $90,927
                                     ===========================================

     Non-accrual loans at December 31, 1998 were $205,000 and $136,000 in 1997.
Accrual of interest is discontinued on a loan when management believes after
considering economic and business conditions and results collection efforts,
that the borrower's financial condition is such that full recovery of the loan
balance is doubtful. Interest that would have been accrued if the loans were not
classified as non-accrual was approximately $19,000 in 1998 and $13,000 in 1997.

ALLOWANCE FOR LOAN LOSSES

     The provision for loan losses and related allowance for loan losses are
based upon management's continued evaluation of the current loan portfolio
considering factors including general economic conditions, adequacy of
collateral on past due loans, past and expected loan loss experience,
composition of loan portfolio, unusual risk concentrations, allowance as a
percentage of total loans and other pertinent factors. No portion of the reserve
is specifically allocated to any individual loan or loan classification. The
total allowance balance is available to absorb losses from all loans included in
the portfolio.

     Net charge-offs during 1998 were $97,000 compared to $46,000 during 1997,
representing an increase of 111% for the period. Average loans increased from
$69,392,000 in 1997 to $82,532,000 for 1998. At December 31 the balance in the
allowance for loan losses increased from $767,000 in 1997 to $940,000 in 1998,
and the ratio of loan loss allowance to loans was 1.00% and 1.04% respectively.
Management is of the opinion that the quality of the loan portfolio remains
strong, but anticipates that losses over the next year may increase in


                                       -9-

<PAGE>



proportion to the increase in the size of the loan portfolio, and a projected
loss of $100,000 in connection with two commercial loans. Provisions for loan
losses have increased in the last two years due to management's efforts to
maintain the reserve at a level adequate for the increasing size of the loan
portfolio and to cover other potential losses which have been identified by
management and the Board of Directors.

     The following sets forth loans past due 90 days or more on which interest
has continued to be accrued, at December 31:


(In thousands)             1998         1997
                           ----         ----
Real estate mortgages...   $  1         $311
Demand. ................      9            0       
Installment ............      0            1
                                        ----
                                      
TOTAL ..................   $ 10         $312
                           =================

This table summarizes the Company's loan loss experience for the years ended
December 31:


(In thousands)                                        1998                1997
                                                      ----                ----
Balance at beginning of period ........            $   767             $   623 
                                                   ---------------------------
Charge-offs:                                                         
  Commercial, consumer and agricultural                 59                  49
  Real estate mortgages ...............                 40                   0
  Installment .........................                  3                   2
                                                   ---------------------------
                                                                     
TOTAL .................................                102                  51
                                                   ---------------------------
Recoveries:                                                          
  Commercial, consumer and agricultural                  1                   3
  Real estate mortgages ...............                  0                   0
  Installment .........................                  4                   2
                                                   ---------------------------
                                                                     
TOTAL .................................                  5                   5 
                                                   ---------------------------
Net charge-offs .......................                 97                  46
                                                   ---------------------------
Provision charged to operations .......                270                 190
                                                   ---------------------------
Balance at end of period ..............            $   940             $   767
                                                   ===========================
Average loans outstanding .............            $82,532             $69,392
Loans outstanding, December 31 ........            $90,499             $76,995
Loan reserve ratios:                                                 
  Net loan charge-offs - average loans                0.12%               0.07%
  Reserve - loans, December 31 ........               1.04%               1.00%
                                                            

                                      -10-

<PAGE>


INVESTMENT PORTFOLIO

     The Company's investment portfolio increased by $8,498,000 or 22% during
the year ended December 31, 1998 to $46,706,000. The increase was due to deposit
growth. If not for the continued strong loan demand, investment growth would
have been greater. Available for sale securities increased by $17,323,000 or
132% to $30,225,000 and Held to maturity securities decreased by $8,756,000, or
35% to $16,454,000, from December 31, 1997 to December 31, 1998, as management
has designated primarily all new bond purchases as Available for Sale.

     Management has started to purchase longer term bonds in its
available-for-sale portfolio in order to achieve higher returns. Should the
value of these bonds decline significantly due to rising interest rates,
management has a strategy in place to sell bonds in order to minimize any loss.
Credit quality remains a high priority when purchasing bonds, and management
continues to maintain a portfolio substantially free of "credit risk".

     The Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" requires the Company to
classify its debt and equity securities into three categories: held to maturity,
available for sale, or trading. Available for sale are evaluated quarterly, and
their carrying values adjusted to reflect their market values, with the
resulting adjustment being reflected as an adjustment, net of tax, to the
Company's equity. The market value of investments available for sale as of
December 31, 1998, reflect an increase in the unrealized gain from December 31,
1997 of $176,000.

     The carrying value of investment securities both available for sale, and
held to maturity at December 31, are summarized as follows:


(In thousands)                                   1998       1997
                                                 ----       ----
Available for sale:
 US Treasury securities ...................   $ 5,886   $ 6,602
 US government agencies and corporations...    15,553     3,709
 State and municipal securities ...........     8,133     2,189
 Other securities .........................       680       502
                                              -----------------
     Total .................................  $30,252   $13,002
                                              =================

Held to maturity:
  US Treasury securities ...................
  US government agencies and corporations...   $10,729   $18,905
  State and municipal securities ...........     2,984     4,181
  Other securities .........................     2,741     2,120
                                               -----------------
              Total ........................   $16,454   $25,206
                                               =================

     The following table sets forth the maturities of investment and debt
securities at December 31, 1998 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of such securities:


                                      -11-

<PAGE>

<TABLE>
<CAPTION>

                            Maturing              Maturing             Maturing             Maturing
                             within             one to five           five to ten           after ten
(In thousands)              one year               years                 years                years
                          ------------ -------- --------------------------------- -------- --------------------
<S>                        <C>          <C>      <C>         <C>       <C>         <C>      <C>         <C>
Available for sale:
  U.S. Treasury
    securities ..........   $ 1,256      6.04%    $ 4,506      6.04%         --        --          --        --
  U.S. government
    agencies and
    corporations ........        --        --       6,032      6.24%    $ 5,918      6.50%    $ 3,519      6.08%
  State and municipal
    securities ..........        --        --       1,044      6.55%      5,579      6.94%      1,342      7.39%
  Other securities ......        --        --          --        --          --        --     $   662        --
                            -------               -------               -------              --------
  Total .................   $ 1,256      6.04%    $11,582      6.17%    $11,497      6.75%    $ 5,523      6.67
                            =======               =======               =======              ========

Held to maturity:
  U.S. government                                                            
    agencies and
    corporations ........   $   500      6.00%    $ 7,280      6.51%    $ 2,484      6.94%    $   464      7.65%
  State and municipal
    securities ..........       570      6.16%      2,415      7.03%         --        --          --        --
  Other securities ......        --        --       2,741      6.46%         --        --          --        --
                            -------               -------               -------              --------
  Total .................   $ 1,070      6.09%    $12,436      6.60%    $ 2,484      6.94%    $   464      7.65%
                            =======               =======               =======              ========
</TABLE>

DEPOSITS

     Deposits at December 31, 1998 were $129,891,000, an increase of $21,102,000
or 19% from the December 31, 1997 balance of $108,789,000. Non-interest bearing
deposits increased $6,034,000 or 41%, to $20,710,000 and interest bearing
deposits increased $15,068,000 or 16% to $109,181,000. The percentage of
non-interest bearing deposits to average total deposits for 1998 increased to
15% from 14% for 1997. The percentage of average non-interest bearing deposits
to average total deposits is important to the Bank's profitability because it
decreases the Bank's overall interest expense.

     Average time deposits increased by $8,489,000 during 1998 to $59,230,000
from $50,741,000 during 1997. Their proportion of total average deposits
increased to 50% form 49% for 1997. Average deposits in savings and money market
accounts increased by $2,804,000 from 1997 to 1998, and average deposits in NOW
and Super-NOW accounts increased by $1,768,000 during the same period.
Management anticipates continued strong growth in deposits from the office in
Towanda, the Back Mountain office at Trucksville and the bank's newest at the
Pine Mall in Wilkes-Barre.

     The average balance of deposits and average rates paid on such deposits
during the years ended December 31 are set forth in the following table:


                                      -12-

<PAGE>

<TABLE>
<CAPTION>
                                                           1998                   1997

                                                    Average   Average        Average   Average
(In thousands)                                      Balance   Rate           Balance   Rate
<S>                                               <C>        <C>            <C>       <C>  
Demand deposits:
  Noninterest bearing ...........                  $ 17,505        --       $ 14,786       --
  Interest bearing ..............                    12,673      2.11%        10,905     2.17%
Savings and money market deposits                    28,995      2.68%        26,191     2.74%
Time deposits ...................                    59,230      5.57%        50,741     5.52%
                                                   --------                 --------

TOTAL ...........................                  $118,403                 $102,623
                                                   ========                 ========
</TABLE>


     Maturities of certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1998 are as follows:

<TABLE>
<CAPTION>

                                             Certificates       Other
                                                  of             Time
(In thousands)                                 Deposits        Deposits        Total
                                              -----------     ---------        -----
<S>                                          <C>             <C>           <C>     
3 months or less..........................        $1,476            --      $ 1,476
3 to 6 months.............................         2,425            --        2,425
6 to 12 months............................         1,841            --        1,841
Over 12 months............................         4,087            --        4,087
No set maturity, state deposit............                        $200          200
                                           -------------- --------------------------
TOTAL.....................................        $9,829          $200      $10,029
                                           ============== ==========================
</TABLE>


CAPITAL

     An adequate capital position is necessary to support continued growth and
earnings, to meet the needs of depositors and borrowers, and to sustain a
reasonable rate of return for stockholders. Stockholders' equity increased by
$2,129,000 or 17% from $12,638,000 at December 31, 1997 to $14,767,000 at
December 31, 1998. This was approximately the same increase as the $1,698,000 or
16% increase from December 1996 to December 1997. The average equity to assets
ratio was 10.04%, 10.15% and 10.30% for the years 1998, 1997 and 1996,
respectively.

     The Board of Directors decision to declare stock dividends instead of cash
dividends has, along with strong profits, helped maintain a high equity to
assets ratio. Because of the strong demand for the Company's stock, the stock
dividend is popular with stockholders. The additional equity is necessary to
keep pace with the strong deposit growth the Bank has experienced, and expects
to continue as a result of the new offices opened over the past several years.
The Board of Directors hope the additional stock generated by the stock
dividends will help satisfy the demand for the Company's stock as well as make
some stock available for the


                                      -13-

<PAGE>


401(k) Employee Stock Ownership Plan which the Company established in late 1995.

     In 1989 the Federal Reserve Board issued risk-based capital guidelines,
which require banking organizations to maintain certain ratios of "qualifying
capital" to "risk-weighted assets". "Qualifying capital" is classified into two
tiers, referred to as Tier 1 and Tier 2 capital. Tier 1 capital consists of
common equity, qualifying perpetual preferred equity and minority interests in
the accounts of unconsolidated subsidiaries, less goodwill. Tier 2 capital
consists of perpetual preferred equity not qualifying for Tier 1 capital, the
allowance for loan losses, mandatory convertible debt and subordinated and other
qualifying securities. The amount of Tier 2 capital may not exceed the amount of
Tier 1 capital. In calculating "risk-weighted", certain risk percentages, as
specified by the Federal Reserve Board, are applied to particular categories of
both on and off-balance sheet assets. The guidelines require that banking
organizations maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4%, and require a minimum ratio of Tier 1 and Tier 2 capital to risk-weighted
assets of 8%.

     The Federal Reserve Board has an additional capital standard, referred to
as the Tier 1 leverage ratio. The Tier 1 leverage ratio is defined as Tier 1
capital (as defined under the risk-based guidelines) divided by average total
assets (net of allowance for losses and goodwill). The minimum leverage ratio is
3% for banking organizations that do not anticipate significant growth and that
have well-diversified risk (including no undue interest rate risk), excellent
asset quality, high liquidity and good earnings. Other banking organizations are
expected to have ratios of at least 4% to 5%, depending upon their particular
circumstances, or risk profile of a given banking organization. The Federal
Reserve Board has not advised the Bank of any specific minimum Tier 1 leverage
ratio applicable to it.

     The table below sets forth the Bank's Tier 1 and Tier 2 capital, risk
adjusted assets (including off-balance sheet items) the Bank's risk-based
capital ratios, and the Bank's Tier 1 leverage ratios. At December 31, 1998 and
1997, the Bank exceeded all regulatory capital requirements.


Risk-Based Capital
December 31, (in thousands, except ratios)       1998          1997
Tier I capital:
  Shareholders' equity .................      $14,369       $12,414
                                              -------       -------
                                        
Tier II capital:                        
  Loan loss reserve ....................          940           767
                                              -------       -------
Total Qualifying Capital ...............      $15,309       $13,181
                                              =======       =======
Risk-adjusted assets (including         
  off-balance sheet items) .............      $95,881       $76,937
Tier I Capital Ratio (4.00% required)...        15.40%        16.14%
Total Capital Ratio (8.00% required)....        15.97%        17.13%
Tier I Leverage Ratio ..................        10.55%        10.71%


                                      -14-

<PAGE>


RESULTS OF OPERATIONS

     Net income for 1998 totaled $1,860,000 ($2.50 basic per share, based on
744,247 weighted average common shares) as compared to 1997's net income of
$1,608,000 ($2.17 per share based on 741,616 weighted average common shares),
and 1996's net income of $1,179,000 ($2.02 per share based on 740,398 weighted
average common shares).

     Net interest income or the spread between total interest income and
interest expense directly impacts the results of operation. The net interest
yield for 1998 declined to 4.72% from 4.79% in 1997. While the average rate on
interest earning assets fell from 8.29% to 8.25%, the average rate on the total
sources to fund the earning assets increased from 3.50% to 3.53%. The Bank's
interest rate spread declined primarily due to lower rates on new loans and many
existing loans being refinanced by customers. Average rates on loans declined
from 9.39% in 1997 to 9.24% in 1998, while average rates on investments
increased from 6.38% in 1997 to 6.44% in 1998. Net interest income for 1998
increased by $767,000 (on a tax equivalent basis) or 15% as was the increase of
$635,000 or 15% for 1997 vs. 1996. Overall, volume had a positive impact of
$861,000 and rate had a negative impact of $94,000 on the change in interest
income.

     Loans at year end increased by $13,504,000 or 18% for 1998 over 1997,
compared to an increase of $14,963,000 or 24% for 1997 over 1996, and deposits
at year end increased by $21,102,000 for 1998 over 1997, compared to $17,733,000
for 1997 over 1996. This was a 19% increase for each year. Investment
securities, at year end, increased $8,498,000 or 22% for 1998 over 1997 compared
to $4,205,000 or 12% for 1997 over 1996. Income on loans increased by $1,107,000
(on a tax equivalent basis) or 17% for 1998 compared to 1997, and interest on
investment securities increased $324,000 (on a tax equivalent basis) or 14%.
Management began purchasing bonds with maturities as long as twenty years in
1998 in order to improve yields. These longer bonds are designated as available
for sale, so the bank has the option of selling the bonds should their values
decline significantly due to interest rate changes.

     The average rates on interest earning assets decreased slightly during
1998, while the average rates paid on interest bearing liabilities increased
slightly. The loan to deposit ratio at 1998 year end remained at 70% as it was
at 1997 year end. Loan growth is expected to continue, and the loan to deposit
ratio should continue to increase slightly, as loan demand is experienced at the
Tunkhannock, Edwardsville, Little Meadows, Towanda, Back Mountain offices, and
the new Pine Mall office in Wilkes-Barre.

     Salaries and employee benefits increased by $209,000 or 13% in 1998 as
compared to 1997. This increase is due primarily to hiring of new employees and
annual salary increases. The bank hired an officer with extensive commercial
lending experience to oversee the Luzerne County offices, and a branch manager
with 35 years experience, for the Tunkhannock office. Staffing of the Pine Mall
office had only a minimal impact on 1998's expenses because the office opened
late in the year.


                                      -15-

<PAGE>


     Occupancy and furniture and equipment expense increased by $96,000 or 15%
in 1998 as compared to 1997. The increase in these expenses reflect an increase
in service agreements due to upgrading the mainframe computer, and an increase
in rent expense due to the Pine Mall office. The bank, during 1998, was able to
rent its additional building at Bowman's Creek and this should moderate any
increase in occupancy expenses for 1999.

     The Deposit Insurance Funds Act of 1996 (DIFA) passed by Congress and
signed by the President, mandates banks to help pay the cost of the bonds issued
by the "Financing Corporation" (FICO), which were used to finance the savings
and loan bailout. The current annual cost to all Bank Insurance Fund (BIF)
members is 1.296 cents per $100 of deposits. Members of the Savings Association
Insurance Fund (SAIF) are required to pay 6.48 cents per $100 of deposits.
Although banks are being required to pay much less than savings associations, it
should be noted that the savings associations were the institutions that created
the losses. This assessment is expected to cost the Bank approximately $17,000
in 1999. The Federal Deposit Insurance Corporation (FDIC) premium on deposit
insurance remains at zero for 1999.

IMPACT OF INFLATION

     The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets or inventories. Management
believes that the most significant impact on financial results is changes in
interest rates and the Company's ability to react to those changes. The
discussion under liquidity and rate sensitivity provides additional information
concerning the importance of maintaining a balanced position between interest
sensitive assets and interest sensitive liabilities, in order to protect against
wide interest rate fluctuations. Inflation also has an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio. An important effect of this has been the
reduction of the proportion of earnings paid out in the form of dividends.
Another significant effect of inflation is on other expenses which tend to rise
during periods of general inflation.

YEAR 2000 IMPACT

     The bank has a Year 2000 policy addressing the "Year 2000" Issue concerning
computers and equipment using computer chips to recognize and process
information based on dates in the year 2000 and beyond. If the computer chips do
not recognize the dates in the Year 2000 accurately, certain problems may
result, particularly those concerning calculations based on dates. Inaccuracies
in interest accruals, payment and due dates or other unanticipated results such
as computer shut downs or crashes may occur if the computers or equipment with
computer chips can not properly recognize dates after December 31, 1999. In some
cases failure to


                                      -16-

<PAGE>


properly recognize dates will not effect the operation of particular equipment.
The bank's policy requires testing of all "mission critical" systems to
determine if they will operate correctly in the year 2000. The Bank's policy
also requires it to test systems (hardware and software) used to interface with
other systems, as well to determine the Year 2000 readiness of systems of its
partners which provide mission critical services to the Bank.

     The Bank's policy addresses five major components: (1) Awareness; (2)
Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation.
The Bank has completed the first three phases, has nearly completed the
Validation and Testing phase and is working on Implementation. The Bank
anticipates that all mission critical systems will complete testing by Spring of
1999. The Bank is in process of identifying those vendors and customers who
might be vulnerable to Year 2000 problems and possibly expose the Bank to a loss
or disruption of service.

     The Bank is developing contingency plans in the event vendors of mission
critical systems fail to be Year 2000 ready in time, or unexpected problems
occur. At this time the Bank can not estimate the cost, if any, that might be
required to implement such contingency plans.

     The Bank anticipates that its total Year 2000 related costs will not exceed
$20,000. This estimate is based on current information and includes costs for
review and testing by third parties. The estimate may change as the Bank
progresses with its Year 2000 program and obtains additional information with
and conducts further testing with third parties. At this time, no significant
problems have arisen concerning Year 2000 issues.

     Bank regulators have intensively focused on Year 2000 exposures, issuing
guidance concerning the responsibilities of senior management and directors.
Year 2000 testing and certification is being addressed as a key safety and
soundness issue in conjunction with regulatory exams. In May 1997, the Federal
Financial Institutions Examinations Council ("FFIEC") issued an interagency
statement to the chief executive officer of all federally supervised financial
institutions regarding Year 2000 management awareness. The FFIEC has highly
priortized Year 2000 compliance in order to avoid major disruptions to the
operations of financial institutions and the country's financial systems when
the new century begins. The FFIEC statement provides guidance to financial
institutions, providers of data services, and all examining personnel of the
federal banking agencies regarding the Year 2000 Issue.

     The Office of the Comptroller of the Currency, which is the bank's primary
regulator, has been conducting Year 2000 compliance examinations. The failure to
implement an adequate Year 2000 program can be identified as an unsafe and
unsound banking practice. The OCC has established an examination procedure which
contains three categories of ratings: "Satisfactory", "Needs Improvement", and
"Unsatisfactory". Banks that receive a Year 2000 rating of Unsatisfactory may be
subject to formal enforcement action, supervisory agreements, cease and desist
orders, civil money penalties, or the appointment of a conservator. In addition,
the OCC will be taking into account Year 2000 compliance programs when reviewing
applications and


                                      -17-

<PAGE>


may deny an application based on Year 2000 related issues. Failure of the Bank
to adequately prepare for Year 2000 issues could negatively impact the Bank's
operations, including the impositions of restrictions on its operations by the
OCC.

     Although the Bank has no reason to believe that it will suffer systems
disruptions due to the Year 2000 issue, and is confident that it will not, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect on the Bank's business, financial condition, results of operations, and
business prospects.

COMMUNITY REINVESTMENT ACTIVITIES

     The Community Reinvestment Act of 1977 (CRA) was adopted to encourage all
financial institutions to help meet the credit needs of the communities they
serve. The Act requires that each institution perform an annual self assessment
of its record in meeting the needs of its entire community, including low and
moderate income families, consistent with safe and sound banking practices. It
also requires that financial institutions keep a record of their CRA related
performance and that this record be made available to the public. The management
of the Bank is proud of its Community Reinvestment activities and its
performance in meeting the credit needs of people of all income levels, race,
religions or national origins. Following its most recent examination of the
Bank's CRA practices, the Comptroller of the Currency awarded the Bank a
"Satisfactory" rating under the new Community Reinvestment Act examination
procedures. Under these new examination procedures, nearly all the Bank's
efforts to improve the communities in which it operates, no longer are
considered when the CRA exam is conducted. Only very specific activities
targeted only to low and low-to-moderate income households are considered CRA
activities. Activities that help a community as a whole do not qualify, except
under extremely limited circumstances.

     In accordance with its plans to continue its efforts to develop products
which are affordable and accessible to all segments of its marketplace, the Bank
has worked with one of its correspondent banks, the Atlantic Central Banker's
Bank, to offer a mortgage product to customers, which only requires a 5% down
payment. This mortgage would require private mortgage insurance, have a low
interest rate, and be sold on the secondary mortgage market.

OTHER ACTIVITIES

     The Company purchased the former "Bluhm's II" and R.B. Learn buildings on
Main Street in Laceyville, during 1996 and 1997. These buildings were purchased
in an effort to revitalize the downtown business community by renovating them
and making the space available for commercial purposes. The bank also may
consider utilizing a portion of this space in connection with its insurance
agency. During 1998 the company renovated the former R. B. Learn location and
rented this space to a chiropractor. This enterprise as well as the restaurant
which was opened in 1997 are having a positive impact on the business community.


                                      -18-

<PAGE>


     The Bank is also taking a leadership role in the ongoing Laceyville Boro
Revitalization effort. The Borough received a grant from the Commonwealth of
Pennsylvania in order to develop a site master plan to include concepts which
may solve some of the issues affecting the downtown area. A Comprehensive
Planner has been hired to provide plans for streetscape improvement and to
identify other possible business opportunities for the community. Monthly
meetings are held at the bank's location in Laceyville and bank officers take an
active role on the revitalization committee.

     It is expected that the community will make a formal application this
spring for additional funds in order to commence work on some of these projects.

TRUST DEPARTMENT

     The Bank's Trust Department, established in 1992, continues to grow and
expand. Offering personal trusts, irrevocable trusts, insurance trusts, trusts
under will, estate management services and IRAs. A Trust Administrator, with
considerable experience, has been hired to operate and expand the department.
Plans to expand the department include soliciting accounts under $1,000,000, a
segment large banks no longer pursue. Management does not expect the Trust
Department to be profitable for at least the next few years.


                                      -19-

<PAGE>


                    Grange National Banc Corp and Subsidiary
               Average Balances, Interest Income/Expense and Rates

<TABLE>
<CAPTION>

           Years Ended                               December 31, 1998                        December 31, 1997

                                              (1)          Interest       Average       (1)        Interest    Average
                                            Average        Income/        Interest    Average       Income/    Interest
                                            Balance        Expense          Rate      Balance       Expense      Rate
------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>              <C>       <C>            <C>         <C>
INTEREST EARNING ASSETS:
 Loans:
  Mortgages ..........................      $53,533.      $  4,681           8.74%   $ 44,474       $  3,873       8.71%
  Installment ........................        4,505.           484          10.74       4,816            560      11.63
  Commercial .........................        24,494         2,457          10.03      20,102          2,082      10.34
                                            ----------------------                   -----------------------
    Total loans ......................        82,532         7,622           9.24      69,392          6,515       9.39
                                            ----------------------                   -----------------------
 Securities available for sale:       
  U.S. Treasury securities ...........         6,812           405           5.95       9,660            584       6.05
  U.S. government agencies ...........         7,399           462           6.24       1,338             87       6.50
  Municipal bonds ....................         4,771           331           6.94         670             49       7.31
  Other securities ...................           577            37           6.41         471             28       5.94
                                            ----------------------                   -----------------------
    Total available for sale .........        19,559         1,235           6.31      12,139            748       6.16
                                            ----------------------                   -----------------------
 Securities held to maturity:         
  U.S. government agencies ...........        15,035           980           6.52      18,498          1,184       6.40
  Municipal bonds ....................         3,404           230           6.76       4,039            278       6.88
  Other securities ...................         2,282           149           6.53         920             60       6.52
                                            ----------------------                   -----------------------
    Total held to maturity ...........        20,721         1,359           6.56      23,457          1,522       6.49
                                            ----------------------                   -----------------------
      Total investment securities ....        40,280         2,594           6.44      35,596          2,270       6.38
                                            ----------------------                   -----------------------
 Deposits in banks ...................         3,193           179           5.61       3,155            177       5.61
                                            ----------------------                   -----------------------
      TOTAL ..........................      $126,005      $ 10,395           8.25    $108,143       $  8,962       8.29
                                            ========--------------                   ========---------------
INTEREST BEARING                      
LIABILITIES:                          
 Deposits:                            
  NOW and super-NOW ..................      $ 12,673      $    268           2.11    $ 10,905       $    237       2.17
  Savings and money market ...........        28,995           777           2.68      26,191            717       2.74
  Certificates of deposit ............        59,030         3,286           5.57      50,541          2,788       5.52
  Other time deposits ................           200            11           5.50         200             11       5.50
                                            ----------------------                   -----------------------
    Total deposits ...................       100,898         4,342           4.30      87,837          3,753       4.27
 Other borrowed funds ................         2,405           111           4.62         844             34       4.03
                                            ----------------------                   -----------------------
      TOTAL ..........................       103,303         4,453           4.31      88,681          3,787       4.27
                                     
 Non-interest bearing funds, net (2)..        22,702                                   19,462
                                            ----------------------                   -----------------------
TOTAL SOURCES TO FUND
EARNING ASSETS .......................      $126,005         4,453           3.53    $108,143          3,787       3.50
                                            ========--------------                   ========---------------
NET INTEREST/YIELD ...................                    $  5,942           4.72%                  $  5,175       4.79%
                                                          ========                                  ========
</TABLE>

----------
(1)  Average balances are daily averages. (2) Demand deposits, stockholders'
     equity and other non-interest bearing liabilities less non-interest earning
     assets. - Non-accrual loans are reflected in the balances, but contributing
     no income. NOTE - Tax exempt interest income has been converted to a tax
     equivalent basis at the U.S. federal income tax rate of 34%.


                                      -20-

<PAGE>


                    Grange National Banc Corp. And Subsidiary
                               Net Interest Income
                         Changes Due to Volume and Rate

<TABLE>
<CAPTION>


                                            1998 vs. 1997                       1997 vs. 1996
                                           Increase (Decrease)              Increase (Decrease)

                                       Total     Due To    Due To         Total    Due To     Due To 
(In thousands)                        Change     Volume      Rate        Change    Volume       Rate
                                     ----------------------------------------------------------------
<S>                                 <C>        <C>        <C>           <C>       <C>        <C>
                                                         
INTEREST INCOME:                                                       
  Loans ..........................   $ 1,107   $ 1,212     ($105)       $ 1,060    $ 1,234    ($174)
  Investment securities ..........       324       302        22             56         46        10
  Deposits in other banks ........         2         2         0             61         59         2
                                     ---------------------------------------------------------------
       TOTAL .....................     1,433     1,516       (83)         1,177      1,339      (162)
                                     ---------------------------------------------------------------
                                                                     
INTEREST EXPENSE:                                                    
  Now/Super-Now deposits .........        31        38        (7)            64         48        16
  Savings/Money market deposits...        60        75       (15)            62         62         0
  Time deposits ..................       498       471        27            429        413        16
  Other Borrowings ...............        77        71         6            (13)        (4)       (9)
                                     ---------------------------------------------------------------
      TOTAL ......................       666       655        11            542        519        23
                                     ---------------------------------------------------------------
NET INTEREST INCOME ..............   $   767   $   861     ($ 94)       $   635    $   820     $(185)
                                     ===============================================================
</TABLE>                                               

                                                                     
     The change in interest due to volume and due to rate has been allocated by
reference to changes in the average balances and the average interest rates of
interest earning assets and interest bearing liabilities. Tax-exempt interest
has been converted to a tax equivalent basis at the U.S. federal income tax rate
of 34%.


                                      -21-

<PAGE>


                          INDEPENDENT AUDITOR'S OPINION

The Board of Directors and Stockholders
Grange National Banc Corp.

     We have audited the consolidated balance sheets of Grange National Banc
Corp. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Grange National
Banc Corp. and subsidiary as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.


Daniel Kenia, P.C.
Tunkhannock, Pennsylvania

January 25, 1999


                                      -22-

<PAGE>


                    GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                                                       1998           1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>   
ASSETS:
  Cash and due from banks ...............................................   $   2,615,466    $   2,514,202
  Interest bearing deposits .............................................       5,610,125        2,417,987
  Investment securities (Note 2):
        Available for sale ..............................................      30,251,442       13,001,723
        Held to maturity, (market value
          1998, $16,677,000; 1997, $25,316,000) .........................      16,454,603       25,205,836
                                                                            ------------------------------
  Loans (Note 3) ........................................................      90,927,128       77,720,098
  Less: unearned interest income ........................................         427,967          724,670
  Less: allowance for loan losses .......................................         940,150          767,475
                                                                            ------------------------------
         Loans, net .....................................................      89,559,011       76,227,953
  Bank premises and equipment, net (Note 4) .............................       3,135,784        3,028,098
  Accrued interest and other assets .....................................       2,080,598        1,730,580
  Intangible assets .....................................................         138,384          140,460
  Other real estate .....................................................         107,789          149,795
                                                                            ------------------------------
TOTAL ASSETS ............................................................   $ 149,953,202    $ 124,416,634
                                                                            ==============================
LIABILITIES:
  Domestic Deposits:
    Non-interest bearing deposits .......................................   $  20,710,241    $  14,675,828
    Interest bearing deposits ...........................................     109,181,088       94,112,851
                                                                            ------------------------------
      Total deposits ....................................................     129,891,329      108,788,679
  Other borrowed funds (Note 5) .........................................       4,471,214        2,279,294
  Accrued interest and other liabilities ................................         823,343          710,857
                                                                            ------------------------------
      Total liabilities .................................................     135,185,886      111,778,830
                                                                            ------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 1)
STOCKHOLDERS' EQUITY (NOTE 1):
  Preferred stock authorized 1,000,000 shares of $5 par;
    None issued nor outstanding .........................................
  Common stock authorized 5,000,000 shares of $5 par,
    751,558 and 741,822 shares issued in 1998 
    and 1997, respectively ..............................................       3,757,790        1,816,525
  Additional paid-in capital ............................................         731,661        2,052,158
  Retained earnings .....................................................      10,017,937        8,685,313
                                                                            ------------------------------
      Total .............................................................      14,507,388       12,553,996
 Accumulated other comprehensive income
    (net of deferred income taxes) (Note 6) .............................         260,000           84,000
  Treasury stock, at cost (Note 1) ......................................             (72)            (192)
                                                                            ------------------------------
      Total stockholders' equity ........................................      14,767,316       12,637,804
                                                                            ------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..............................   $ 149,953,202    $ 124,416,634
                                                                            ==============================
</TABLE>

                                                                              

                                      -23-

<PAGE>


                 See Notes to Consolidated Financial Statements
                    GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
                  STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                       1998           1997           1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>             <C>   
Interest Income:
  Interest and fees on loans ........................................   $  7,531,903    $ 6,462,812    $ 5,421,051
  Interest on investment securities:                                 
    US Treasury securities ..........................................        405,229        583,566        664,440
    Obligations of other US government                               
      agencies and corporations .....................................      1,442,403      1,271,288      1,216,544
     Obligations of states and political subdivisions (tax-exempt)...        370,571        216,027        183,183
    Other securities ................................................        187,208         87,259         54,442
  Interest on deposits in banks .....................................        179,432        177,221        115,601
                                                                        ------------------------------------------
          Total interest income .....................................     10,116,746      8,798,173      7,655,261
                                                                        ------------------------------------------
Interest Expense:                                                    
  Interest on deposits ..............................................      4,341,667      3,753,657      3,198,198
  Interest on borrowed funds ........................................        110,656         34,145         47,102
                                                                        ------------------------------------------
          Total interest expense ....................................      4,452,323      3,787,802      3,245,300
                                                                        ------------------------------------------
        Net interest income .........................................      5,664,423      5,010,371      4,409,961
                                                                     
      Provision for loan losses (Note 3) ............................        270,000        190,000        125,000
                                                                        ------------------------------------------
        Net interest income after provision for loan losses .........      5,394,423      4,820,371      4,284,961
                                                                     
Other Income (Note 7) ...............................................        784,864        676,731        500,271
Other Expenses (Note 8) .............................................     (3,608,956)    (3,205,301)    (2,627,512)
                                                                        ------------------------------------------
Income before taxes .................................................      2,570,331      2,291,801      2,157,720
                                                                     
                                                                        ------------------------------------------
Provision for income taxes (Notes 1 and 6) ..........................        710,000        684,000        660,000
                                                                        ------------------------------------------
Net income ..........................................................   $  1,860,331    $ 1,607,801    $ 1,497,720
Other comprehensive income, net of tax:                              
  Unrealized gains on securities:                                    
    Unrealized holding gain (loss) arising during period ............   $    176,000    $    81,000    $   (62,000)
                                                                        ------------------------------------------
Comprehensive income ................................................   $  2,036,331    $ 1,688,801    $ 1,435,720
                                                                        ==========================================
Earnings per share (Notes 1, 11 and 12):                             
Basic ...............................................................   $       2.50    $      2.17    $      2.02
                                                                        ==========================================
Diluted .............................................................   $       2.25    $      2.04    $      1.99
                                                                        ==========================================
Basic shares outstanding ............................................        744,247        741,616        740,398
                                                                        ==========================================
Diluted shares outstanding ..........................................        826,606        787,965        752,046
                                                                        ==========================================
</TABLE>

                                                                               
                 See Notes to Consolidated Financial Statements


                                      -24-

<PAGE>

Page 25

                    GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                  Accumulated
                                                      Common         Additional                      Other
                                         Treasury      Stock           Paid-in      Retained     Comprehensive
                                           Stock      $5 Par           Capital      Earnings        Income          Total
--------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>             <C>            <C>         <C>


Balance, December 31, 1995 .....          ($486)    $ 1,743,870    $1,559,336     $ 6,154,547     $ 65,000     $ 9,522,267 
Net income .....................                                                    1,497,720                    1,497,720 
Stock dividend $0.37 per                                                                                     
  share, plus cash in lieu of                                                                                
  fractional shares ............                         32,585       208,613        (259,377)                     (18,179)
Sale of stock from treasury                  50                                                                         50 
Unrealized holding losses                                                                                    
  on investment securities .....                                                                   (94,000)        (94,000)
Deferred tax asset .............                                                                    32,000          32,000 
                                      ------------------------------------------------------------------------------------
Balance, Dceember 31, 1996 .....          ($436)    $ 1,776,455    $1,767,949     $ 7,392,890     $  3,000     $10,939,858
Net income .....................                                                    1,607,801                    1,607,801 
Stock dividend $0.44 per                                                                                     
  share, plus cash in lieu of                                                                                
  fractional shares ............                         33,210       259,074        (315,378)                     (23,094)
Issuance of common stock .......                          6,860        25,135                                       31,995 
Sale of stock from treasury ....            244                                                                        244 
Unrealized holding gains                                                                                     
  on investment securities .....                                                                   124,000         124,000 
Deferred tax liability .........                                                                   (43,000)        (43,000)
                                      ------------------------------------------------------------------------------------
Balance, December 31, 1997 .....          ($192)    $ 1,816,525    $2,052,158     $ 8,685,313     $ 84,000     $12,637,804
Net income .....................                                                    1,860,331                    1,860,331 
Stock dividend $0.71 per                                                                                     
  share, plus cash in lieu of                                                                                
  fractional shares ............                         52,570       445,767        (527,707)                     (29,370)
Stock split ....................                      1,841,240    (1,841,240)                                           0 
Issuance of common stock .......                         47,455        74,976                                      122,431 
Sale of stock from treasury ....            120                                                                        120 
Unrealized holding gains                                                                                     
  on investment securities .....                                                                   265,000         265,000 
Deferred tax liability .........                                                                   (89,000)        (89,000)
                                      ------------------------------------------------------------------------------------
Balance, December 31, 1998 .....           ($72)    $ 3,757,790    $  731,661     $10,017,937     $260,000     $14,767,316
                                      ====================================================================================
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      -25-

<PAGE>

Page 26

                    GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                                 1998           1997           1996 
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>            <C>            
OPERATING ACTIVITIES:                                                                                               
 Net income .........................................................  $  1,860,331    $  1,607,801   $  1,154,077  
 Adjustments to reconcile net income to net cash                                                                    
  provided by operating activities:                                                                                 
                                                                                                                    
                                                                                                                    
   Depreciation and amortization ....................................       329,912         284,748        140,758  
   Provision for loan losses ........................................       270,000         190,000         65,000  
   Increase (decrease) in deferred income taxes .....................      (100,000)         58,000        (57,123) 
 Changes in operating assets and liabilities:                                                                       
                                                                                                                    
                                                                                                                    
                                                                                                                    
  Increase (decrease) in accrued interest income and other assets ...      (350,299)       (380,868)      (193,817) 
                                                                                                                    
  Increase in accrued interest expense and other liabilities ........       170,486         119,884         13,600  
                                                                                                                    
  NET CASH PROVIDED BY                                                                                              
   OPERATING ACTIVITIES .............................................     2,180,430       1,879,565      1,122,495  
                                                                       ---------------------------------------------
INVESTING ACTIVITIES:                                                                                               
 Purchase bank premises and equipment ...............................      (393,241)       (615,241)      (309,602) 
 Decrease (increase) in other real estate ...........................        42,006        (149,795)        69,618  
 Purchase of securities "available for sale" ........................   (16,664,841)     (3,723,722)    (4,155,304) 
 Decrease (increase) in mortgage-backed securities 
  "available for sale"...............................................    (2,769,115)     (3,731,563)                
 Sales of securities "available for sale" ...........................                     3,755,046                 
 Redemptions of securities "available for sale" .....................     2,360,237       2,512,206      2,871,501  
 Purchase of securities "held to maturity" ..........................    (2,213,060)     (9,703,703)    (6,660,973) 
 Redemptions of securities "held to maturity" .......................    10,458,545       7,747,916      4,873,223  
 Decrease (increase) in mortgage-backed securities
   "held to maturity" ...............................................       505,749        (980,226)      (778,779) 
 Increase in loans to customers .....................................   (13,601,058)    (15,007,728)    (6,502,044) 
 Increase in deposits in banks ......................................    (3,192,139)       (443,345)      (878,293) 
 Premium paid on core deposits ......................................                                     (164,579) 
                                                                       ---------------------------------------------
  NET CASH USED IN                                                                                                  
   INVESTING ACTIVITIES .............................................   (25,466,917)    (20,340,155)   (11,635,232) 
                                                                       ---------------------------------------------
FINANCING ACTIVITIES:                                                                                               
                                                                                                                    
 Increase in deposits before interest credited ......................    17,454,097      14,567,265      7,255,032  
 Increase in borrowed funds .........................................     2,191,920         666,134      1,487,393  
 Interest credited to deposits ......................................     3,648,553       3,166,016      1,833,276  
 Cash dividends paid ................................................       (29,370)        (23,094)        (8,178) 
 Decrease in treasury stock .........................................           120             244             50  
 Issuance of common stock ...........................................       122,432          31,995            --   
                                                                       ---------------------------------------------
                                                                                                                    
  NET CASH PROVIDED BY                                                                                              
   FINANCING ACTIVITIES .............................................    23,387,752      18,408,560     10,567,573  
                                                                       ---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND                                                                                 
 CASH EQUIVALENTS ...................................................       101,265         (52,030)        54,836  
CASH AND CASH EQUIVALENTS, January 1 ................................     2,514,202       2,566,232      1,793,476  
                                                                       ---------------------------------------------
CASH AND CASH EQUIVALENTS, December 31 ..............................  $  2,615,466    $  2,514,202   $  1,848,312  
                                                                       =============================================
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:                                                                    
 Cash paid during the year for:                                                                                     
  Interest ..........................................................  $    996,759    $    993,280   $    600,664  
  Income taxes ......................................................  $    780,000    $    765,553   $    474,000  
 Non-cash investing and financing activities:                                                                       
  Unrealized gains (losses) on securities ...........................  $    176,000    $     81,000   $    (169,000)
  Stock dividend ....................................................       498,337         292,284        110,398  
</TABLE> 
                                                               
                 See Notes to Consolidated Financial Statements

                                      -26-

<PAGE>


Grange National Banc Corp.  and Subsidiary
Notes to Financial Statements

1. Summary of Significant Accounting Policies:

     The following summary of significant accounting policies is presented for
the reader to obtain a better understanding of the Company's financial
statements and related financial data included in this report. The accounting
and reporting policies and practices of the Company conform to generally
accepted accounting principles within the banking industry.

Business and Principles of Consolidation:

     Grange National Banc Corp. (Company) and its subsidiary the Grange National
Bank (Bank) provide banking services to domestic customers primarily in
northeastern Pennsylvania. The consolidated financial statements include the
accounts of the Company and its bank subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Use of Estimates:

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Investment Securities:

     The Company follows the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). In accordance with
SFAS No. 115 the Company classifies each debt and equity security as held to
maturity or available for sale. Investments classified as held to maturity are
reflected at amortized cost. Investments classified as available for sale are
reflected at fair market value. Realized gains or losses securities are included
in earnings. Unrealized gains and losses on available for sale securities are
excluded from earnings and reflected, net of income taxes as other comprehensive
income and in a separate component of stockholders' equity as accumulated other
comprehensive income until realized. These unrealized gains and losses are the
only component of comprehensive income. Upon purchase of securities the Company
specifically designates which securities are classified as "available for sale"
and "held to maturity".


                                      -27-

<PAGE>


     Amortization of premiums and accretion of discounts are recognized as
adjustments to interest income. Gains or losses on disposition are based on the
net proceeds and the adjusted carrying value of the securities using the
specific identification method.

Loans and Allowance for Loan Losses:

     Loans are stated at face value, net of unearned discount and the allowance
for loan losses. Unearned discount on consumer loans is recognized as income
over the terms of the loans by a method that approximates the simple interest
method. Interest on other loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
operating expenses. Loan losses and recoveries are charged or credited to the
allowance for loan loss account at the time incurred. The provision for loan
losses and related allowance of loan losses are based upon management's
continual evaluation of the current loan portfolio and prior loan loss
experience. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.

     The bank has adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan Income Recognition and Disclosures," in its evaluation
of the loan portfolio. SFAS 114 requires that certain impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's original effective interest rate. As a practical expedient, impairment
may be measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.

Premises and Equipment:

     Building and office equipment are stated at cost less accumulated
depreciation computed on the straight line method. Costs incurred for routine
maintenance and repairs are expensed currently. The estimated depreciable lives
used in computing depreciation are as follows:

                  Buildings and improvements                  7 to 50 years
                  Equipment and furniture                     5 to 20 years

National banking law restricts the investment in bank premises to the amount of
a bank's capital stock. However, in certain circumstances, and with regulatory
approval, investment in bank premises can be as much as 50% of the stockholders'
equity. The ratio of investment in bank premises to stockholders' equity at
December 31, 1998 was within the approved 50% limit and no regulations have been
violated.


                                      -28-

<PAGE>


Advertising Costs:

     The Company follows the policy of charging advertising cost to expense as
incurred. During 1998 and 1997, advertising costs amounted to $103,000 and
$129,000, respectively.

Intangible Assets:

     Intangible assets are included in the other assets and are being amortized
over a period of fifteen years using the straight line method. Amortization for
1998 and 1997 was $17,025 each.

Other Real Estate:

     Other real estate consists of properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair market value based on appraised value at
the date of foreclosure. Loan losses arising from the acquisition of such
properties are charged against the allowance for loan losses.

Treasury Stock:

     Treasury stock is shown at cost and consists of six and sixteen shares of
common stock in 1998 and 1997, respectively.

Pension Plan:

     The Bank's pension plan is an Employee Stock Ownership Plan with 401(k)
Provisions ("KSOP") which covers substantially all employees. The Plan, which is
a type of stock bonus plan, is a plan of deferred compensation in which Company
contributions are used to provide participating employees with stock in Grange
National Banc Corp. The KSOP also provides that participants may make
contributions to the Plan on a before-tax basis, pursuant to provisions found
under Section 401(k) of the Internal Revenue Code. Participants may elect to
defer up to 15% of their current compensation and the Company may match up to
$1.00 for each $1.00 that is deferred. The Company contributed $16,848, $12,982
and $4,498 as matching contribution to employee deferrals during 1998, 1997 and
1996. The Company also made an Employer Optional Contribution to the Plan of
$77,820, $71,139 and $56,147 during 1998, 1997 and 1996, which represents 6% of
gross salaries for each year.

Cash and Cash Equivalents:

     The Company considers cash and due from banks as cash and cash equivalents
for purposes of the Statements of Cash Flows.


                                      -29-

<PAGE>


Income Taxes:

     Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently payable and deferred
taxes related primarily to the temporary differences between the financial
reporting and tax basis of an asset or liability. The temporary differences
relate principally to the use of different depreciation methods for financial
statement and income reporting purposes, resulting in differences in asset basis
due to accumulated depreciation on bank premises and equipment, accretion of
discounts on financial basis of securities, allowances for loan losses and
unrealized holding gains and losses on available for sale securities which are
not included in taxable income.. Deferred taxes represent future consequences of
the differences which will either be taxable or deductible in the year the
assets and liabilities are recovered or settled. Under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," deferred
income taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The income tax expense (or benefit) is the difference
between the deferred tax asset or liability calculated for each period.

     The Company and its subsidiary file a consolidated federal income tax
return.

Earnings Per Share:

     Effective for 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.

Restrictions on Cash and Due From Bank Accounts:

     The Bank is required to maintain average balances with various
correspondent banks. The amount of those balances for the year ended December
31, 1998 was approximately $20,000.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities:

     The Financial Accounting Standards Board issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which the Company has adopted for 1997. The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial components approach that focuses on
control.


                                       -30-

<PAGE>


Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provided consistent
standards for distinguishing transfers of financial assets that are sales from
transfers from secured borrowings.

     This Statement provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitization, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities.

     The adoption of the SFAS No. 125 standards did not have a material effect
on operating results for 1998 or 1997.

Financial Instruments with Off-Balance Sheet Risk:

     The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve to varying degrees elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract or notional amounts of those
instruments express the extent of involvement the Company has in particular
classes of financial instruments.

     Company exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company may require
collateral or other security to support financial instruments with off-balance
sheet risk. These commitments at December 31 are as follows (in thousands):


                                                     Contract or Notional Amount
  Financial instruments whose contract                  1998             1997
     amounts represent credit risk:                     ----             ----
     
           Commitments to extend credit............   $4,020           $2,676
           Standby letters of credit...............     $463              $49

     Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount


                                      -31-

<PAGE>


of collateral obtained if deemed necessary is based on management's credit
assessmant of the counterparty.

     Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.

Concentrations of Credit:

     All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. All such
customers are depositors of the Bank. Investments in municipal securities
involve governmental entities within Pennsylvania. The concentrations of credit
by type are set forth in Note 3. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Commercial and
standby letters of credit were granted primarily to commercial borrowers. The
Bank, as a matter of policy, does not extend credit to any single borrower or
group of related borrowers in excess of $2,000,000, unless secured by bank
deposits or partially guaranteed by an agency of the federal government.

Regulatory Matters:

     The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies and undergoes periodic examinations by such
regulatory authorities. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts of capital to total "risk weighted"
assets. At December 31, 1998 the Bank is required to have minimum Tier 1 and
Total Capital ratios of 4% and 8% respectively. The Bank's actual ratios at that
date were 15.40% and 15.97% respectively. The Bank's leverage ratio at December
31, 1998 was 10.55%. As of the most recent examination, federal regulators
categorized the Bank as well capitalized within regulatory criteria. Since that
notification, there are no conditions or events that management believes would
change the Bank's category.

     Dividends are paid by the Company from its assets which are mainly provided
by dividends from the Bank. However, certain regulatory restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the form
of cash dividends, loans or advances. As


                                      -32-

<PAGE>


of December 31, 1998, the Bank had retained earnings of $9,661,000 of which
under federal regulations, the Bank's extension of credit to its parent company
must be on the same terms and conditions as extensions of credit to
nonaffilliates. The maximum amount the Bank can loan to the Company is limited
to 20% of its capital and surplus. Such extensions of credit, with limited
exceptions, must be fully collateralized.

Line of Credit:

     At December 31, 1998 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $47,636,000 at a variety
of available terms.

Comprehensive Income:

     In 1997, the Financial Accounting Standards Board issued statement No. 130
-- "Reporting Comprehensive Income," which is effective for years beginning
after December 15, 1997. This statement establishes standards for reporting and
displaying of comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to report a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. Prior to the issuance of
this statement, some of those changes in equity were displayed in a statement
that reports the results of operations, while others were included directly in a
statement of financial position. The 1997 financial statements have been
restated where applicable to reflect the adoption of SFAS No. 130.

2. Investment Securities:

     The amortized cost and estimated fair value of investments in debt
securities are as follows:                                             

<TABLE>
<CAPTION>
                                                                           1998

                                                                    Gross        Gross        Estimated 
                                                   Amortized     Unrealized   Unrealized           Fair
(In thousands)                                        Cost          Gains        Losses           Value
                                                 ------------------------------------------------------
<S>                                                 <C>           <C>           <C>          <C>    
Available for sale:                              
  U.S. Treasury notes .........................        $ 5,762      $   124                    $ 5,886
  U.S. government agencies and  corporations ..         15,469           92      ($10)          15,551
  Municipal bonds .............................          7,965          169                      8,134
  Other securities ............................            662           18                        680
                                                 ------------------------------------------------------
     Total available for sale .................        $29,858      $   604      ($10)         $30,251
                                                 ======================================================
Held to maturity:                                                                          
  U.S. government agencies and corporations ...        $10,728      $   178      ($68)         $10,838
  Municipal bonds .............................          2,985           50                      3,035
  Other securities ............................          2,741           68        (5)           2,804
                                                 ------------------------------------------------------
     Total held to maturity ...................        $16,454      $   296      ($73)         $16,677
                                                 ======================================================
</TABLE>                                               

                                               

                                      -33-

<PAGE>

<TABLE>
<CAPTION>

                                                                         1997
<S>                                                 <C>          <C>          <C>           <C>   
Available for sale:
  U.S. Treasury notes .........................      $ 6,545      $    64      ($    7)      $ 6,602
  Obligations of other U.S. government
    agencies or corporations ..................        3,669           40                      3,709
    Municipal bonds ...........................        2,167           23           (1)        2,189
  Other securities ............................          493            9                        502
                                                     -------      -------      -------       -------
     Total available for sale .................      $12,874      $   136      ($    8)      $13,002
                                                     =======      =======      =======       =======
Held to maturity:
  U.S. government agencies and corporations ...      $18,905      $   109      ($   47)      $18,967
  Municipal bonds .............................        4,181           23           (6)        4,198
  Other securities ............................        2,120           31                      2,151
                                                     -------      -------      -------       -------
     Total held to maturity ...................      $25,206      $   163      ($   53)      $25,316
                                                     =======      =======      =======       =======
</TABLE>


     The amortized cost and estimated fair value of debt securities at December
31, 1998 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>

                                      Available For Sale                 Held to Maturity
                                      ------------------                 ---------------- 
                                                      Estimated                           Estimated
                                    Amortized              Fair         Amortized              Fair
(In thousands)                           Cost             Value              Cost             Value
                                    ---------------------------------------------------------------
<S>                                  <C>              <C>               <C>               <C>   
Maturing within one year ....         $ 1,256           $ 1,264           $ 1,070           $ 1,076
Maturing in one to five years          11,582            11,848            12,436            12,615
Maturing in five to ten years          11,497            11,595             2,484             2,517
Maturing after ten years ....           4,861             4,864               464               469
No set maturity .............             662               680                          
                                    ---------------------------------------------------------------
     TOTAL ..................         $29,858           $30,251           $16,454           $16,677
                                    ===============================================================
</TABLE>

                                                                           

                                      -34-

<PAGE>


3. Loans and Allowance for Loan Losses:

     Major classifications of loans at December 31 are as follows:

(In thousands)                               1998      1997
                                            -----      ----
Real estate mortgages:
  Agricultural ........................   $ 1,323   $ 1,441
  Residential, 1 - 4 family ...........    48,731    41,239
  Residential, multi-family ...........       747       687
  Nonfarm, nonresidential properties...    14,076     9,598
                                          -----------------
       Total real estate mortgages ....    64,877    52,965
Agricultural loans ....................       268       285
Commercial loans ......................    13,653    12,702
Municipal loans .......................     2,043     1,789
Consumer loans ........................     9,950     9,955
Overdrafts ............................       136        24
                                          -----------------
     Gross loans ......................    90,927    77,720
Less:  Unearned income ................       428       725
       Allowance for loan losses ......       940       767
                                          -----------------
            Loans, net ................   $89,559   $76,228
                                          =================

     Nonaccrual loans at December 31, 1998 and 1997, were $205,000 and $136,000,
respectively.

     The Company adopted SFAS No. 114 effective January 1, 1995. The adoption of
SFAS No. 114 did not have a material effect on the financial condition or
operating results of the Company. At December 31, 1998 and 1997 the recorded
investment in loans that were considered impaired under SFAS No. 114 was
$421,000 and $290,000, respectively. No transfers to loan loss were made in 1998
or 1997 for any impaired loans. The average recorded investment in impaired
loans during the years ended December 31, 1998 and 1997 was approximately
$301,000 and $287,000 respectively. Interest payments received on impaired loans
are applied to principal; otherwise, these receipts are recorded as interest
income. For the years ended December 31, 1998 and 1997, the Company recognized
interest income on impaired loans of $27,000 and $18,000. The interest that
would have been earned in accordance with the original terms is approximately
$44,000 and $29,000 respectively.

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

(In thousands)                        1998        1997        1996
                                      ----        ----        ----
Balance, January 1 ............      $ 767       $ 623       $ 532
Provision charged to operations        270         190         125
Loans charged off .............       (102)        (51)        (41)
Recoveries ....................          5           5           7
                                     -----------------------------
Balance, December 31 ..........      $ 940       $ 767       $ 623
                                     =============================


                                      -35-

<PAGE>


4. Premises and Equipment:

     Premises and equipment are summarized as follows:

                                                 Accumulated
                                  Gross Book     Amortization     Net Book
December 31, 1998:                   Value      & Depreciation     Value
                                  ----------    --------------    --------
  Land .....................      $  440,082                      $  440,082
  Buildings ................       2,660,782      $  780,539       1,880,243

  Furniture and equipment...       2,279,561       1,464,102         815,459
                                  ------------------------------------------
       Total ...............      $5,380,425      $2,244,641      $3,135,784
                                  ==========================================
December 31, 1997:
  Land .....................      $  440,082                      $  440,082
  Buildings ................       2,515,143      $  688,675       1,826,468
  Furniture and equipment...       2,021,578       1,260,030         761,548
                                  ------------------------------------------
       Total ...............      $4,976,803      $1,948,705      $3,028,098
                                  ==========================================

     Depreciation and amortization were applied as follows:


                                    1998          1997          1996
                                   -----         -----          ----
Premises .................      $ 89,840      $ 80,364      $ 66,297
Furniture and equipment...       240,072       187,359       124,100
                                ------------------------------------
     Total ...............      $329,912      $267,723      $190,397
                                ====================================

     The Bank has non-cancelable operating leases on the building for its
Edwardsville and Back Mountain Offices. The aforementioned leases have been
treated as operating leases in the accompanying financial statements. Rental
expense for 1998 was $134,000. Minimum future obligations under non-cancelable
operating leases in effect at December 31, 1998 are as follows:

                     1999                       $149,200
                     2000                        149,200
                     2001                        125,950
                     2002                        112,000
                     2003 and thereafter         663,250
                                              ----------
                     Total                    $1,199,600
                                              ==========
5. Other Borrowed Funds

     Other borrowed funds include interest-bearing demand notes payable to the
U.S. Treasury for Treasury collections made by the Bank. Remittances of amounts
collected are made upon demand. The year end balance due was $104,000 in 1998
and $750,000 in 1997.

     The Bank enters into repurchase agreements with customers which amounted to
$1,024,000 in 1998 and $1,172,000 in 1997.


                                      -36-

<PAGE>


     The Bank has a line of credit with the Federal Home Loan Bank for
$45,630,000 which could be utilized for various operating purposes. Borrowings
under this line of credit are secured by qualified assets (primarily investment
securities). Interest paid on these short term borrowings varies based on
interest rate fluctuations. The outstanding balance of which was zero at
December 31, 1998.

     The Federal Home Loan Bank of Pittsburgh has loaned the Bank $440,000 to
fund the Bank's Affordable Housing Program. These loans are amortized over 25
years, at 4%, payable monthly and due in ten years. The Bank has also borrowed
two term loans for a total of $3,000,000, with ten year maturities and five year
calls. The interest rates on these loans range form 4.76% to 5.63%. At the call
date and thereafter, the FHLB has the option to convert the loan to a variable
rate. The Bank can pay the loan off without penalty if the FHLB decides to
convert the loan to a variable rate. The year end balance due the Federal Home
Loan Bank was $3,342,649 in 1998 and $357,041 in 1997. The FHLB loans mature as
follows:

 1999         2000         2001          2002              2003 and beyond
 ----         ----         ----          ----              ---------------
 $12,878      $13,159      $12,118       $304,495          $3,000,000

6. Income Taxes:

     The components of the federal income tax provisions are as follows:

                                      1998            1997            1996
                                      ----            ----            ----
Currently payable .........      $ 810,000       $ 749,000       $ 701,000
Deferred portion (benefits)       (100,000)        (65,000)        (41,000)
                                 -----------------------------------------
     Total ................      $ 710,000       $ 684,000       $ 660,000
                                 =========================================

     The sources of the net deferred income tax liability (asset) in other
liabilities (assets) for the years ended at December 31 were as follows:

<TABLE>
<CAPTION>
                                                                       1998            1997
                                                                       ----            ----

<S>                                                                  <C>             <C>      
Depreciation ..................................................      $  96,000       $  85,000
Accretion of discounts on securities ..........................         15,000          40,000
Unrealized gains on available for sale investment securities...        133,000          44,000
Accrued employee stock incentive ..............................        (26,000)
Allowance for loan losses .....................................       (270,000)       (210,000)
                                                                    -------------------------
     Net deferred tax (asset) .................................      ($ 52,000)      ($ 41,000)
                                                                     =========================
</TABLE>



                                      -37-

<PAGE>


A reconciliation of income tax expense at the federal statutory rate and the
effective federal income tax rate is as follows:

<TABLE>
<CAPTION>
                                          1998                  1997                  1996
                                          ----                  ----                  ----

<S>                             <C>          <C>      <C>           <C>      <C>           <C>   
Provision at statutory rate..   $ 874,000    34.00%   $ 779,000     34.00%   $ 733,000     34.00%
Tax-exempt income                                                            
  from investments ..........    (112,000)   (4.36)     (64,000)    (2.79)     (53,000)    (2.50)
Tax-exempt income                                                            
  from loans ................     (42,000)   (1.63)     (30,000)    (1.31)     (18,000)    (0.80)
Other .......................     (10,000)   (0.39)      (1,000)    (0.05)      (2,000)    (0.10)
                                ----------------------------------------------------------------
     Total ..................   $ 710,000    27.62%   $ 684,000     29.85%   $ 660,000     30.60%
                                ================================================================
</TABLE>


7. Other Income:

     Other income for the years ended December 31, consists of the following:


                                             1998          1997         1996
                                             ----          ----         ----
Service charges and fees .............     225,564    $ 163,813    $ 141,357
Service charges on deposit accounts...     387,629      366,050      292,382
Gain on sale of securities ...........                   23,118
Gain (loss) on sale of real estate....     (24,961)                  (21,488)
Other ................................     196,632      123,750       88,020
                                         -----------------------------------
     Total other income ..............   $ 784,864    $ 676,731    $ 500,271
                                         ===================================

8. Other Expenses:

     Other expenses for the years ended December 31, consists of the following:


                                             1998           1997           1996
                                             ----           ----           ----
Salaries and employee benefits ....    $1,835,224     $1,622,546     $1,367,510
Occupancy expenses ................       408,073        363,422        241,019
Furniture and equipment expenses...       326,283        275,013        241,886
Other operating expenses ..........     1,039,376        944,320        777,097
                                       ----------------------------------------
     Total other expenses .........    $3,608,956     $3,205,301     $2,627,512
                                       ========================================

9. Related Party Transactions:

     During the ordinary course of business, loans are made to officers,
directors, and their related interests. These transactions are made on
substantially the same terms and at those rates prevailing at the time for
comparable transactions with others.


                                      -38-

<PAGE>


     A summary of this loan activity is listed below:


                                 1998              1997              1996
                                 ----              ----              ----
Balance, January 1 ....      $ 1,269,719       $   997,070       $ 1,107,115
Additions .............          428,024           427,289           252,281
Amounts collected .....         (146,590)         (154,640)         (362,326)
Amounts charged off....
                             -----------------------------------------------
Balance, December 31...      $ 1,551,153       $ 1,269,719       $   997,070
                             ===============================================

10. Grange National Banc Corp. (Parent Company Only) Financial Statements:


BALANCE SHEETS, DECEMBER 31                            1998            1997 
                                                       ----            ----
                          ASSETS               
Cash .............................              $    10,587      $     4,660
Investment in bank subsidiary ....               14,398,938       12,301,438
Securities "available for sale"...                   44,400           34,400
Land and buildings ...............                  519,683          499,363
                                                ----------------------------
        TOTAL  ASSETS ............              $14,973,608      $12,839,861
                                                ============================
                                               
                        LIABILITIES            
Notes payable, bank subsidiary....                 $198,192         $198,457
Other liabilities.................                    8,100            3,600
                                                ----------------------------
       Total liabilities..........                 $206,292         $202,057
                                                ----------------------------
                     STOCKHOLDERS'  EQUITY
Preferred stock authorized
  1,000,000 shares of $5 par:
  None issued
  Common stock authorized 5,000,000
  shares of $5 par; 751,552 and
  726,610 shares issued and
  outstanding in 1998 and 1997,
  respectively .......................            3,757,790        1,816,525
Additional paid-in capital ...........              731,661        2,052,158
Retained earnings ....................           10,017,937        8,685,313
Unrealized holding gains (losses)          
  on investment securities (net of         
  deferred income taxes) .............              260,000           84,000
Less:  Treasury stock, at cost .......                  (72)            (192)
                                                ----------------------------
        Stockholders' equity .........           14,767,316       12,637,804
                                                ----------------------------
        TOTAL LIABILITIES AND            
          STOCKHOLDERS' EQUITY .......         $ 14,973,608     $ 12,839,861
                                               =============================
                                        

                                      -39-

<PAGE>

<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31                              1998            1997            1996
                                                              ----            ----            ----                   
<S>                                                      <C>             <C>             <C>       
INCOME:
  Dividends from bank subsidiary ..................      $   74,370      $  133,094      $   18,179
  Dividends from other securities .................             982             832             195
  Interest on deposits                          
 Other income .....................................           4,221             600
                                                         ------------------------------------------
               Total income .......................          79,573         134,526          18,374
                                                         ------------------------------------------
OPERATING EXPENSES:                             
  Interest expense ................................          17,229           8,996           3,182
  Other operating expense .........................           8,082           2,789             312
                                                         ------------------------------------------
               Total operating expenses ...........          25,311          11,785           3,494
                                                         ------------------------------------------
Income before undistributed income of subsidiary...          54,262         122,741          14,880
EQUITY IN UNDISTRIBUTED INCOME OF
  SUBSIDIARY ......................................       1,806,069       1,485,060       1,482,840
                                                         ------------------------------------------
NET INCOME ........................................      $1,860,331      $1,607,801      $1,497,720
                                                         ==========================================
</TABLE>

                                                         
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS                        
FOR THE YEARS ENDED, DECEMBER 31                                   1998              1997              1996
                                                                   ----              ----              ----
<S>                                                         <C>               <C>               <C> 
OPERATING  ACTIVITIES:       
  Net income .........................................      $ 1,860,331       $ 1,607,801       $ 1,497,720
  Adjustments to reconcile net income to              
   net cash provided by operating activities:         
     Amortization and depreciation ...................            7,827             2,023
      Equity in undistributed income of subsidiary ...       (1,806,069)       (1,485,060)       (1,482,840)
                                                            -----------------------------------------------
          Net cash provided by  operating activities             62,089           124,764            14,880
                                                            -----------------------------------------------
INVESTING  ACTIVITIES:
  Increase in buildings and land .....................          (28,677)         (194,845)          (53,176)
  Purchase securities "available for sale" ...........                            (19,900)
  Investment in Bank subsidiary ......................         (122,431)          (31,995)
                                                            -----------------------------------------------
           Net cash used in investing activities .....         (151,108)         (246,740)          (53,176)
                                                            -----------------------------------------------
FINANCING  ACTIVITIES:                                
  Proceeds from notes payable ........................              265           116,860            56,246
  Increase in other liabilities ......................            1,500               600
  Sale of treasury stock .............................              120               244                50
  Issuance of common stock ...........................          122,431            31,995
  Dividends to stockholders ..........................          (29,370)          (23,094)          (18,179)
                                                            -----------------------------------------------
          Net cash provided by (used in)              
            financing activities .....................           94,946           126,605            38,117
                                                            -----------------------------------------------
INCREASE  (DECREASE)  IN  CASH .......................            5,927             4,629              (179)
CASH  BALANCE,  JANUARY 1.............................            4,660                31               210
                                                            -----------------------------------------------
CASH  BALANCE,  DECEMBER 31...........................      $    10,587       $     4,660       $        31
                                                            ===============================================
</TABLE>


                                      -40-

<PAGE>


11. Stockholder's Equity

Stock Split - Retroactive Effect on Financial Statements:

     In July 1998, the Board of Directors of the Company voted a two-for-one
split of the Company's common stock, to be effected in the form of a stock
distribution, payable to shareholders of record as of July 30, 1998. The
financial statements have been revised to give retroactive effect of the stock
split as if the additional shares had been outstanding for all periods.

Stock Options:

     In January 1994, the Board of Directors adopted an Employee Stock Option
Plan in which stock options may be granted to all officers and key employees of
the Company. The aggregate number of shares which may be issued upon exercise of
the options under the plan is 20,000. Options are exercisable up to one-third in
the second year after the date of grant, up to two-thirds in the third year
after the date of grant and up to 100% in the fourth year after the date of
grant, with options expiring at the end of ten years after the date of grant.

     The Board of Directors also adopted a Stock Option Plan for non-employee
Directors which will be available to all non-employee members of the Board of
Directors. The aggregate number of shares which may be issued upon exercise of
the options under the Director Plan is 20,000 shares and are exercisable in part
from time to time beginning one year after the date of grant and expiring ten
years thereafter. Effective April 1, 1994, options to purchase 1,000 shares of
stock were automatically granted to each non-employee Director under this plan
expiring April 1, 2004.

     The Board of Directors adopted an additional Stock Option Plan (the "Plan")
in November 1995, subject to shareholder approval, covering the employees and
directors. The Plan authorizes the grant of options to purchase not more than
55,000 shares of common stock under the Plan. Options granted under the Plan are
intended to be either incentive stock options or nonstatutory stock options. As
of February 29, 1996, options for 50,160 shares of common stock having an
exercise price of $32.50 were outstanding and 4,840 shares of common stock were
available for future option grants under the Plan. Of the 50,160 shares of
common stock outstanding for options, 36,320 shares of common stock were issued
as incentive stock options. The remaining shares outstanding for options were
granted to each non-employee director equally as nonstatutory stock options.
Pursuant to Section 422 of the Internal Revenue Code, shareholder approval is
required for the incentive stock options to qualify for favorable tax treatment.
Exercise prices of options granted under all plans are current market prices at
time of grant.


                                      -41-

<PAGE>


                                                                        Weighted
                                                      Non-Employee       average
                                       Employee         Director        Exercise
Year ended December 31, 1996        Stock Options     Stock Options      Prices
                                    -------------     -------------      ------
Outstanding 1995 ...............        92,514           43,680          $14.86
Lapsed .........................                         (3,460)    
Adjustment for stock dividend...         2,074              956
Outstanding ....................        94,588           41,176          $14.68
Year ended December 31, 1997                       
Outstanding 1996 ...............        94,588           41,176          $14.68
Granted ........................                         16,720     
Exercised ......................          (686)          (2,058)
Adjustment for stock dividend            1,864              658
Outstanding ....................        95,766           56,622          $15.13
Year ended December 31, 1998                       
Outstanding 1997 ...............        95,766           56,622          $15.13
Granted ........................         3,000     
Exercised ......................       (11,361)            (500)
Adjustment for stock dividend...           961            1,133
Outstanding ....................        88,366           57,255          $15.00
                                                           
     The Company measures stock based compensation costs using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the stock
option plans been determined based on the fair value at the grant date for
awards in 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:

                                                        1998              1997
                                                        ----              ----
       Net income - as reported                    $1,860,000        $1,608,000
       Net income - pro forma                      $1,822,000        $1,481,000
       Basic income per share - as reported        $     2.50        $     2.17
       Basic income per share - pro forma          $     2.45        $     2.00
       Diluted income per share - as reported      $     2.25        $     2.04
       Diluted income per share - pro forma        $     2.20        $     1.86
                                                               
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 2.0% for 1998 and 1997; risk-free interest rate
of 5.96% and 6.34% for 1998 and 1997 respectively; expected lives of 10 years
for 1998 and 1997, which is the option term; and volatility of 23.00% and 5.00%
for 1998 and 1997 respectively.


                                      -42-

<PAGE>


Stock Dividends:

     The Company has declared stock dividends in December and June of 1998,
December and June of 1997 at the following rates $0.40, $0.31, $0.23, $0.21,
respectively, with fractional shares paid in cash. The Company issued 7,141 and
6,746 shares of common stock in conjunction with these dividends. Accordingly,
amounts equal to the fair market value (based on quoted market prices as
adjusted) of the additional shares issued have been charged to retained earnings
and credited to common stock and additional paid-in capital. Earnings per common
share, weighted average shares outstanding, and all stock option activity have
been restated to reflect the stock dividends.

Preferred Stock:

     The Company authorized 1,000,000 shares of preferred stock at $5 par value.
At December 31, 1998 no shares were issued or outstanding.

12. Earnings Per Share

     The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>

                                                                 1998          1997         1996
                                                            ----------------------------------------
<S>                                                            <C>           <C>         <C>    
Numerator:
     Net income                                                 $1,860,331    $1,607,801  $1,497,720
                                                            ----------------------------------------

Denominator:
  Denominator for basic earnings
  per share - weighted average shares                              744,247       741,616     740,398

  Effect of dilutive securities:
    Employee stock options                                          82,359        56,618      21,891
                                                            ----------------------------------------

  Dilutive potential common shares
    Denominator for diluted earnings per share - adjusted
    weighted average and assumed conversions                       826,606       798,234     762,289
                                                            ========================================

Basic earnings per share                                             $2.50         $2.17       $2.02
Diluted earnings per share                                           $2.25         $2.04       $1.99
</TABLE>


13. Fair Value of Financial Instruments:

     The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair


                                      -43-

<PAGE>


value estimates are made at a specific point in time based on the type of
financial instrument and relevant market information.

     Because no quoted market price exists for a significant portion of the
Company's financial instruments, the fair values of such financial instruments
are derived based on the amount and timing of future cash flows, estimated
discount rates, as well as management's best judgement with respect to current
economic conditions. Many of the estimates involve uncertainties and matters of
significant judgement and cannot be determined with precision.

     The fair value information provided is indicative of the estimated fair
value of those financial instruments and should not be interpreted as an
estimate of the value of Grange National Banc Corp. taken as a whole. The
disclosures do not address the value of recognized and unrecognized
non-financial assets and liabilities or the value of future anticipated
business.

     The following methods and assumptions were used to estimate the fair values
of significant financial instruments at December 31, 1998 and 1997:

Cash and Due From Banks:

     The carrying amounts of cash and due from banks approximate fair value.

Interest Bearing Deposits:

     Carrying amounts of variable rate or demand deposits approximate fair
value. The fair value of fixed rate or fixed term interest bearing deposits are
estimated based on discounting future cash flows using current rates.

Securities:

     Fair values of securities are based on quoted market prices.

Loans:

     For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values for
mortgage, consumer, commercial real estate and commercial loans are estimated by
discounting future cash flows using interest rates currently being offered with
similar terms to borrowers with similar credit quality.

Deposits:

     The fair value of deposits with no stated maturity; such as, non-interest
bearing demand deposits, variable rate savings, money market and checking
accounts is equal to the carrying amount payable on demand. Fair value of
certificates of deposit are estimated by discounting estimated future cash flows
using current rates offered for deposits of similar maturities.


                                      -44-

<PAGE>


Other:

     The estimated fair values of accrued interest receivable, accrued interest
payable, debt (principally short term including treasury tax and loan deposits),
and other assets and liabilities are deemed to be equal to the amounts
recognized in the consolidated statements of financial position.

     The following table presents the carrying amounts and estimated fair values
of financial instruments at December 31:    
 
<TABLE>
<CAPTION>
                  
                                                                1998                   1997
                                                                ----                   ----
                                                        Carrying      Fair      Carrying      Fair
  (In thousands)                                          Value       Value      Value       Value
                                                        --------------------------------------------
<S>                                                     <C>         <C>         <C>         <C>     
Financial assets:
  Cash and due from banks ..........................    $  2,615    $  2,615    $  2,514    $  2,514
  Interest bearing deposits ........................       5,610       5,610       2,418       2,415
  Investment securities ............................      46,706      46,886      38,208      38,318
  Loans, net .......................................      89,559      94,078      76,228      74,407
  Accrued interest receivable and other assets .....       2,081       2,081       1,731       1,731

Financial liabilities:
  Deposit liabilities ..............................     129,891     131,202     108,789     108,253
  Other borrowed funds .............................       4,471       4,477       2,279       2,279
  Accrued interest payable and  other liabilities...         823         823         711         711
</TABLE>


                   Summary of Quarterly Results of Operations


                                         First     Second       Third     Fourth
In thousands, except per share data)    Quarter    Quarter     Quarter   Quarter
--------------------------------------------------------------------------------
1998
----
Interest income....................     $2,359      $2,457      $2,589    $2,712
Net interest income................      1,320       1,367       1,434     1,543
Provision for loan losses..........         75          50          75        70
Other income.......................        189         170         201       229
Other expenses.....................        830         862         920     1,002
Net income.........................        414         430         463       553
Net income per share:                              
     Basic.........................      $0.57       $0.59       $0.63     $0.71
     Diluted.......................      $0.51       $0.53       $0.56     $0.65
                                                                 

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<PAGE>

                                         First     Second       Third     Fourth
In thousands, except per share data)    Quarter    Quarter     Quarter   Quarter
--------------------------------------------------------------------------------
1997
----
Interest income .........               $1,983      $2,147      $2,298    $2,370
Net interest income .....                1,135       1,228       1,310     1,337
Provision for loan losses                   30          30          55        75
Other income ............                  133         167         188       189
Other expenses ..........                  731         788         798       888
Net income ..............                  362         389         436       420
Net income per share:                   
     Basic ..............               $ 0.50      $ 0.54      $ 0.55    $ 0.58
     Diluted ............               $ 0.47      $ 0.51      $ 0.54    $ 0.52
                                                                                
 
     The above gives retroactive effect to stock dividends and stock splits

Price Range of Common Stock and Dividends:

     The Company's Common Stock is traded in the market. Prior to the stock
offering in 1994 the stock was not actively traded. The market prices are the
prices at which shares have been sold by stockbrokers to the Company's
knowledge. The following firm is known to make a market in the Common Stock of
Grange National Banc Corp.

                                            Hopper Soliday & Company, Inc.
                                            1825 Oregon Pike
                                            Lancaster, PA 17601
                                            (717) 560-3000

     As of March 17, 1998 there were approximately 855 shareholders of record.

<TABLE>
<CAPTION>
1998                               4th Quarter     3rd Quarter      2nd Quarter      1st Quarter
<S>                                   <C>            <C>              <C>             <C>   
Bid............................       $43.50         $38.00           $30.00          $30.62
Ask............................       $47.50         $39.00           $31.00          $31.00
Stock Dividends per Share......        $0.405         None             $0.31           None

<CAPTION>
1997                               4th Quarter     3rd Quarter      2nd Quarter      1st Quarter
<S>                                   <C>            <C>              <C>             <C>   
Bid............................       $27.50         $21.25           $20.75          $20.00
Ask............................       $28.00         $21.75           $21.25          $21.00
Stock Dividends per Share......        $0.23          None             $0.21           None

<CAPTION>
1996                               4th Quarter     3rd Quarter      2nd Quarter      1st Quarter
<S>                                   <C>            <C>              <C>             <C>   
Bid............................       $20.00         $18.25           $16.75          $15.88
Ask............................       $21.00         $18.75           $17.25          $16.38
Stock Dividends per Share......        $0.20          None             $0.17           None
</TABLE>


The above are historical amounts as adjusted for the effects of a two for one
stock split on July 30, 1998.


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<PAGE>


Stock Transfers:                                     Shareholder Services:
Mildred Grose, Assistant Vice-President              Philip O. Farr, Comptroller
P.O. Box 40                                          198 E. Tioga St.
Meshoppen, Pa.  18630                                Tunkhannock, Pa.  18657
(717) 833-2131                                       (717) 836-2100


                                     Offices

<TABLE>
<S>                                                           <C>   
Laceyville                                                    Lawton
Kevin Huyck, Branch Manager                                   Yvonne Nuss, Branch Manager
(570) 869-1522                                                (570) 934-2178

Meshoppen                                                     Bowman's Creek
Mildred Grose, AVP and Br. Mgr.                               Paula C. Coleman, Asst. Cashier and Br. Mgr.
(570) 833-2131                                                (570) 298) 2163

Tunkhannock                                                   Edwardsville
Richard D. Stark, Vice President and Br. Mgr.                 Donald Werts, Asst. Cashier and Br. Mgr.
(570) 836-2100                                                (570) 283-4462

Little Meadows                                                Towanda
Lorraine Corwin, Br. Mgr                                      Karen Glossenger, Branch Manager
(570) 623-2297                                                (570) 265-4711

Back Mountain                                                 Pine Mall
L. Lee Posten, Asst. Cashier and Br. Mgr.                     Debra D. Hannon, Branch Manager
(570) 696-6958                                                (570) 208-1500
</TABLE>


                                 On the Internet
            Web Site: www.grangebank.com  E-Mail: bank@grangebank.com

                                    Officers

                    Robert C. Wheeler, Chairman of the Board

                         John W. Purtell, Vice Chairman

                         Thomas A. McCullough, President

                  Sally A. Steele, Secretary of the Corporation

                        Melvin E. Milner, Vice President

                        Joseph I. Killeen, Vice President

                        Richard D. Stark, Vice President

                           Philip O. Farr, Comptroller


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<PAGE>


                                    Directors

                                  Brian R. Ace,
                           Owner, Laceyville Hardware

                                 Thomas C. Burns
                           Retired; Dentist until 1994

                                 Edward A. Coach
                           Certified Public Accountant

                              Thomas A. McCullough
                      President and Chief Executive Officer
                     of the Bank and the Company since 1991

                                W. Kenneth Price
                      Co-owner of Ken Mar Home Furnishings

                                 John W. Purtell
                         President, S.F. Williams Inc.,
                              automobile dealership

                                 Sally A. Steele
                                    Attorney

                                  R. Levi Tyler
                                  Dairy Farmer

                                Robert C. Wheeler
                       Retired; Chief Executive Officer of
                         The Bank and Company until 1990


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