Exhibit 13

                              Financial Highlights
                              --------------------

In thousands, except per share amounts          2005          2004          2003
--------------------------------------------------------------------------------
Earnings per share                         $    2.73     $    2.61     $    2.78
Dividends per share                        $    1.44     $    1.35     $    1.35
Total Capital                              $  63,799     $  62,376     $  60,807
Total Deposits                             $ 397,867     $ 395,301     $ 407,944
Total Assets                               $ 575,688     $ 563,708     $ 584,590



                                    Contents
                                    --------

Management's Letter............................................................2

Board of Directors.............................................................3

Promotions and Appointments....................................................4

Community Projects and Sponsorships............................................5

Business.......................................................................6

Properties.....................................................................7

Investor Information...........................................................8

Selected Financial Data........................................................9

Management's Discussion and Analysis of Financial Condition
  and Results of Operations...................................................10

Management's Report on Internal Control Over Financial Reporting..............21

Reports of Independent Registered Public Accounting Firm......................22

Financial Statements and Supplementary Data...................................25

    Consolidated Balance Sheets...............................................25

    Consolidated Statements of Income.........................................26

    Consolidated Statements of Stockholders' Equity...........................27

    Consolidated Statements of Cash Flows.....................................28

General Notes to Financial Statements.........................................29

Executive Officers............................................................41

Company Officers..............................................................42

Company Board Members.........................................................43

Customer Services.............................................................44


               Penseco Financial Services Corporation  /  2005 Annual Report   1


<PAGE>


                               Management's Letter
                               -------------------

Dear Shareholder:

This past year was one of significant  progress for Penseco  Financial  Services
Corporation.  Total earnings  increased 4.8%, with core earnings from operations
increasing a healthy 9.6%. Loans grew 14.8% in 2005 while asset quality remained
strong, as we continued to emphasize a strong risk management process.


     Earnings for the twelve months ended December 31, 2005  increased  $268,000
or 4.8% to  $5,869,000  compared  to  $5,601,000  for the  twelve  months  ended
December 31, 2004.  Corresponding earnings per share increased to $2.73 for 2005
compared to $2.61 for 2004. Core after-tax  earnings from operations  (excluding
one-time  security  gains of  $357,000  in 2004 and  losses of  $13,000 in 2005)
increased $513,000 or 9.6% in 2005.

     The major  component  of our  increased  earnings  was an  increase  in net
interest income to $19.6 million in 2005 from $17.8 million for 2004. This 10.1%
increase  in net  interest  income,  and the  corresponding  increase in our tax
equivalent  percentage margin to 3.57% in 2005 from 3.18% in 2004, was driven by
an  increase  in net loans to $317.6  million at year end 2005.  This marked the
second  consecutive  year of double digit loan  growth.  Loan growth in 2005 was
primarily in our residential real estate portfolio.

     Asset  quality  continues to be strong.  Provision  for loan losses in 2005
ended at $3.8 million or 1.2% of total loans compared to $3.6 million or 1.3% in
2004.  Net charge offs as a percentage  of average  loans were .02% in both 2005
and 2004.  Given the  historical  performance  of our loan portfolio and our low
levels of charge  offs,  management  feels  the  level of loan loss  reserve  is
adequate.

     Penseco dedicated  significant  resources during 2005 to the implementation
of Section 404 of the  Sarbanes-Oxley  Act.  Section 404 requires  management to
establish a series of documented  internal  controls.  Our independent  auditors
then  test  the  effectiveness  of  these  controls.  Both  management  and  the
independent  auditors'  attestations to the  effectiveness of these controls are
contained in this annual report.

     In June of 2005,  Penseco contracted with Information  Technology,  Inc. to
provide state of the art  application  software to run on our existing IBM AS400
platform.  The  conversion  to the new  software is  occurring  during the first
quarter of 2006 and will  provide  efficiencies  that will enable us to keep our
customer  service fees low,  greatly reduce  account  opening time and provide a
much improved internet banking and bill payment product.

     In July,  our  Board  of  Directors  appointed  Penseco  Financial  Service
Corporation's first Nominating and Corporate Governance Committee. The Committee
is comprised of independent  directors and is charged with developing  effective
Corporate  Governance  procedures  for our company.  Our Boards'  commitment  to
strong  corporate  governance  will help  ensure  continued  confidence  in your
investment in the company.

     As you know,  our President and CEO, Otto P.  Robinson,  Jr., had announced
his intentions to retire at the end of 2005. Mr. Robinson had been President and
CEO of our  company  for the last 30 years.  During  that time,  our company has
thrived as one of the  strongest  financial  institutions  under $1.0 billion in
assets in the country.  Our  shareholders,  employees  and customers are greatly
appreciative for his 30 years of leadership and dedication to our  organization.
Mr. Robinson will continue to serve as a member of our Board of Directors.

     The past year's successes are attributed to the hard work of our employees.
During the year, the following  employees  were promoted and appointed:  Melissa
McLain was named Assistant Branch Operations Officer of the Mount Pocono Office;
Sheila  Caprario was named  Branch  Operations  Officer of the East  Stroudsburg
Office;  Paul J. Macknosky,  III was appointed Trust Investment  Officer. We are
pleased to  announce  that  George F.  Edwards,  Jr., a long time  resident  and
businessman  in the borough of Moscow,  was named to the  Advisory  Board of our
North Pocono Office.

     As  we  transition  into  2006,  our  emphasis  will  be on  improving  our
competitive  position  in our  primary  markets in an effort to grow our balance
sheet, increase revenues and improve earnings for the years ahead.




Sincerely yours,

Craig W. Best, President and CEO and D. William Hume, Chairman of the Board


2   Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


                               Board of Directors
                               ------------------

This page of the 2005 Annual  Report to  Shareholders  contains one  picture.  A
description of the picture follows:


Seated left to right:


Emily S. Perry,  Edwin J. Butler,  P. Frank Kozik,  Secretary,  D. William Hume,
Chairman  of the  Board,  Craig W. Best,  President  and CEO,  Attorney  Otto P.
Robinson, Jr., Russell C. Hazelton, and Sandra C. Phillips


Standing left to right:


Robert W.  Naismith,  Ph.D.,  James B.  Nicholas,  Richard E.  Grimm,  Executive
Vice-President and Treasurer, Steven L. Weinberger, and James G. Keisling


                Penseco Financial Services Corporation  /  2005 Annual Report  3


<PAGE>


                            Promotions & Appointments
                            -------------------------

This page of the 2005 Annual Report to  Shareholders  contains six  pictures.  A
description of each picture follows, starting at the top, from left to right:

Craig W. Best
President and CEO

D. William Hume
Chairman of the Board

George F. Edwards, Jr.
North Pocono Advisory Board

Sheila Caprario
Branch Operations Officer

Paul J. Macknosky III
Trust Investment Officer

Melissa McLain
Assistant Branch Operations Officer


4   Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


                       Community Projects and Sponsorships
                       -----------------------------------


This page depicts the Company's involvement in Community Events.


                Penseco Financial Services Corporation  /  2005 Annual Report  5


<PAGE>


PENSECO FINANCIAL SERVICES CORPORATION


Business


GENERAL


PENSECO FINANCIAL SERVICES CORPORATION,  (the "Company"), which is headquartered
in Scranton,  Pennsylvania, was formed under the general corporation laws of the
State of Pennsylvania in 1997 and is registered as a financial  holding company.
The  Company  became  a  holding  company  upon  the  acquisition  of all of the
outstanding  shares of Penn  Security  Bank and Trust  Company (the  "Bank"),  a
state-chartered   bank,  on  December  31,  1997.  The  Company  is  subject  to
supervision  by the  Federal  Reserve  Board.  The  Bank,  as a  state-chartered
financial institution, is subject to supervision,  regulation and examination by
the Federal Deposit  Insurance  Corporation and the  Pennsylvania  Department of
Banking.

     The Company's  principal  banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania,  containing trust, investor services, marketing,
audit,  credit card,  human  resources,  executive,  data processing and central
bookkeeping offices. There are eight additional offices.


     Through its banking subsidiary,  the Company generates interest income from
its outstanding loans receivable and its investment  portfolio.  Other income is
generated  primarily  from  merchant  transaction  fees,  trust fees and service
charges on deposit  accounts.  The Company's  primary costs are interest paid on
deposits and  borrowings  and general  operating  expenses.  The Bank provides a
variety of commercial and retail banking  services to business and  professional
customers,  as well as retail  customers,  on a personalized  basis.  The Bank's
primary lending  products are real estate,  commercial and consumer  loans.  The
Bank also offers ATM access,  credit cards,  active investment  accounts,  trust
department services and other various lending,  depository and related financial
services.  The Bank's  primary  deposit  products are savings and demand deposit
accounts and  certificates  of deposit.  The Company also offers  collateralized
repurchase  agreements,  that have a one day maturity, as an alternative deposit
option for its customers.

     The Bank has a third party  marketing  agreement  with  National  Financial
Services (formerly Fiserv Investor Services, Inc.) that allows the bank to offer
a full range of securities,  brokerage and annuity sales to its  customers.  The
Investor  Services  division  is located in the  headquarters  building  and the
services are offered throughout the entire branch system.

     The Company is not dependent  upon a single  customer,  or a few customers,
the loss of one or more of which  would  have a material  adverse  effect on its
operations.  The operations and earnings of the  Corporation  are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.


COMPETITION


The Bank operates in a competitive environment in which it must share its market
with many local  independent banks as well as several banks which are affiliates
or  branches  of very large  regional  holding  companies.  The Bank  encounters
competition from diversified financial institutions,  ranging in size from small
banks to the nationwide banks operating in its region. The competition  includes
commercial banks,  savings and loan associations,  credit unions,  other lending
institutions and mortgage originators.

     The  principal  competitive  factors  among the Bank's  competitors  can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits,  especially time deposits,  and interest rates
and fees  charged to  customers  on loans are very  competitive.  From a service
perspective,  the Bank competes in areas such as convenience of location,  types
of services, service costs and banking hours.


6  Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


EMPLOYEES


As  of  December  31,  2005,  the  Company  employed  189  full-time  equivalent
employees.  The employees of the Company are not  represented  by any collective
bargaining  group.  Management  of the  Company  considers  relations  with  its
employees to be good.


SUPERVISION AND REGULATION


The Company is  registered  as a bank  holding  company  under the Bank  Holding
Company Act of 1956,  as amended,  and, as such, is subject to  supervision  and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board" or "FRB").  The Company is required to file quarterly  reports of
its operations with the FRB.

     As a  financial  holding  company,  the Company is  permitted  to engage in
banking-related  activities as authorized by the Federal Reserve Board, directly
or through  subsidiaries or by acquiring  companies already  established in such
activities subject to the FRB regulations relating to those activities.

     The Bank,  as a  Pennsylvania  state-chartered  financial  institution,  is
subject to  supervision,  regulation  and  examination  by the  Commonwealth  of
Pennsylvania  Department  of  Banking  and  by  the  Federal  Deposit  Insurance
Corporation  (the  "FDIC"),  which  insures  the Bank's  deposits to the maximum
extent permitted by law.


FORWARD LOOKING INFORMATION


This Form 10-K contains forward-looking informational statements, in addition to
the  historical  financial  information  required by the Securities and Exchange
Commission.  There are certain  risks and  uncertainties  associated  with these
forward-looking statements which could cause actual results to differ materially
from those  stated  herein.  Such risks are  discussed  in the section  entitled
"Management  Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations".  These forward-looking  statements reflect management's analysis as
of this point in time.  Readers  should  review the other  documents the Company
periodically files with the Securities and Exchange  Commission in order to keep
apprised of any material changes.


Properties


There  are  nine  offices   positioned   throughout  the  greater   Northeastern
Pennsylvania  region.  They are located in the South  Scranton,  East  Scranton,
Green Ridge, and Central City sections of Scranton,  the Borough of Moscow,  the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners.  Through these offices, the
Company  provides  a full  range of  banking  and trust  services  primarily  to
Lackawanna, Wayne, Monroe and the surrounding counties. All offices are owned by
the Bank or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc.,
with the exception of the Mount Pocono Office, which is owned by the Bank but is
located on land occupied under a long-term lease. The Company also owns property
in the  Borough  of  Dalton,  Lackawanna  County,  to use for  potential  future
expansion.

     The principal office,  located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district,  houses the
operations,   trust,  investor  services,   marketing,  credit  card  and  audit
departments  as well as the  Company's  executive  offices.  Several  remote ATM
locations  are leased by the Bank,  which are  located  throughout  Northeastern
Pennsylvania.  All branches and ATM locations  are equipped with closed  circuit
television monitoring.


                Penseco Financial Services Corporation  /  2005 Annual Report  7


<PAGE>


                              Investor Information

Stockholders  may obtain,  without charge,  a copy of the Company's Form 10-K by
writing  to the  Controller's  office or  accessing  the  Company's  website  at
www.pennsecurity.com.  Questions  may be directed to any branch  location of the
Company or by contacting the Controller's office at:


                           Patrick Scanlon, Controller
                     Penseco Financial Services Corporation
                           150 North Washington Avenue
                        Scranton, Pennsylvania 18503-1848
                                 1-800-327-0394


Management of the Company is aware of the following  securities dealers who make
a market in the Company stock:

Archipelago Trading Services, Inc.                    Knight Equity Markets, LP
Boenning & Scattergood, Inc.                          Monroe Securities, Inc.
Ferris, Baker, Watts, Inc.                            Ryan, Beck & Company, Inc.
Hill Thompson Magid & Company, Inc.                   UBS Capital Markets, LP
Jefferies & Company, Inc.


The Company's capital stock is traded on the  "Over-the-Counter"  BULLETIN BOARD
under the symbol "PFNS". The following table sets forth the price range together
with  dividends  paid for each of the past two years.  These  quotations  do not
necessarily reflect the value of actual transactions.


                               Dividends Paid
2005              High     Low   Per Share
---------------------------------------------
First Quarter     $ 41    $ 41   $  .33
Second Quarter      47      42      .33
Third Quarter       44      41      .33
Fourth Quarter      43      41      .45
                                 ------
                                 $ 1.44
                                 ======


                               Dividends Paid
2004              High     Low   Per Share
---------------------------------------------
First Quarter     $ 41    $ 38   $  .30
Second Quarter      41      35      .30
Third Quarter       41      34      .30
Fourth Quarter      42      40      .45
                                 ------
                                 $ 1.35
                                 ======


A graph depicts Dividends Paid (in millions)           Year
-----------------------------------------------------------
               $ 3,094                                 2005
                 2,900                                 2004
                 2,900                                 2003
                 2,899                                 2002
                 2,685                                 2001


As of February 10, 2006 there were approximately 921 stockholders of the Company
based on the number of holders of record.


Reference should be made to the information about the Company's dividend policy
and regulatory guidelines on pages 17 and 39.


TRANSFER AGENT


Penn Security Bank and Trust Company,  Trust  Department,  150 North  Washington
Avenue,  Scranton,  Pennsylvania  18503-1848.  Stockholders' questions should be
directed to the Bank's Trust Department at 570-346-7741.


                     QUARTERLY FINANCIAL AMOUNTS (unaudited)
                    (in thousands, except per share amounts)


                            First    Second     Third    Fourth
2005                       Quarter   Quarter   Quarter   Quarter
----------------------------------------------------------------
Net Interest Income        $ 4,697   $ 4,888   $ 4,960   $ 5,045
Provision for Loan Losses      122         -         -       141
Other Income                 2,346     2,126     2,564     1,838
Other Expenses and Taxes     5,675     5,494     5,827     5,336
Net Income                   1,246     1,520     1,697     1,406
Earnings Per Share         $  0.58   $  0.71   $  0.79   $  0.65


                           First     Second     Third    Fourth
2004                       Quarter   Quarter   Quarter   Quarter
----------------------------------------------------------------
Net Interest Income        $ 4,216   $ 4,363   $ 4,591   $ 4,636
Provision for Loan Losses       18         3       114         9
Other Income                 2,414     2,006     2,830     2,344
Other Expenses and Taxes     5,467     5,003     5,692     5,493
Net Income                   1,145     1,363     1,615     1,478
Earnings Per Share         $  0.53   $  0.64   $  0.75   $  0.69


8  Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


                            Selected Financial Data


(in thousands, except per share amounts)

RESULTS OF OPERATIONS:

<TABLE>
<CAPTION>
                                     2005         2004         2003         2002         2001
---------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>          <C>
Interest Income                 $  28,170    $  25,385    $  26,014    $  27,899    $  31,860
Interest Expense                    8,580        7,579        8,228        8,011       12,524
---------------------------------------------------------------------------------------------
Net Interest Income                19,590       17,806       17,786       19,888       19,336
Provision for Loan Losses             263          144          476          813          954
---------------------------------------------------------------------------------------------
Net Interest Income after
   Provision for Loan Losses       19,327       17,662       17,310       19,075       18,382
Other Income                        8,874        9,594       10,743       11,032        9,186
Other Expenses                     20,719       20,584       20,454       21,098       20,077
Income Taxes                        1,613        1,071        1,628        2,256        1,869
---------------------------------------------------------------------------------------------
Net Income                      $   5,869    $   5,601    $   5,971    $   6,753    $   5,622


BALANCE SHEET AMOUNTS:
Assets                          $ 575,688    $ 563,708    $ 584,590    $ 496,956    $ 482,551
Investment Securities           $ 229,957    $ 262,678    $ 293,125    $ 139,132    $ 128,623
Net Loans                       $ 317,562    $ 276,576    $ 236,882    $ 285,509    $ 320,208
Deposits                        $ 397,867    $ 395,301    $ 407,944    $ 414,664    $ 406,531
Long-Term Borrowings            $  75,401    $  84,620    $  93,523    $       -    $       -
Stockholders' Equity            $  63,799    $  62,376    $  60,807    $  58,975    $  54,648

PER SHARE AMOUNTS:
Earnings per Share              $    2.73    $    2.61    $    2.78    $    3.14    $    2.62
Dividends per Share             $    1.44    $    1.35    $    1.35    $    1.35    $    1.25
Book Value per Share            $   29.70    $   29.04    $   28.31    $   27.46    $   25.44
Common Shares Outstanding       2,148,000    2,148,000    2,148,000    2,148,000    2,148,000

FINANCIAL RATIOS:
Net Interest Margin                 3.57%        3.18%        3.24%        4.21%        4.30%
Return on Average Assets            1.03%         .96%        1.05%        1.37%        1.18%
Return on Average Equity            9.23%        9.11%        9.87%       11.79%       10.57%
Average Equity to Average Assets   11.19%       10.57%       10.59%       11.58%       11.19%
Dividend Payout Ratio              52.75%       51.72%       48.56%       42.99%       47.71%
</TABLE>



                Penseco Financial Services Corporation  /  2005 Annual Report  9


<PAGE>


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

The following  discussion is intended to provide  information  to facilitate the
understanding  and assessment of  significant  changes and trends related to the
financial  condition  of the  Company and the  results of its  operations.  This
discussion and analysis should be read in conjunction with the Company's audited
consolidated   financial  statements  and  notes  thereto.  All  information  is
presented in thousands of dollars, except as indicated.


Critical Accounting Policies

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  assets and  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.

     Provision  (allowance)  for possible  loan losses - The  provision for loan
losses is based on past loan loss  experience,  management's  evaluation  of the
potential loss in the current loan portfolio under current  economic  conditions
and such other  factors as, in  management's  best  judgement,  deserve  current
recognition  in  estimating  loan losses.  The annual  provision for loan losses
charged to  operating  expense is that amount which is  sufficient  to bring the
balance of the allowance for possible loan losses to an adequate level to absorb
anticipated losses.

     Actuarial  assumptions  associated with pension,  post-retirement and other
employee benefit plans - These assumptions include discount rate, rate of future
compensation increases and expected return on plan assets.

     Provision for income taxes - Management  believes that the  assumptions and
judgements  used  to  record  tax  related  assets  or  liabilities   have  been
appropriate.

     Fair  value of certain  investment  securities  - Fair value of  investment
securities are based on quoted market prices.

     Loan  servicing  rights -  Mortgage  servicing  rights  are  evaluated  for
impairment  based on the fair value of those  rights.  Fair values are estimated
using  discounted  cash flows  based on current  market  rates of  interest  and
current expected future prepayment rates. For purposes of measuring  impairment,
the rights must be stratified by one or more predominant risk characteristics of
the underlying loans. The Company stratifies its capitalized  mortgage servicing
rights  based on the  product  type,  interest  rate and term of the  underlying
loans. The amount of impairment  recognized is the amount,  if any, by which the
amortized cost of the rights for each stratum exceed the fair value.

     Premium  amortization  - The  amortization  of premiums on  mortgage-backed
securities  is  done  based  on  management's  estimate  of  the  lives  of  the
securities,  adjusted,  when  necessary,  for advanced  prepayments in excess of
those estimates.


SUMMARY

Net  earnings  for 2005  totalled  $5,869,  an increase of $268 or 4.8% from the
$5,601  earned in 2004,  which was a  decrease  of $370 or 6.2% from the  $5,971
earned in 2003.  Net earnings per share were $2.73 in 2005,  compared with $2.61
in 2004 and $2.78 in 2003. Core after tax earnings for 2005,  excluding one time
security  gains or losses,  increased by $513 or 9.6% compared  with 2004.  Core
after tax earnings  for 2004  decreased  $381 or 6.6%  compared  with 2003.  Net
earnings for 2005 increased from 2004 mainly due to higher  interest income from
strong  loan  demand  experienced  during  2005.  This  was  offset  by a higher
provision  for loan  losses and lower  non-interest  income.  Income  taxes were
higher largely from increased  operating income and lower tax-free  income.  Net
earnings  for 2004  decreased  from 2003  mainly due to the  reduction  of other
operating income from the sale of fixed-rate loans which peaked during the third
quarter of 2003.  This was offset by a lower provision for loan losses and lower
income taxes.

     The Company's  return on average  assets was 1.03% in 2005 compared to .96%
in 2004 and 1.05% in 2003.  Return on average equity was 9.23%,  9.11% and 9.87%
in 2005, 2004 and 2003, respectively.


A graph depicts Net Income (in millions)    Year
------------------------------------------------
            $ 5,869                         2005
              5,601                         2004
              5,971                         2003
              6,753                         2002
              5,622                         2001


A graph depicts Return on Average Assets    Year
------------------------------------------------
            1.03%                           2005
             .96%                           2004
            1.05%                           2003
            1.37%                           2002
            1.18%                           2001



10 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


RESULTS OF OPERATIONS


Net Interest Income

The principal component of the Company's earnings is net interest income,  which
is the difference  between interest and fees earned on  interest-earning  assets
and interest paid on deposits and other borrowings.

     Net interest  income  increased  $1.8 million or 10.1% to $19.6 million for
2005 compared to $17.8 million for 2004. Loan income was higher overall for 2005
due to  increases  in the  volume of new loans and  interest  rates.  Investment
income  decreased due in part to the return of principal on the  Mortgage-Backed
Securities  portfolio and the sale of $10 million long term fixed rate municipal
securities during the first quarter of 2005. Interest expense for 2005 increased
$1.0 million or 13.2% to $8.6 million for 2005 compared to $7.6 million in 2004.
The  increase is primarily  due to  increases  in interest  rates as the Federal
Reserve continued to raise interest rates through 2005.

     Net  interest  income  for 2004 was  $17.8  million,  which  was  basically
unchanged from 2003.  Loan income was lower overall for 2004 since the volume of
new loans and rate increases  occurred primarily in the second half of the year.
Investment  income  increased  due to  purchases  of  tax-exempt  securities  at
favorable  tax-equivalent  yields.  Interest expense for 2004 remained low as to
deposits,  offset by an increase  in  long-term  borrowing  costs in 2004 versus
2003, since the long-term debt was not incurred until March 2003.

     Net  interest   income,   when   expressed  as  a  percentage   of  average
interest-earning  assets,  is referred to as net interest margin.  The Company's
net interest  margin for the year ended December 31, 2005 was 3.6% compared with
3.2% for the year ended  December 31, 2004 and 3.2% for the year ended  December
31, 2003.

     Interest  income in 2005 totalled $28.2 million,  compared to $25.4 million
in  2004,  an  increase  of  $2.8  million  or  11.0%.   The  yield  on  average
interest-earning  assets  increased  to 5.1% in 2005,  compared to 4.5% in 2004.
Average  interest-earning assets decreased in 2005 to $548.2 million from $560.3
million in 2004.  Average  loans,  which are  typically  the  Company's  highest
yielding earning assets, increased $41.8 million or 16.3% in 2005. Average loans
represented 54.3% of 2005 average  interest-earning assets, compared to 45.7% in
2004.  Income on loans  increased  $5.0 million or 36.8% in 2005,  compared to a
decrease  in  loan  income  of $1.0  million  or 6.8%  during  2004.  Investment
securities  decreased  on  average by $55.1  million or 18.9% to $237.1  million
compared to $292.2 million in 2004. Income on investments  declined $2.1 million
or 17.9% to $9.6 million in 2005, from $11.7 million in 2004.

     The average rate paid on interest-bearing liabilities during 2005 was 2.1%,
compared to 1.7% in 2004.

     Interest  income in 2004 totalled $25.4 million,  compared to $26.0 million
in 2003, a decrease of 2.3%.  The yield on average  interest-earning  assets was
4.5% in  2004,  compared  to  4.8%  in  2003.  Average  interest-earning  assets
increased in 2004 to $560.3 million from $548.2 million in 2003.  Average loans,
which are typically the Company's  highest  yielding  earning assets,  decreased
$6.4 million in 2004, while investment  securities increased on average by $51.9
million.  Average  loans  represented  45.7%  of 2004  average  interest-earning
assets, compared to 47.9% in 2003.

     Interest  expense also  decreased in 2004 to $7.6 million from $8.2 million
in 2003, a decrease of $.6 million or 7.3%.

The average rate paid on interest-bearing liabilities during 2004 was 1.7%,
compared to 1.9% in 2003.


The most significant impact on net interest income between periods is derived
from the interaction of changes in the volume of and rates earned or paid on
interest-earning assets and interest-bearing liabilities. The volume of earning
dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods.


A graph depicts Net Interest Income (in millions)      Year
-----------------------------------------------------------
                  $  19,590                            2005
                     17,806                            2004
                     17,786                            2003
                     19,888                            2002
                     19,336                            2001


                Penseco Financial Services Corporation  /  2005 Annual Report 11


<PAGE>


Distribution of Assets, Liabilities and Stockholders'  Equity/Interest Rates and
Interest Differential


The table below presents  average weekly  balances,  interest  income on a fully
taxable  equivalent basis and interest expense,  as well as average rates earned
and paid on the Company's  major asset and  liability  items for the years 2005,
2004 and 2003.


<TABLE>
<CAPTION>
                                                    2005                            2004                            2003
------------------------------------------------------------------------------------------------------------------------------------
                                        Average   Revenue/   Yield/     Average   Revenue/   Yield/     Average   Revenue/   Yield/
                                        Balance   Expense     Rate      Balance   Expense    Rate       Balance   Expense     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
ASSETS
Investment securities:
  Available-for-sale:
    U.S. Treasury securities           $   1,849  $      7    6.87%    $   6,206  $    370    5.96%    $  30,127  $  1,250    4.15%
    U.S. Agency obligations              116,429     3,650    3.13       133,231     4,340    3.26        79,520     3,660    4.60
    States & political subdivisions       23,873     1,006    6.38        41,142     1,931    7.11        20,433       947    7.02
    Federal Home Loan Bank stock           4,907       143    2.91         5,704        94    1.65         4,911        97    1.98
    Other                                  1,765        47    2.66           549        13    2.37           435        11    2.53
  Held-to-maturity:
    U.S. Agency obligations               59,036     2,631    4.46        74,291     3,334    4.49        75,194     3,365    4.48
    States & political subdivisions       29,250     1,610    8.34        31,103     1,545    7.53        29,730     1,621    8.26
Loans, net of unearned income:
  Real estate mortgages                  217,942    13,396    6.15       185,440    10,044    5.42       194,135    11,246    5.79
  Commercial                              42,820     2,782    6.50        36,312     1,814    5.00        31,288     1,497    4.78
  Consumer and other                      37,037     2,391    6.46        34,287     1,774    5.17        36,997     1,890    5.11
Federal funds sold                         6,011       176    2.93         5,434        58    1.07        35,620       340     .95
Interest on balances with banks            7,302       211    2.89         6,589        68    1.03         9,781        90     .92
-----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                  548,221  $ 28,170    5.14%      560,288  $ 25,385    4.53%      548,171  $ 26,014    4.75%
-----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                    8,961                           8,732                           8,760
Bank premises and equipment                9,184                           9,593                           9,984
Accrued interest receivable                2,967                           3,225                           3,144
Other assets                               2,663                           3,040                           4,482
Less: Allowance for loan losses            3,686                           3,523                           3,411
-----------------------------------------------------------------------------------------------------------------------------------
Total Assets                           $ 568,310                       $ 581,355                       $ 571,130

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand-Interest bearing              $  32,821  $    190     .58%    $  31,425  $    115     .37%    $  28,738  $    144     .50%
  Savings                                 79,262       275     .35        81,812       346     .42        76,983       472     .61
  Money markets                           84,115     1,246    1.48        89,161       707     .79        87,973       737     .84
  Time - Over $100                        26,088       808    3.10        28,067       806    2.87        32,525       844    2.59
  Time - Other                            86,995     2,501    2.87        92,752     1,985    2.14       105,858     2,873    2.71
Repurchase agreements                     27,546       415    1.51        22,817       167     .73        22,266       183     .82
Short-term borrowings                        378        19    5.03           595        10    1.68           699        11    1.57
Long-term borrowings                      79,919     3,126    3.91        88,955     3,443    3.87        76,401     2,964    3.88
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                 417,124  $  8,580    2.06%      435,584  $  7,579    1.74%      431,443$    8,228    1.91%
-----------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing             86,302                          82,757                          76,421
All other liabilities                      1,270                           1,545                           2,763
Stockholders' equity                      63,614                          61,469                          60,503
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                 $ 568,310                       $ 581,355                       $ 571,130
Interest Spread                                               3.08%                           2.79%                           2.84%
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                               $ 19,590                        $ 17,806                        $ 17,786

FINANCIAL RATIOS
Net interest margin                                           3.57%                           3.18%                           3.24%
Return on average assets                                      1.03%                            .96%                           1.05%
Return on average equity                                      9.23%                           9.11%                           9.87%
Average equity to average assets                             11.19%                          10.57%                          10.59%
Dividend payout ratio                                        52.75%                          51.72%                          48.56%
</TABLE>


12 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE


<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2005 compared to 2004                 of Change   Volume        Rate       Volume
             ----------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>          <C>
EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities          $   (243)  $   (260)   $     56     $   (39)
                 U.S. Agency obligations               (690)      (548)       (173)         31
                 States & political subdivisions       (925)      (810)       (197)         82
                 Equity securities                       83          7          71           5
               Held-to-maturity:
                 U.S. Agency obligations               (703)      (685)        (22)          4
                 States & political subdivisions         65        (92)        165          (8)
             Loans, net of unearned income:
               Real estate mortgages                  3,352      1,762       1,354         236
               Commercial                               968        325         545          98
               Consumer and other                       617        142         442          33
             Federal funds sold                         118          6         101          11
             Interest bearing balances with banks       143          7         123          13
             ----------------------------------------------------------------------------------
               Total Interest Income                  2,785       (146)      2,465         466
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                 75          5          66           4
LIABILITIES    Savings                                  (71)       (11)        (57)         (3)
               Money markets                            539        (40)        615         (36)
               Time - Over $100                           2        (57)         65          (6)
               Time - Other                             516       (123)        677         (38)
             Repurchase agreements                      248         35         178          35
             Short-term borrowings                        9         (4)         20          (7)
             Long-term borrowings                      (317)      (350)         36          (3)
             ----------------------------------------------------------------------------------
               Total Interest Expense                 1,001       (545)      1,600         (54)
             ----------------------------------------------------------------------------------
               Net Interest Income                 $  1,784   $    399    $    865     $   520
             ==================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2004 compared to 2003                 of Change   Volume        Rate       Volume
             ----------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>          <C>
EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities          $   (880)  $   (993)   $    545     $  (432)
                 U.S. Agency obligations                680      2,471      (1,066)       (725)
                 States & political subdivisions        984        959          12          13
                 Equity securities                       (1)        19         (17)         (3)
               Held-to-maturity:
                 U.S. Agency obligations                (31)       (40)          9           -
                 States & political subdivisions        (76)        75        (169)         18
             Loans, net of unearned income:
               Real estate mortgages                 (1,202)      (503)       (718)         19
               Commercial                               317        240          69           8
               Consumer and other                      (116)      (138)         22           -
             Federal funds sold                        (282)      (287)         43         (38)
             Interest bearing balances with banks       (22)       (29)         11          (4)
             ----------------------------------------------------------------------------------
               Total Interest Income                   (629)     1,774      (1,259)     (1,144)
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                (29)        13         (37)         (5)
LIABILITIES    Savings                                 (126)       29         (146)         (9)
               Money markets                            (30)        10         (44)          4
               Time - Over $100                         (38)      (115)         91         (14)
               Time - Other                            (888)      (355)       (603)         70
             Repurchase agreements                      (16)         5         (20)         (1)
             Short-term borrowings                       (1)        (2)          1           -
             Long-term borrowings                       479        487          (7)         (1)
             ----------------------------------------------------------------------------------
               Total Interest Expense                  (649)        72        (765)         44
             ----------------------------------------------------------------------------------
               Net Interest Income                 $     20   $  1,702    $   (494)    $(1,188)
             ==================================================================================
</TABLE>


                Penseco Financial Services Corporation  /  2005 Annual Report 13


<PAGE>


Provision for Loan Losses


The  provision  for loan losses  represents  management's  determination  of the
amount  necessary  to bring  the  allowance  for  loan  losses  to a level  that
management  considers  adequate to reflect the risk of future losses inherent in
the Company's loan portfolio.

     The  provision  for loan  losses  was $263 in 2005,  an  increase  of 82.6%
compared  to  $144  for  2004.  The  increase  in the  provision  was due to the
Company's increased commercial loan portfolio.

     The Company  believes that the judgments used in establishing the Allowance
for Loan Losses are based on reliable information.  In assessing the sufficiency
of the Allowance for Loan Losses, management considers, how well prior estimates
have related to actual  experience.  The Company  continually  monitors the risk
elements,  historical rates and other data used in establishing the allowance on
a periodic basis. The Company has not found it necessary to change the allowance
by material  amounts,  which would call into  question  the  reliability  of the
judgments used in its calculation.

     There are also no particular  risk elements in the local economy that put a
group or category of loans at increased risk,  however the Company has increased
its portfolio of commercial  loans,  which  typically bear a higher risk.  These
loans are typically secured by real estate to minimize this risk.

     The process of  determining  the adequacy of the  allowance is  necessarily
judgmental and subject to changes in external conditions. Accordingly, there can
be no assurance  that existing  levels of the allowance  will  ultimately  prove
adequate to cover actual loan losses.


OTHER INCOME

The following  table sets forth  information by category of other income for the
Company for the past three years:

Years Ended December 31,                        2005          2004          2003
--------------------------------------------------------------------------------
Trust department income                     $  1,479      $  1,353      $  1,311
Service charges on deposit accounts              940         1,056         1,133
Merchant transaction income                    4,521         5,001         5,005
Other fee income                               1,575         1,650         1,630
Other operating income                           372           177         1,323
Realized (losses) gains on securities, net       (13)          357           341
--------------------------------------------------------------------------------
  Total Other Income                        $  8,874      $  9,594      $ 10,743
================================================================================

Other income  decreased $720 or 7.5% during 2005 to $8,874 from $9,594 for 2004.
Service  charge income  decreased  $116 or 11.0%.  Merchant  transaction  income
declined $480 or 9.6%, mainly from lower volumes.  Other fee income declined $75
or 4.5%,  including  reduced  brokerage  income  of $140 or 27.5%.  The  Company
experienced a loss on securities of $13 in 2005 compared to a gain on securities
of $357 in 2004.  Offsetting  these declines were increases in trust  department
income of $126 or 9.3% and other operating income of $195 or 110.2%.

     Other income  decreased  $1,149 or 10.7% during 2004 to $9,594 from $10,743
for 2003.  Service charge income  decreased $77 or 6.8%.  Other operating income
decreased  $1,146,  mostly due to a reduction  of $1,083 in gains on the sale of
refinanced mortgage loans in the secondary market, which peaked during the third
quarter of 2003, while interest rates were falling.  Refinancing activity slowed
as  interest  rates  increased  during  2004.  Offsetting  these  declines  were
increases in other operating  income,  trust income of $42 or 3.2% and brokerage
income of $85 or 20.0%, mainly from increased business.


OTHER EXPENSES

The following table sets forth information by category of other expenses for the
Company for the past three years:

Years Ended December 31,                        2005          2004          2003
--------------------------------------------------------------------------------
Salaries and employee benefits              $  9,261      $  9,165      $  9,010
Occupancy expenses, net                        1,377        1,255         1,388
Furniture and equipment expenses               1,078        1,136         1,175
Merchant transaction expenses                  3,646        4,058         4,158
Other operating expenses                       5,357        4,970         4,723
--------------------------------------------------------------------------------
  Total Other Expenses                      $ 20,719      $ 20,584      $ 20,454
================================================================================

Other  expenses  increased $135 or 1% for 2005 to $20,719 from $20,584 for 2004.
Occupancy  expense  increased $122 or 9.7%. Other operating  expenses  increased
$387  or  7.8%,  mainly  due  to  increased  professional   services.   Merchant
transaction expense declined $412 or 10.2% due to lower volumes.

     Other  expenses  increased  $130 or 1% for 2004 to $20,584 from $20,454 for
2003.  Salaries and  employee  benefits  increased  $155 to $9,165 for 2004 from
$9,010 for 2003,  primarily due to merit increases and health care costs.  Other
operating expenses increased $247 or 5.2%, mainly due to increased  professional
expenses.  Occupancy  expense  decreased $133,  largely from lower  depreciation
expense.


INCOME TAXES

Federal income tax expense increased $542 or 50.6% to $1,613 in 2005 compared to
$1,071 in 2004, due to increased operating income and decreased tax-free income.

     Federal  income  tax  expense  decreased  $557 or 34.2% to  $1,071  in 2004
compared  to $1,628 in 2003,  due to  increased  tax free  income and  decreased
operating income.

     The Company's  effective income tax rate for 2005, 2004 and 2003 was 21.6%,
16.1% and 21.4%, respectively.

     The Company uses the asset and liability  method of accounting for deferred
income  taxes.  If  current  available   information  raises  doubt  as  to  the
realization of deferred tax assets,  a valuation  allowance is established.  The
Company evaluates the recoverability of deferred tax assets based on its ability
to generate future profits. The Company employs budgeting and periodic reporting
processes to continually monitor its progress. Historically, the Company has had
sufficient profits for recovery of deferred tax benefits.

     For further  discussion  pertaining to Federal income taxes, see Note 14 to
the Consolidated Financial Statements.


FINANCIAL CONDITION

Total assets  increased  $12.0 million or 2.1% during 2005 to $575.7  million at
December 31, 2005 compared to $563.7  million at December 31, 2004. For the year
ended December 31, 2004,  total assets decreased $20.9 million or 3.6% to $563.7
million compared to $584.6 million at December 31, 2003.


INVESTMENT PORTFOLIO

The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.


     The following  table presents the carrying value, by security type, for the
Company's investment portfolio:

December 31,                                2005            2004            2003
--------------------------------------------------------------------------------
U.S. Treasury securities               $       -       $   5,077       $  15,387
U.S. Agency securities                   171,308         190,547         221,156
States & political subdivisions           50,887          60,789          50,228
Equity securities                          7,762           6,265           6,354
--------------------------------------------------------------------------------
  Total Investment Securities          $ 229,957       $ 262,678       $ 293,125
================================================================================


14 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


LOAN PORTFOLIO


Details regarding the Company's loan portfolio for the past five years are as
follows:

<TABLE>
<CAPTION>
December 31,                           2005        2004        2003        2002        2001
-------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>         <C>
Real estate - construction
  and land development            $  13,132   $   6,805   $   3,078   $   5,031   $   9,124
Real estate mortgages               227,853     196,149     172,964     217,883     246,486
Commercial                           42,894      41,560      30,056      30,077      30,001
Credit card and related plans         3,152       2,872       2,403       2,320       2,377
Installment                          26,293      25,679      25,855      27,306      30,142
Obligations of states &
  political subdivisions              8,038       7,111       6,026       6,239       5,678
-------------------------------------------------------------------------------------------
  Loans, net of unearned income
                                    321,362     280,176     240,382     288,856     323,808
Less: Allowance for loan losses       3,800       3,600       3,500       3,347       3,600
-------------------------------------------------------------------------------------------
  Loans, net                      $ 317,562   $ 276,576   $ 236,882   $ 285,509   $ 320,208
===========================================================================================
</TABLE>


LOANS

Total net loans  increased  $41.0 million to $317.6 million at December 31, 2005
from $276.6 million at December 31, 2004, an increase of 14.8%. This increase is
mainly due to strong loan demand with a mix of fixed and variable rate loans.

     Total net loans  increased  $39.7 million to $276.6 million at December 31,
2004 from  $236.9  million at December  31,  2003,  an  increase of 16.8%.  This
increase is mainly due to strong  loan  demand with a mix of fixed and  variable
rate loans.


A graph depicts Net Loans (in millions)      Year
--------------------------------------------------
              $ 317,562                      2005
                276,576                      2004
                236,882                      2003
                285,509                      2002
                320,208                      2001


LOAN QUALITY

     The  lending  activities  of the  Company  are guided by the  comprehensive
lending policy  established by the Board of Directors.  Loans must meet criteria
which  include  consideration  of the  character,  capacity  and  capital of the
borrower, collateral provided for the loan, and prevailing economic conditions.

     Regardless  of credit  standards,  there is risk of loss  inherent in every
loan  portfolio.  The  allowance  for loan losses is an amount  that  management
believes will be adequate to absorb  possible  losses on existing loans that may
become  uncollectible,  based on evaluations of the collectibility of the loans.
The evaluations take into consideration such factors as change in the nature and
volume of the loan  portfolio,  overall  portfolio  quality,  review of specific
problem  loans,  industry  experience,  collateral  value and  current  economic
conditions that may affect the borrower's  ability to pay.  Management  believes
that the allowance for loan losses is adequate.  While management uses available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for loan losses. Such agencies may
require the  Company to  recognize  additions  to the  allowance  based on their
judgment of information available to them at the time of their examination.

     The  allowance  for loan losses is  increased by periodic  charges  against
earnings  as  a  provision  for  loan  losses,  and  decreased  periodically  by
charge-offs  of loans  (or  parts of  loans)  management  has  determined  to be
uncollectible, net of actual recoveries on loans previously charged-off.


                Penseco Financial Services Corporation  /  2005 Annual Report 15


<PAGE>


NON-PERFORMING ASSETS

Non-performing  assets consist of non-accrual  loans,  loans past due 90 days or
more and still  accruing  interest and other real estate  owned.  The  following
table sets forth  information  regarding  non-performing  assets as of the dates
indicated:

<TABLE>
<CAPTION>
December 31,                                     2005      2004      2003      2002      2001
---------------------------------------------------------------------------------------------
<S>                                           <C>       <C>       <C>       <C>       <C>
Non-accrual loans                             $ 1,627   $ 1,991   $ 1,533   $ 2,245   $ 1,917
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        152       253       169       394       304
  Credit card loans                                21        13         3         -        22
---------------------------------------------------------------------------------------------
  Total non-performing loans                    1,800     2,257     1,705     2,639     2,243
Other real estate owned                            91       176       121        59       143
---------------------------------------------------------------------------------------------
  Total non-performing assets                 $ 1,891   $ 2,433   $ 1,826   $ 2,698   $ 2,386
=============================================================================================
</TABLE>

Loans are generally placed on a non-accrual status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on non-accrual  status, all interest previously accrued but not collected
is charged  against  current  income.  Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.

     Loans on which the accrual of  interest  has been  discontinued  or reduced
amounted  to $1,627,  $1,991 and $1,533 at  December  31,  2005,  2004 and 2003,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $264,  $199 and $198 for 2005, 2004 and 2003,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $27,
$16 and $29 for 2005, 2004 and 2003,  respectively.  There are no commitments to
lend additional funds to borrowers whose loans are on non-accrual status.

     The  management  process for  evaluating  the adequacy of the allowance for
loan losses  includes  reviewing each month's loan committee  reports which list
all  loans  that  do  not  meet  certain  internally  developed  criteria  as to
collateral adequacy, payment performance, economic conditions and overall credit
risk.  These  reports also address the current  status and actions in process on
each listed loan. From this  information,  adjustments are made to the allowance
for loan losses.  Such adjustments include both specific loss allocation amounts
and general  provisions  by loan category  based on present and past  collection
experience,  nature and volume of the loan portfolio, overall portfolio quality,
and current economic  conditions that may affect the borrower's  ability to pay.
As of December 31, 2005,  there are no significant  loans as to which management
has serious doubt about their collectibility.

     At December  31,  2005,  2004 and 2003,  the Company did not have any loans
specifically classified as impaired.

     Most of the Company's  lending  activity is with  customers  located in the
Company's  geographic  market area and repayment thereof is affected by economic
conditions in this market area.


LOAN LOSS EXPERIENCE


The following tables present the Company's loan loss experience during the
periods indicated:

<TABLE>
<CAPTION>
Years Ended December 31,                   2005      2004      2003      2002      2001
---------------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>
Balance at beginning of year            $ 3,600   $ 3,500   $ 3,347   $ 3,600   $ 3,100
---------------------------------------------------------------------------------------
Charge-offs:
  Real estate mortgages                      31         -        11        91        38
  Commercial and all others                   -        12       289       944       389
  Credit card and related plans              68        34        51        44        37
  Installment loans                          14         7         4        22        19
---------------------------------------------------------------------------------------
Total charge-offs                           113        53       355     1,101       483
---------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                      46         3        24        31        20
  Commercial and all others                   -         -         6         -         -
  Credit card and related plans               3         2         2         1         1
  Installment loans                           1         4         -         3         8
---------------------------------------------------------------------------------------
Total recoveries                             50         9        32        35        29
---------------------------------------------------------------------------------------
Net charge-offs                              63        44       323     1,066       454
---------------------------------------------------------------------------------------
Provision charged to operations             263       144       476       813       954
---------------------------------------------------------------------------------------
  Balance at End of Year                $ 3,800   $ 3,600   $ 3,500   $ 3,347   $ 3,600
=======================================================================================
Ratio of net charge-offs
to average loans outstanding              0.02%     0.02%     0.12%     0.34%     0.14%
=======================================================================================
</TABLE>


16 Penseco Financial Services Corporation  /  2005 Annual Report


<PAGE>


The allowance for loan losses is allocated as follows:

<TABLE>
<CAPTION>
December 31,                    2005             2004             2003             2002             2001
---------------------------------------------------------------------------------------------------------------
                              Amount     %1    Amount     %1    Amount     %1    Amount     %1    Amount     %1
---------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Real estate mortgages        $ 1,200   75%    $ 1,100   72%    $ 1,100   73%    $ 1,600   77%    $  1,700  79%
Commercial
  and all others               2,190   16       2,070   18       1,970   15       1,222   13       1,375   11
Credit card and
  related plans                  185    1         180    1         180    1         175    1         175    1
Personal installment loans       225    8         250    9         250   11         350    9         350    9
---------------------------------------------------------------------------------------------------------------
  Total                      $ 3,800  100%    $ 3,600  100%    $ 3,500  100%    $ 3,347  100%    $ 3,600  100%
===============================================================================================================
</TABLE>

Note: 1 - Percent of loans in each category to total loans


DEPOSITS

The primary  source of funds to support the Company's  operations is its deposit
base.  Company deposits increased $2.6 million to $397.9 million at December 31,
2005 from $395.3 million at December 31, 2004.  Company deposits decreased $12.6
million to $395.3  million at December 31, 2004 from $407.9  million at December
31,  2003,  a decrease  of 3.1%,  mainly due to a decrease  in higher  rate time
deposits.


The maturities of time deposits of $100,000 or more are as follows:

  Three months or less                                         $  6,100
  Over three months through six months                            5,789
  Over six months through twelve months                           5,321
  Over twelve months                                             10,914
                                                               --------
  Total                                                        $ 28,124
                                                               ========



A graph depicts Deposits (in millions)     Year
-----------------------------------------------
                 $ 397,867                 2005
                   395,301                 2004
                   407,944                 2003
                   414,664                 2002
                   406,531                 2001


DIVIDEND POLICY

Payment of future  dividends  will be subject to the  discretion of the Board of
Directors  and will  depend  upon the  earnings of the  Company,  its  financial
condition, its capital requirements, its need for funds and other matters as the
Board deems appropriate.

     Dividends  on the  Company  common  stock,  if  approved  by the  Board  of
Directors,  are customarily paid on or about March 15, June 15, September 15 and
December 15.


ASSET/LIABILITY MANAGEMENT

The  Company's  policy  is to match  its  level  of  rate-sensitive  assets  and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations.  While no single measure can completely  identify
the impact of changes in interest  rates on net  interest  income,  one gauge of
interest  rate-sensitivity  is to measure,  over a variety of time periods,  the
differences  in  the  amounts  of  the  Company's   rate-sensitive   assets  and
rate-sensitive liabilities.  These differences, or "gaps", provide an indication
of the extent to which net interest  income may be affected by future changes in
interest  rates.  A  positive  gap  exists  when  rate-sensitive  assets  exceed
rate-sensitive  liabilities  and indicates  that a greater volume of assets than
liabilities  will  reprice  during a given  period.  This  mismatch  may enhance
earnings in a rising  interest rate  environment  and may inhibit  earnings when
interest rates  decline.  Conversely,  when  rate-sensitive  liabilities  exceed
rate-sensitive  assets,  referred  to as a negative  gap,  it  indicates  that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising  interest  rate  environment  may inhibit  earnings and declining
interest  rates  may  enhance  earnings.  However,  because  interest  rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.


LIQUIDITY

The objective of liquidity  management is to maintain a balance  between sources
and uses of funds in such a way that  the cash  requirements  of  customers  for
loans and deposit withdrawals are met in the most economical manner.  Management
monitors its liquidity position  continuously in relation to trends of loans and
deposits for  short-term  as well as long-term  requirements.  Liquid assets are
monitored  on a daily  basis to  assure  maximum  utilization.  Management  also
manages its liquidity  requirements  by maintaining an adequate level of readily
marketable assets and access to short-term funding sources.  Management does not
foresee any adverse trends in liquidity.


                Penseco Financial Services Corporation  /  2005 Annual Report 17


<PAGE>


     The Company remains in a highly liquid condition both in the short and long
term.  Sources of liquidity  include the Company's U.S. Agency bond  portfolios,
additional  deposits,  earnings,  overnight  loans to and from  other  companies
(Federal  Funds) and lines of credit at the Federal Reserve Bank and the Federal
Home Loan Bank.  The Company is not a party to any  commitments,  guarantees  or
obligations that could materially affect its liquidity.


     The Company offers collateralized  repurchase  agreements,  that have a one
day maturity,  as an alternative  deposit option for its customers.  The Company
also has long-term debt  outstanding  to the FHLB,  which was used to purchase a
Freddie Mac pool of residential mortgages,  as described earlier in this report.
The Company continues to have $171,053 of available  borrowing capacity with the
FHLB.


COMMITMENTS AND CONTINGENT LIABILITIES

In the  normal  course  of  business,  there  are  outstanding  commitments  and
contingent   liabilities,   created  under   prevailing   terms  and  collateral
requirements  such as  commitments to extend  credit,  financial  guarantees and
letters  of  credit,  which  are not  reflected  in the  accompanying  Financial
Statements.  The  Company  does not  anticipate  any losses as a result of these
transactions.  These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.

     The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.

     Financial  instruments  whose  contract  amounts  represent  credit risk at
December 31, 2005 and 2004 are as follows:

                                        2005              2004
--------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                        $ 41,229          $ 21,152
  Variable rate                     $ 75,100          $ 67,502
Standby letters of credit           $ 15,268          $ 17,662


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

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

     The Company is upgrading its computer technology at an estimated total cost
of $1.5 million of which $.7 million has been incurred through December 31, 2005
and is included in fixed assets,  but not yet placed in service.  The project is
expected to be completed in the first quarter of 2006.


RELATED PARTIES

The Company does not have any material transactions involving related persons or
entities,  other than traditional  banking  transactions,  which are made on the
same  terms  and  conditions  as those  prevailing  at the  time for  comparable
transactions  with unrelated  parties.  The Bank has issued  standby  letters of
credit for the accounts of related parties in the amount of $6,545.


CAPITAL RESOURCES

A strong  capital  position is important to the continued  profitability  of the
Company and promotes  depositor and investor  confidence.  The Company's capital
provides a basis for future growth and  expansion  and also provides  additional
protection against unexpected losses.

     Additional  sources of capital would come from  retained  earnings from the
operations  of the  Company  and  from  the  sale of  additional  common  stock.
Management has no plans to offer additional common stock at this time.

     The  Company's  total  risk-based  capital ratio was 18.62% at December 31,
2005. The Company's  risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold.  This is the current
criteria  which the FDIC  uses in  determining  the  lowest  insurance  rate for
deposit  insurance.  The Company's  risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately  capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital  requirements  without the necessity of increasing its
equity capital.

The following  table presents  Stockholders'  Equity of the Company for the past
two years:


Years Ended December 31,                         2005              2004
-----------------------------------------------------------------------
Balance at beginning of year                 $ 62,376          $ 60,807
Net Income                                      5,869             5,601
Less:
  Other comprehensive income                    1,352             1,132
  Cash dividends declared                       3,094             2,900
-----------------------------------------------------------------------
Total Stockholders' Equity                   $ 63,799          $ 62,376
=======================================================================


18 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


A graph depicts Stockholders' Equity (in millions)     Year
-----------------------------------------------------------
                $  63,799                              2005
                   62,376                              2004
                   60,807                              2003
                   58,975                              2002
                   54,648                              2001


A graph depicts Return on Average Equity               Year
-----------------------------------------------------------
                 9.23%                                 2005
                 9.11%                                 2004
                 9.87%                                 2003
                11.79%                                 2002
                10.57%                                 2001


ITEM 7A  Quantitative and Qualitative Disclosures About Market Risk

The Company  currently  does not enter into  derivative  financial  instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial  instruments  with similar  characteristics.  However,  the Company is
party to traditional  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, financial guarantees
and letters of credit. These traditional instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the Consolidated Balance Sheets.  Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract.  Commitments  generally  have fixed  expiration  dates or other
termination  clauses and may require payment of a fee. Standby letters of credit
are conditional commitments issued to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.

     Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.

     The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability  Committee.  Interest  rate risk is the  potential  of  economic
losses  due to future  interest  rate  changes.  These  economic  losses  can be
reflected as a loss of future net interest  income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income.  Management  realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and an interest rate shock  simulation  report.  The Company
has no market risk sensitive  instruments held for trading purposes.  It appears
the Company's market risk is reasonable at this time.

     The following table provides  information  about the Company's  market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes  in  interest  rates.  For  loans,  securities,   and  liabilities  with
contractual  maturities,  the table  presents  principal  cash flows and related
weighted-average  interest  rates  by  contractual  maturities  as  well  as the
Company's  historical  experience of the impact of interest rate fluctuations on
the  prepayment  of  residential  and  home  equity  loans  and  mortgage-backed
securities.  For core deposits (e.g., DDA, interest checking,  savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable,  related weighted-average interest rates based on
the Company's  historical  experience,  management's  judgment,  and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.


                  Penseco Financial Services Corporation / 2005 Annual Report 19


<PAGE>


MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2005

The table below presents States and political subdivisions securities on a fully
taxable equivalent basis.
<TABLE>
<CAPTION>
                                                                                                      Non-Rate
                                          2006        2007      2008      2009      2010 Thereafter  Sensitive    Total   Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>         <C>       <C>       <C>       <C>        <C>        <C>        <C>
ASSETS
Fixed interest rate securities:
  U.S. Treasury securities           $       -  $        -  $      -  $      -  $      -  $       -  $       -  $       -  $      -
    Yield                                    -           -         -         -         -          -          -          -
  U.S. Agency obligations               66,280      11,688     1,840     1,930     2,025     43,153          -    126,916   125,642
    Yield                                3.47%       4.25%     4.82%     4.82%     4.82%      4.82%          -      4.06%
  States & political subdivisions            -           -         -     7,612     8,347     34,928          -     50,887    53,273
    Yield                                    -           -         -     8.21%     8.22%      6.99%          -      7.37%
Variable interest rate securities:
  U.S. Agency obligations               13,001      13,008    13,418     2,443     2,522          -          -     44,392    44,395
    Yield                                3.16%       3.13%     3.14%     3.23%     3.23%          -          -      3.15%
  Federal Home Loan Bank stock               -           -         -         -         -      4,699          -      4,699     4,699
    Yield                                    -           -         -         -         -      3.00%          -      3.00%
  Other                                      -           -         -         -         -      3,063          -      3,063     3,063
    Yield                                    -           -         -         -         -      1.71%          -      1.71%
Fixed interest rate loans:
  Real estate mortgages                  9,397       9,561     7,654     9,927     7,283     90,767          -    134,589   133,060
    Yield                                6.10%       6.43%     6.24%     5.92%     6.26%      6.14%          -      6.15%
  Consumer and other                     1,942       1,747     1,636     1,253     1,030      2,572          -     10,180    10,206
    Yield                                6.94%       6.80%     6.74%     6.81%     7.00%      6.61%          -      6.79%
Variable interest rate loans:
  Real estate mortgages                 19,763       9,465     8,771     8,686     9,024     50,687          -    106,396    102,367
    Yield                                7.17%       6.92%     6.90%     6.89%     6.88%      6.50%          -      6.76%
  Commercial                            42,894           -         -         -         -          -          -     42,894     42,894
    Yield                                6.50%           -         -         -         -          -          -      6.50%
  Consumer and other                    12,990       3,734     3,304     2,818     3,025      1,432          -     27,303     27,693
    Yield                                7.50%       8.84%     8.55%     8.07%     8.08%      8.13%          -      7.97%
Less: Allowance for loan losses            602         334       292       309       278      1,985          -      3,800
Interest bearing deposits with banks       263           -         -         -         -          -          -        263        263
    Yield                                4.00%           -         -         -         -          -          -      4.00%
Cash and due from banks                      -           -         -         -         -          -     11,310     11,310     11,310
Other assets                                 -           -         -         -         -          -     16,596     16,596
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                         $ 165,928  $   48,869  $ 36,331  $ 34,360  $ 32,978  $ 229,316  $  27,906  $ 575,688  $ 558,865
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing          $       -  $   33,094  $      -  $      -  $      -  $       -  $       -  $  33,094  $  33,094
    Yield                                    -        .61%         -         -         -          -          -       .61%
  Savings                                    -      86,013         -         -         -          -          -     86,013     86,013
    Yield                                    -        .77%         -         -         -          -          -       .77%
  Money markets                         80,463           -         -         -         -          -          -     80,463     80,463
    Yield                                2.11%           -         -         -         -          -          -      2.11%
  Fixed interest rate deposits:
  Time - Over $100,000                  17,210       6,047     3,841       200       726        100          -     28,124     28,877
    Yield                                3.37%       3.94%     4.06%     3.75%     4.33%      5.00%          -      3.62%
  Time - Other                          44,975      18,031     6,549     3,247     4,908        750          -     78,460     78,917
    Yield                                2.87%       3.95%     3.69%     3.42%     4.24%      4.41%          -      3.31%
Demand - Non-interest bearing                -           -         -         -         -          -     91,713     91,713     91,713
Repurchase agreements                   30,414           -         -         -         -          -          -     30,414     30,414
    Yield                                1.75%           -         -         -         -          -          -      1.75%
Short-term borrowings                    4,626           -         -         -         -          -          -      4,626      4,626
    Yield                                2.46%           -         -         -         -          -          -      2.46%
Long-term borrowings                     9,547       9,887     8,781     8,612     6,635     31,939          -     75,401     75,710
    Yield                                3.50%       3.50%     3.63%     3.69%     3.86%      4.36%          -      3.93%
Other liabilities                            -           -         -         -         -          -      3,581      3,581
Stockholders' equity                         -           -         -         -         -          -     63,799     63,799
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
    Stockholders' Equity             $ 187,235  $  153,072  $ 19,171  $ 12,059  $ 12,269  $  32,789  $ 159,093  $ 575,688  $ 509,827
====================================================================================================================================
Excess of (liabilities) assets subject
    to interest rate change          $ (21,307) $ (104,203) $ 17,160  $ 22,301  $ 20,709  $ 196,527  $(131,187) $       -
====================================================================================================================================
</TABLE>


20 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


The management of Penseco  Financial  Services  Corporation  is responsible  for
establishing and maintaining adequate internal control over financial reporting.
Penseco Financial Services Corporation's internal control system was designed to
provide reasonable  assurance to the Company's management and Board of Directors
regarding  the  preparation  and  fair   presentation  of  published   financial
statements in accordance with U.S. generally accepted accounting principles. All
internal   control  systems,   no  matter  how  well  designed,   have  inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only   reasonable   assurance  with  respect  to  financial   statement
preparation and presentation.

     Management  maintains a comprehensive system of controls intended to ensure
that  transactions are executed in accordance with  management's  authorization,
assets are  safeguarded,  and financial  records are reliable.  Management  also
takes steps to see that information and communication flows are effective and to
monitor performance, including performance of internal control procedures.

     Penseco   Financial   Services   Corporation    management   assessed   the
effectiveness of the Company's  internal control over financial  reporting as of
December 31, 2005 based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway  Commission (COSO) in Internal  Control-Integrated
Framework.  Based on this assessment,  management  believes that, as of December
31, 2005, the Company's internal control over financial reporting is effective.

     Management's  assessment of the  effectiveness  of the  Company's  internal
control  over  financial  reporting  as of December 31, 2005 has been audited by
McGrail, Merkel, Quinn & Associates, the Company's independent registered public
accounting firm, as stated in their report appearing on page 22, which expresses
unqualified opinions on management's  assessment and on the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005.


                Penseco Financial Services Corporation  /  2005 Annual Report 21


<PAGE>


             Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania



     We have  audited  management's  assessment,  included  in the  accompanying
Management's Report on Internal Control Over Financial  Reporting,  that Penseco
Financial  Services  Corporation and subsidiary  maintained  effective  internal
control over  financial  reporting  as of December  31, 2005,  based on criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring  Organizations of the Treadway  Commission (COSO).  Penseco Financial
Services Corporation and subsidiary's  management is responsible for maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to  express  an opinion  on  management's  assessment  and an
opinion on the  effectiveness  of the company's  internal control over financial
reporting based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinion.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.


22 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


To the Board of Directors and Stockholders
Penseco Financial Services Corporation


                                      [2]


     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     In our opinion,  management's  assessment that Penseco  Financial  Services
Corporation and subsidiary  maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated,  in all material  respects,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring  Organizations  of the Treadway  Commission  (COSO).
Also in our opinion,  Penseco  Financial  Services  Corporation  and  subsidiary
maintained, in all material respects,  effective internal control over financial
reporting  as of December 31, 2005,  based on criteria  established  in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States),  the consolidated  financial
statements of Penseco  Financial  Services  Corporation  and  subsidiary and our
report dated February 3, 2006 expressed an unqualified opinion.




Scranton, Pennsylvania
February 3, 2006


                Penseco Financial Services Corporation  /  2005 Annual Report 23


<PAGE>


             Report of Independent Registered Public Accounting Firm




To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania


     We have audited the  accompanying  consolidated  balance  sheets of Penseco
Financial Services  Corporation and subsidiary as of December 31, 2005 and 2004,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 2005.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Penseco
Financial Services  Corporation and subsidiary as of December 31, 2005 and 2004,
and the results of their  operations  and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity  with U.S.  generally
accepted accounting principles.

     We also have  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States), the effectiveness of Penseco
Financial Services Corporation and subsidiary's  internal control over financial
reporting  as of December 31, 2005,  based on criteria  established  in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the  Treadway  Commission  (COSO)  and our  report  dated  February  3,  2006
expressed an unqualified opinion on management's assessment of the effectiveness
of Penseco Financial Services Corporation and subsidiary's internal control over
financial  reporting and an unqualified  opinion on the effectiveness of Penseco
Financial Services Corporation and subsidiary's  internal control over financial
reporting.



Scranton, Pennsylvania
February 3, 2006


24 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


ITEM 8   Financial Statements and Supplementary Data


                           Consolidated Balance Sheets

(in thousands, except per share amounts)
<TABLE>
<CAPTION>
                 December 31,                                    2005       2004
                 ---------------------------------------------------------------
<S>              <C>                                        <C>        <C>
ASSETS           Cash and due from banks                    $  11,310  $   7,763
                 Interest bearing balances with banks             263        534
                 ---------------------------------------------------------------
                   Cash and Cash Equivalents                   11,573      8,297

                 Investment securities:
                   Available-for-sale, at fair value          147,942    167,410
                   Held-to-maturity (fair value of $83,130
                     and $97,791, respectively)                82,015     95,268
                 ---------------------------------------------------------------
                   Total Investment Securities                229,957    262,678

                 Loans, net of unearned income                321,362    280,176
                   Less: Allowance for loan losses              3,800      3,600
                 ---------------------------------------------------------------
                   Loans, Net                                 317,562    276,576

                 Bank premises and equipment                    9,453      9,233
                 Other real estate owned                           91        176
                 Accrued interest receivable                    3,473      3,406
                 Other assets                                   3,579     3,342
                 ---------------------------------------------------------------
                   Total Assets                             $ 575,688  $ 563,708
                 ===============================================================

LIABILITIES      Deposits:
                   Non-interest bearing                     $  91,713  $  82,938
                   Interest bearing                           306,154    312,363
                 ---------------------------------------------------------------
                   Total Deposits                             397,867    395,301

                 Other borrowed funds:
                   Repurchase agreements                       30,414      18,398
                   Short-term borrowings                        4,626        886
                   Long-term borrowings                        75,401     84,620
                 Accrued interest payable                       1,261        886
                 Other liabilities                              2,320      1,241
                 ---------------------------------------------------------------
                 Total Liabilities                            511,889    501,332
                 ===============================================================
STOCKHOLDERS'    Common stock, $.01 par value, 15,000,000
EQUITY             shares authorized, 2,148,000
                   shares issued and outstanding                   21         21
                 Surplus                                       10,819     10,819
                 Retained earnings                             53,607     50,832
                 Accumulated other comprehensive income          (648)       704
                 ---------------------------------------------------------------
                   Total Stockholders' Equity                  63,799     62,376
                 ===============================================================
                   Total Liabilities and
                     Stockholders' Equity                   $ 575,688  $ 563,708
                 ===============================================================
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements.


                Penseco Financial Services Corporation  /  2005 Annual Report 25


<PAGE>


                        Consolidated Statements of Income


(in thousands, except per share amounts)

<TABLE>
<CAPTION>
              Years Ended December 31,                      2005       2004       2003
              -------------------------------------------------------------------------
              <S>                                       <C>        <C>        <C>
INTEREST      Interest and fees on loans                $ 18,569   $ 13,632   $ 14,632
INCOME        Interest and dividends on investments:
                U.S. Treasury securities and U.S.
                  Agency obligations                       6,408      8,044      8,275
                States & political subdivisions            2,616      3,476      2,569
                Other securities                             190        107        108
              Interest on Federal funds sold                 176         58        340
              Interest on balances with banks                211         68         90
              -------------------------------------------------------------------------
                Total Interest Income                     28,170     25,385     26,014
              -------------------------------------------------------------------------
INTEREST      Interest on time deposits
EXPENSE         of $100,000 or more                          808        806        844
              Interest on other deposits                   4,212      3,153      4,226
              Interest on other borrowed funds             3,560      3,620      3,158
              -------------------------------------------------------------------------
                Total Interest Expense                     8,580      7,579      8,228
              -------------------------------------------------------------------------
                Net Interest Income                       19,590     17,806     17,786
              Provision for loan losses                      263        144        476
              -------------------------------------------------------------------------
                Net Interest Income After Provision
                  for Loan Losses                         19,327     17,662     17,310
              -------------------------------------------------------------------------
OTHER         Trust department income                      1,479      1,353      1,311
INCOME        Service charges on deposit accounts            940      1,056      1,133
              Merchant transaction income                  4,521      5,001      5,005
              Other fee income                             1,575      1,650      1,630
              Other operating income                         372        177      1,323
              Realized (losses) gains on securities, net     (13)       357        341
              -------------------------------------------------------------------------
                Total Other Income                         8,874      9,594    10,743
              -------------------------------------------------------------------------
OTHER         Salaries and employee benefits               9,261      9,165      9,010
EXPENSES      Occupancy expenses, net                      1,377      1,255      1,388
              Furniture and equipment expenses             1,078      1,136      1,175
              Merchant transaction expenses                3,646      4,058      4,158
              Other operating expenses                     5,357      4,970      4,723
              -------------------------------------------------------------------------
                Total Other Expenses                      20,719     20,584     20,454
              -------------------------------------------------------------------------
              Income before income taxes                   7,482      6,672      7,599
              Applicable income taxes                      1,613      1,071      1,628
              -------------------------------------------------------------------------
NET INCOME    Net Income                                $  5,869   $  5,601   $  5,971
              =========================================================================
PER SHARE     Earnings Per Share                        $   2.73   $   2.61   $   2.78
              =========================================================================
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements.


26 Penseco Financial Services Corporation  /  2005 Annual Report


<PAGE>


                 Consolidated Statements of Stockholders' Equity


Years Ended December 31, 2005, 2004 and 2003

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                                                 Other          Total
                                             Common               Retained   Comprehensive   Stockholders'
(in thousands except per share data)         Stock      Surplus   Earnings      Income          Equity
----------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>          <C>             <C>
Balance, December 31, 2001                  $ 21       $ 10,819   $ 45,060     $  3,075        $ 58,975

Comprehensive income:
  Net income, 2003                             -              -      5,971           -            5,971
  Unrealized losses on securities,
    net of reclassification adjustment
    and taxes                                  -              -          -       (1,239)         (1,239)
                                                                                                -------
Comprehensive income                                                                              4,732

Cash dividends declared ($1.35 per share)      -              -     (2,900)           -          (2,900)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 2003                    21         10,819     48,131        1,836          60,807

Comprehensive income:
  Net income, 2004                             -              -      5,601            -           5,601
  Unrealized losses on securities,
    net of reclassification adjustment
    and taxes                                  -              -          -       (1,132)         (1,132)
                                                                                                -------
Comprehensive income                                                                              4,469

Cash dividends declared ($1.35 per share)      -              -     (2,900)           -          (2,900)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 2004                    21         10,819     50,832          704          62,376

Comprehensive income:
  Net income, 2005                             -              -      5,869           -            5,869
  Other comprehensive income, net of tax
    Unrealized losses on securities,
      net of reclassification adjustment       -              -          -         (341)           (341)
    Minimum pension liability adjustment       -              -          -       (1,011)         (1,011)
                                                                                -------          -------
  Other comprehensive income                                                     (1,352)         (1,352)
Comprehensive income                                                                              4,517

Cash dividends declared ($1.44 per share)      -              -     (3,094)           -          (3,094)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2005                  $ 21       $ 10,819   $ 53,607     $   (648)       $ 63,799
==========================================================================================================
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements.


                Penseco Financial Services Corporation  /  2005 Annual Report 27


<PAGE>


                      Consolidated Statements of Cash Flows


(in thousands)
<TABLE>
<CAPTION>

(in thousands)   Years Ended December 31,                                 2005          2004          2003
                 ------------------------------------------------------------------------------------------
                 <S>                                                 <C>           <C>           <C>
OPERATING        Net Income                                          $   5,869     $   5,601     $   5,971
ACTIVITIES       Adjustments to reconcile net income to net
                   cash provided by operating activities:
                     Depreciation                                          704           813         1,119
                     Provision for loan losses                             263           144           476
                     Deferred income tax provision (benefit)               166          (119)         (182)
                     Amortization of securities (net of accretion)       1,379         1,573         1,050
                     Net realized losses (gains) on securities              13          (357)         (341)
                     (Gain) loss on other real estate                      (46)           (2)           15
                     Gain on disposition of fixed asset                     (5)            -             -
                     (Increase) decrease in interest receivable            (67)         (108)          101
                     Decrease in other assets                              313           366         1,441
                     (Decrease) increase in income taxes payable          (442)          117           252
                     Increase (decrease) in interest payable               375          (272)         (159)
                     (Decrease) increase in other liabilities              (29)          110          (239)
                 ------------------------------------------------------------------------------------------
                     Net cash provided by
                       operating activities                              8,493         7,866         9,504
                 ------------------------------------------------------------------------------------------
INVESTING        Purchase of investment securities
ACTIVITIES         available-for-sale                                  (47,526)      (49,975)     (122,157)
                 Proceeds from sales and maturities of investment
                   securities available-for-sale                        46,451        41,938        41,407
                 Purchase of investment securities
                   to be held-to-maturity                                    -             -      (103,031)
                 Proceeds from repayments of investment
                   securities available-for-sale                        19,140        17,893         7,308
                 Proceeds from repayments of investment
                   securities to be held-to-maturity                    12,746        17,661        19,894
                 Net loans (originated) repaid                         (41,550)      (40,015)       47,677
                 Proceeds from other real estate                           432           124           397
                 Proceeds from sale of fixed asset                          10             -             -
                 Investment in premises and equipment                     (929)         (111)       (1,134)
                 ------------------------------------------------------------------------------------------
                     Net cash used by investing activities             (11,226)      (12,485)     (109,639)
                 ------------------------------------------------------------------------------------------
FINANCING        Net increase in demand and savings deposits           (3,984)         5,977         6,862
ACTIVITIES       Net (payments) proceeds on time deposits                6,550       (18,620)      (13,582)
                 Increase (decrease) in repurchase agreements           12,016        (1,056)           35
                 Net increase (decrease) in short-term borrowings        3,740            63           (67)
                 Proceeds from long-term borrowings                          -             -       100,000
                 Payments on long-term borrowings                       (9,219)       (8,903)       (6,477)
                 Cash dividends paid                                    (3,094)       (2,900)       (2,900)
                 ------------------------------------------------------------------------------------------
                     Net cash provided (used) by
                       financing activities                              6,009       (25,439)       83,871
                 ------------------------------------------------------------------------------------------
                     Net increase (decrease) in cash and
                       cash equivalents                                  3,276       (30,058)      (16,264)

                 Cash and cash equivalents at January 1                  8,297        38,355        54,619
                 ------------------------------------------------------------------------------------------
                 Cash and cash equivalents at December 31            $  11,573     $   8,297     $  38,355
                 ==========================================================================================
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements.


28 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


                      General Notes To Financial Statements


NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated in 1997 under the laws of Pennsylvania. It is the parent company of
Penn Security Bank and Trust Company (Bank), a state chartered bank.

     The Company  operates from nine banking  offices under a state bank charter
and provides full banking services,  including trust services, to individual and
corporate  customers  primarily  in  Northeastern  Pennsylvania.  The  Company's
primary   deposit   products  are  savings  and  demand  deposit   accounts  and
certificates  of  deposit.   Its  primary  lending  products  are  real  estate,
commercial and consumer loans.

     The Company's  revenues are  attributable to a single  reportable  segment,
therefore segment information is not presented.

     The accounting  policies of the Company conform with accounting  principles
generally  accepted in the United  States of America and with general  practices
within the banking industry.


BASIS OF PRESENTATION

The Financial Statements of the Company have been consolidated with those of its
wholly-owned subsidiary,  Penn Security Bank and Trust Company,  eliminating all
intercompany items and transactions.

  The Statements are presented on the accrual basis of accounting.

     All  information  is presented  in  thousands of dollars,  except per share
amounts.


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  assets and  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.

     Material estimates that are particularly  susceptible to significant change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. In connection  with the  determination  of the allowances
for losses on loans and foreclosed real estate,  management obtains  independent
appraisals for significant properties.


EMERGING ACCOUNTING STANDARDS

In December  2004,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  No.  123  (Revised  2004),  Share-Based  Payment.  Statement  No. 123
(Revised 2004) is a revision of FASB Statement 123,  Accounting for  Stock-Based
Compensation  and supersedes APB Opinion No. 25,  Accounting for Stock Issued to
Employees,  and its  related  implementation  guidance.  The  Statement  focuses
primarily on accounting for  transactions  in which an entity  obtains  employee
services in share-based payment  transactions.  Statement No. 123 (Revised 2004)
requires an entity to measure the cost of employee services received in exchange
for an award of equity  instruments  based on the  grant-date  fair value of the
award,  except in certain  circumstances.  That cost will be recognized over the
period  during which an employee is required to provide  service in exchange for
the award.  The  statement is effective as of the  beginning of the first annual
reporting period that begins after December 15, 2005.

     The Company has not issued any  share-based  payments that will be required
to be accounted for under Statement No. 123 (Revised 2004).

     In December 2004, FASB issued  Statement No. 153,  Exchanges of Nonmonetary
Assets,  An  Amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary
Transactions.  Statement  No.  153  eliminates  the  exception  from fair  value
measurement for nonmonetary  exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that
do not have commercial substance. Statement No. 153 specifies that a nonmonetary
exchange  has  commercial  substance  if the future cash flows of the entity are
expected to change  significantly as a result of the exchange.  The statement is
effective for fiscal periods beginning after June 15, 2005.

     The Company has not been a party to any nonmonetary exchanges that would be
impacted by application of Statement No. 153.

     In May 2005, FASB issued  Statement No. 154,  Accounting  Changes and Error
Corrections - a replacement of APB Opinion No. 20, Accounting Changes,  and FASB
Statement No. 3, Reporting  Accounting Changes in Interim Financial Statements -
An Amendment of APB Opinion No. 28.  Statement No. 154 provides  guidance on the
accounting  for and reporting of accounting  changes and error  corrections.  It
establishes  retrospective  application,  or earliest date  practicable,  as the
required method for reporting a change in accounting  principle or correction of
an error.  The Statement is effective for  accounting  changes or corrections of
errors made in fiscal periods beginning after December 15, 2005.

     The Company  believes that the adoption of this  statement  will not have a
significant impact on its results of operations or financial position.


INVESTMENT SECURITIES

Investments  in securities are classified in two categories and accounted for as
follows:

     Securities  Held-to-Maturity  Bonds, notes,  debentures and mortgage-backed
securities for which the Company has the positive  intent and ability to hold to
maturity  are  reported at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts  computed on the straight-line  basis, which approximates
the interest method, over the remaining period to maturity.

     Securities  Available-for-Sale  Bonds, notes,  debentures,  mortgage-backed
securities and certain equity securities not classified as securities to be held
to maturity are carried at fair value with unrealized  holding gains and losses,
net of tax,  reported as a net amount in a separate  component of  stockholders'
equity until realized.

     The amortization of premiums on mortgage-backed securities is done based on
management's estimate of the lives of the securities,  adjusted, when necessary,
for advanced prepayments in excess of those estimates.

     Gains  and  losses  on  the  sale  of  securities   available-for-sale  are
determined  using the  specific  identification  method  and are  reported  as a
separate component of other income in the Statements of Income.



                Penseco Financial Services Corporation  /  2005 Annual Report 29


<PAGE>

NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
            (CONTINUED)


LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

Loans are  stated  at the  principal  amount  outstanding,  net of any  unearned
income,  deferred  loan fees and the  allowance  for loan  losses.  Interest  is
accrued daily on the outstanding balances.

     Loans are  generally  placed on a  non-accrual  status  when  principal  or
interest is past due 90 days or when payment in full is not anticipated.  When a
loan is placed on non-accrual  status,  all interest  previously accrued but not
collected  is charged  against  current  income.  Loans are  returned to accrual
status when past due interest is collected  and the  collection  of principal is
probable.

     The  provision  for loan  losses  is based on past  loan  loss  experience,
management's  evaluation  of the  potential  loss in the current loan  portfolio
under current  economic  conditions  and such other factors as, in  management's
best  judgement,  deserve  current  recognition in estimating  loan losses.  The
annual  provision  for loan losses  charged to operating  expense is that amount
which is  sufficient  to bring the balance of the  allowance  for possible  loan
losses to an adequate level to absorb anticipated losses.


PREMISES AND EQUIPMENT

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Provision  for  depreciation  and  amortization,  computed  principally  on  the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets.  Maintenance  and repairs are charged to current expense as
incurred.


LONG-LIVED ASSETS

The Company  reviews the  carrying  value of  long-lived  assets for  impairment
whenever events or changes in  circumstances  indicate that carrying  amounts of
the assets might not be  recoverable,  as  prescribed  in Statement of Financial
Accounting  Standards  No. 144,  Accounting  for the  Impairment  or Disposal of
Long-Lived Assets (SFAS 144).


LOAN SERVICING

The  Company  generally  retains  the right to  service  mortgage  loans sold to
others.  The cost allocated to the mortgage  servicing  rights retained has been
recognized as a separate asset and is being  amortized in proportion to and over
the period of estimated net servicing income.

     Mortgage  servicing  rights are evaluated for impairment  based on the fair
value of those rights.  Fair values are estimated  using  discounted  cash flows
based on current market rates of interest and current expected future prepayment
rates.  For purposes of measuring  impairment,  the rights must be stratified by
one or more  predominant  risk  characteristics  of the  underlying  loans.  The
Company  stratifies  its  capitalized  mortgage  servicing  rights  based on the
product type,  interest  rate and term of the  underlying  loans.  The amount of
impairment  recognized is the amount, if any, by which the amortized cost of the
rights for each stratum exceed the fair value.


ADVERTISING EXPENSES

Advertising costs are expensed as incurred.  Advertising  expenses for the years
ended  December  31,  2005,  2004 and  2003,  amounted  to $472,  $476 and $473,
respectively.


INCOME TAXES

Provisions  for income taxes are based on taxes  payable or  refundable  for the
current year (after  exclusion of  non-taxable  income such as interest on state
and municipal  securities) as well as deferred  taxes on temporary  differences,
between the amount of taxable  income and pre-tax  financial  income and between
the tax bases of  assets  and  liabilities  and their  reported  amounts  in the
Financial  Statements.  Deferred tax assets and  liabilities are included in the
Financial  Statements at currently  enacted  income tax rates  applicable to the
period in which the  deferred  tax assets and  liabilities  are  expected  to be
realized or settled as prescribed in Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109). As changes in tax laws or rates
are  enacted,  deferred  tax assets and  liabilities  are  adjusted  through the
provision for income taxes.


PENSION EXPENSE

Pension  expense has been  determined in accordance  with Statement of Financial
Accounting Standards No. 87, Employers Accounting for Pensions (SFAS 87).


POSTRETIREMENT BENEFITS EXPENSE

Postretirement benefits expense has been determined in accordance with Statement
of  Financial   Accounting   Standards  No.  106,   Employers   Accounting   for
Postretirement Benefits Other Than Pensions (SFAS 106).


CASH FLOWS

For purposes of the Statements of Cash Flows, cash and cash equivalents  include
cash on hand, due from banks,  interest  bearing balances with banks and Federal
funds sold for a one-day period.

The Company paid  interest and income taxes during the years ended  December 31,
2005, 2004 and 2003 as follows:

                             2005              2004             2003
--------------------------------------------------------------------
Income taxes paid        $  1,886         $     802         $  1,698
Interest paid            $  8,205          $  7,851         $  8,387


Non-cash  transactions  during the years ended December 31, 2005, 2004 and 2003,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $301, $177 and $474, respectively.


TRUST ASSETS AND INCOME

Assets held by the Company in a fiduciary or agency  capacity for its  customers
are not included in the Financial  Statements since such items are not assets of
the Company. Trust income is reported on the accrual basis of accounting.


EARNINGS PER SHARE

Basic  earnings per share is computed on the weighted  average  number of common
shares  outstanding  during each year  (2,148,000) as prescribed in Statement of
Financial  Accounting  Standards  No. 128,  Earnings  Per Share  (SFAS  128).  A
calculation of diluted earnings per share is not applicable to the Company.


RECLASSIFICATIONS

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2005
presentation.


30 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


NOTE 2 -- CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:


December 31,                                 2005             2004
------------------------------------------------------------------
Cash items in process of collection      $  6,568          $ 2,951
Non-interest bearing balances               1,544            1,952
Cash on hand                                3,198            2,860
------------------------------------------------------------------
    Total                                $ 11,310          $ 7,763
==================================================================


The Company may, from time to time,  maintain bank balances with other financial
institutions in excess of $100,000 each. Management is not aware of any evidence
that would indicate that such deposits are at risk.


NOTE 3 -- INVESTMENT SECURITIES

The amortized cost and fair value of investment securities at December 31, 2005
and 2004 are as follows:

                              AVAILABLE-FOR-SALE

                                           Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2005                          Cost       Gains        Losses        Value
---------------------------------------------------------------------------
U.S. Agency securities     $  74,852   $        -   $      308    $  74,544
Mortgage-backed securities    44,408            -          407       44,001
States & political
  subdivisions                20,698          937            -       21,635
---------------------------------------------------------------------------
  Total Debt Securities      139,958          937          715      140,180
Equity securities              7,433          402           73        7,762
---------------------------------------------------------------------------
  Total Available-
    for-Sale               $ 147,391   $    1,339   $      788    $ 147,942
===========================================================================



                              AVAILABLE-FOR-SALE

                                           Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2004                          Cost       Gains        Losses        Value
---------------------------------------------------------------------------
U.S. Treasury securities   $   5,000   $       77   $        -    $   5,077
U.S. Agency securities        70,777          510          541       70,746
Mortgage-backed
  securities                  53,782           36           36       53,782
States & political
  subdivisions                30,910          686           56       31,540
---------------------------------------------------------------------------
  Total Debt Securities      160,469        1,309          633      161,145
Equity securities              5,873          392            -        6,265
---------------------------------------------------------------------------
  Total Available-
    for-Sale               $ 166,342   $    1,701   $      633    $ 167,410
===========================================================================


Equity  securities at December 31, 2005 and 2004,  consisted  primarily of other
financial institutions stock and Federal Home Loan Bank (FHLB) stock, which is a
required  investment  in order to  participate  in an  available  line of credit
program.  The  FHLB  stock  is  stated  at par  value  as  there  is no  readily
determinable fair value.


A summary of transactions involving  available-for-sale debt securities in 2005,
2004 and 2003 are as follows:

December 31,                    2005             2004              2003
-----------------------------------------------------------------------
Proceeds from sales         $ 10,250         $ 18,380          $ 15,640
Gross realized gains              51              385               341
Gross realized losses             64               28                 -



                                Held-to-Maturity

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2005                          Cost       Gains        Losses       Value
---------------------------------------------------------------------------
Mortgage-backed
  securities               $  52,763   $        3   $    1,274    $  51,492
States & political
  subdivisions                29,252        2,386            -       31,638
---------------------------------------------------------------------------
  Total Held-to-
    Maturity               $  82,015   $    2,389   $    1,274    $  83,130
===========================================================================



                                Held-to-Maturity

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2004                          Cost       Gains        Losses       Value
---------------------------------------------------------------------------
Mortgage-backed
  securities               $  66,019   $       10   $      357    $  65,672
States & political
  subdivisions                29,249        2,870            -       32,119
---------------------------------------------------------------------------
  Total Held-to-
    Maturity               $  95,268   $    2,880   $      357    $  97,791
===========================================================================

Investment  securities  with  amortized  costs and fair values of  $106,280  and
$107,914 at December  31, 2005 and  $104,700  and $107,574 at December 31, 2004,
were pledged to secure trust funds,  public  deposits and for other  purposes as
required by law.


     The amortized  cost and fair value of debt  securities at December 31, 2005
by contractual  maturity,  are shown in the following table. Expected maturities
will differ from contractual  maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.


                                  Available-for-Sale         Held-to-Maturity
--------------------------------------------------------------------------------
                                Amortized      Fair       Amortized      Fair
                                   Cost        Value         Cost        Value
--------------------------------------------------------------------------------
Due in one year or less:
  U.S. Agency securities        $  64,860    $  64,610    $       -    $       -
After one year through
  five years:
  U.S. Agency securities            9,992        9,934            -            -
After five years through
  ten years:
  States & political
    subdivisions                        -            -          240          266
After ten years:
  States & political
    subdivisions                   20,698       21,635       29,012       31,372
--------------------------------------------------------------------------------
  Subtotal                         95,550       96,179       29,252       31,638
Mortgage-backed securities         44,408       44,001       52,763       51,492
--------------------------------------------------------------------------------
  Total Debt Securities         $ 139,958    $ 140,180    $  82,015    $  83,130
================================================================================


                Penseco Financial Services Corporation  /  2005 Annual Report 31


<PAGE>


NOTE 3 -- INVESTMENT SECURITIES (CONTINUED)


The  gross  fair  value and  unrealized  losses  of the  Company's  investments,
aggregated by investment category and length of time that individual  securities
have been in a continuous  unrealized  loss  position,  at December 31, 2005 and
2004 are as follows:


<TABLE>
<CAPTION>

                                  Less than twelve months   Twelve months or more             Totals
------------------------------------------------------------------------------------------------------------
                                     Fair     Unrealized       Fair     Unrealized       Fair     Unrealized
December 31, 2005                    Value      Losses         Value      Losses         Value      Losses
------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>            <C>        <C>            <C>        <C>
U.S. Agency securities             $  39,870  $      227     $  34,674  $       81     $  74,544  $      308
Mortgage-backed securities             8,598         104        86,501       1,577        95,099       1,681
Equities                              1,298           73             -           -         1,298          73
------------------------------------------------------------------------------------------------------------
   Total                           $  49,766  $      404     $ 121,175  $    1,658     $ 170,941  $    2,062
============================================================================================================
</TABLE>


<TABLE>
<CAPTION>

                                  Less than twelve months   Twelve months or more             Totals
------------------------------------------------------------------------------------------------------------
                                     Fair     Unrealized       Fair     Unrealized       Fair     Unrealized
December 31, 2004                    Value      Losses         Value      Losses         Value      Losses
------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>            <C>        <C>            <C>        <C>
U.S. Agency securities             $  35,064  $      541     $       -  $        -     $  35,064  $      541
Mortgage-backed securities            93,527         393             -           -        93,527         393
States & political subdivisions        3,257          24         4,889          32         8,146          56
------------------------------------------------------------------------------------------------------------
  Total                            $ 131,848  $      958     $   4,889  $       32     $ 136,737  $      990
============================================================================================================
</TABLE>

The table above at December 31, 2005,  includes  twenty-one (21) securities that
have unrealized  losses for less than twelve months and ten (10) securities that
have been in an unrealized loss position for twelve or more months.


U.S. Agency Securities

The unrealized  losses on the Company's  investments in these  obligations  were
caused  by  recent  interest  rate  increases.  The  contractual  terms of these
investments  do not permit the issuer to settle the  securities  at a price less
than the par value of the  investment.  Because  the  Company has the ability to
hold these  investments  until a recovery of fair value,  which may be maturity,
the Company does not consider  these  investments  to be  other-than-temporarily
impaired at December 31, 2005.


Mortgage-Backed Securities

The unrealized losses on the Company's investment in mortgage-backed  securities
were caused by recent  interest rate increases.  The  contractual  cash flows of
these  investments  are  guaranteed  by  an  agency  of  the  U.S.   government.
Accordingly,  it is  expected  that these  securities  would not be settled at a
price less than the  amortized  cost of the  Company's  investment.  Because the
decline in market  value is  attributable  to changes in interest  rates and not
credit quality and because the Company has the ability to hold these investments
until a recovery  of fair value,  which may be  maturity,  the Company  does not
consider these investments to be other-than-temporarily impaired at December 31,
2005.


Marketable Equity Securities

The  unrealized  losses  on  the  Company's   investment  in  marketable  equity
securities  were caused  primarily by recent  interest rate  increases and other
market  conditions.  The Company's  investments in marketable  equity securities
consist  primarily of  investments in common stock of companies in the financial
services industry.  Because the Company has the ability and intent to hold these
investments for a reasonable period of time sufficient for a forecasted recovery
of  fair  value,  the  Company  does  not  consider  these   investments  to  be
other-than-temporarily impaired at December 31, 2005.


32 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


NOTE 4 -- LOANS

Major classifications of loans are as follows:

December 31,                                               2005           2004
-------------------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development                   $  13,132      $   6,805
  Secured by 1-4 family residential properties:
  Revolving, open-end loans                              15,070         19,356
  Secured by first liens                                125,950        102,583
  Secured by junior liens                                22,649         17,761
  Secured by multi-family properties                        355            411
  Secured by non-farm, non-residential properties        63,829         56,038
Commercial and industrial loans to U.S. addressees       42,894         41,560
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                           3,152          2,872
  Other (installment and student loans, etc.)            24,773         24,091
Obligations of states & political subdivisions            8,038          7,111
All other loans                                           1,520          1,588
-------------------------------------------------------------------------------
  Gross Loans                                           321,362        280,176
Less: Unearned income on loans                                -              -
-------------------------------------------------------------------------------
  Loans, Net of Unearned Income                       $ 321,362      $ 280,176
===============================================================================

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,627, $1,991 and $1,533 at December 31, 2005, 2004 and 2003,  respectively.
If interest on those loans had been  accrued,  such income would have been $264,
$199 and $198 for 2005,  2004 and 2003,  respectively.  Interest income on those
loans,  which is recorded only when  received,  amounted to $27, $16 and $29 for
2005, 2004 and 2003, respectively. Also, at December 31, 2005 and 2004, the Bank
had loans totalling $173 and $266, respectively,  which were past due 90 days or
more and still accruing interest (credit card and guaranteed student loans).


NOTE 5 -- ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,              2005       2004       2003
----------------------------------------------------------------
Balance at beginning of year       $ 3,600    $ 3,500    $ 3,347
Provision charged to operations        263        144        476
Recoveries credited to allowance        50          9         32
----------------------------------------------------------------
                                     3,913      3,653      3,855
Losses charged to allowance           (113)       (53)      (355)
----------------------------------------------------------------
  Balance at End of Year           $ 3,800    $ 3,600    $ 3,500
================================================================

A comparison of the provision for loan losses for Financial  Statement  purposes
with the allowable bad debt deduction for tax purposes is as follows:


Years Ended December 31,   Book Provision     Tax Deduction
------------------------   --------------     -------------
             2005              $ 263              $  63
             2004              $ 144              $  44
             2003              $ 476              $ 323


The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $380,  $664  and  $948 at  December  31,  2005,  2004  and  2003,
respectively.


NOTE 6 --LOAN SERVICING

The Company  services  $54,682 in  mortgage  loans for Freddie Mac which are not
included in the accompanying Consolidated Balance Sheets.


     Custodial escrow balances  maintained in connection with the foregoing loan
servicing,  and  included in  deposits,  were  approximately  $562 and $620,  at
December 31, 2005 and 2004,  respectively.  The balance of the servicing  rights
was  $314  and  $450  at  December  31,  2005  and  2004,  respectively,  net of
amortization.

     The Company has not recorded any new mortgage  servicing rights during 2005
or 2004.  Amortization expense of $136 and $197 was recorded for the years ended
December 31, 2005 and 2004, respectively.


     There was no  allowance  for  impairment  recorded at December  31, 2005 or
2004.


NOTE 7 -- BANK PREMISES AND EQUIPMENT

December 31,                                   2005           2004
------------------------------------------------------------------
Land                                      $   3,117      $   3,122
Buildings and improvements                   14,623         14,550
Furniture and equipment                      13,406         12,550
------------------------------------------------------------------
                                             31,146         30,222
Less: Accumulated depreciation               21,693         20,989
------------------------------------------------------------------
  Net Bank Premises and Equipment         $   9,453      $   9,233
==================================================================


Buildings and  improvements  are being  depreciated over 10 to 39.5 year periods
and equipment over 3 to 10 year periods.  Depreciation  expense amounted to $704
in 2005, $813 in 2004 and $1,119 in 2003.


     Occupancy  expenses were reduced by rental income received in the amount of
$61,  $63  and  $64 in the  years  ended  December  31,  2005,  2004  and  2003,
respectively.


NOTE 8 -- OTHER REAL ESTATE OWNED

Real estate  acquired  through  foreclosure  is recorded at the lower of cost or
market  at the time of  acquisition.  Any  subsequent  write-downs  are  charged
against operating expenses.  The other real estate owned as of December 31, 2005
and 2004 was $91 and $176,  respectively,  supported by  appraisals  of the real
estate involved.


NOTE 9 --  INVESTMENT  IN AND LOAN TO,  INCOME  FROM  DIVIDENDS  AND  EQUITY  IN
           EARNINGS OR LOSSES OF SUBSIDIARY

Penseco Realty, Inc. is a wholly-owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is presented below:


                                    Equity in
                                    underlying                   Bank's
           Percent         Total    net assets    Amount    proportionate
          of voting     investment  at balance      of      part of loss
Year     stock owned     and loan   sheet date   dividends  for the period
--------------------------------------------------------------------------
2005         100%        $ 3,250     $ 3,235       None        $     -
2004         100%        $ 3,350     $ 3,335       None        $     -
2003         100%        $ 3,450     $ 3,435       None        $     -


Penseco Financial Services Corporation / 2005 Annual Report 33


<PAGE>


NOTE 10 -- DEPOSITS

December 31,                                     2005              2004
-----------------------------------------------------------------------
Demand - Non-interest bearing               $  91,713         $  82,512
Demand - Interest bearing                      33,094            31,161
Savings                                        86,013            89,990
Money markets                                  80,463            91,604
Time - Over $100,000                           28,124            23,779
Time - Other                                   78,460            76,255
-----------------------------------------------------------------------
  Total                                     $ 397,867         $ 395,301
=======================================================================


Scheduled maturities of time deposits are as follows:

                       2006        $  62,185
                       2007           24,078
                       2008           10,390
                       2009            3,447
                       2010            5,634
        2011 and thereafter              850
--------------------------------------------
                      Total        $ 106,584
============================================


NOTE 11 -- OTHER BORROWED FUNDS

At December 31, 2005 and 2004, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase agreements.

     Short-term borrowings generally have original maturity dates of thirty days
or less.

     Investment  securities  with amortized costs and fair values of $35,209 and
$35,026 at December 31, 2005 and $28,007 and $28,360 at December 31, 2004,  were
pledged to secure repurchase agreements.

Years Ended December 31,                                  2005              2004
--------------------------------------------------------------------------------
Amount outstanding at year end                        $ 35,040          $ 19,284
Average interest rate at year end                        2.01%              .75%
Maximum amount outstanding at any month end           $ 35,040          $ 30,176
Average amount outstanding                            $ 27,638          $ 22,776
Weighted average interest rate during the year:
  Federal funds purchased                                3.96%             2.21%
  Repurchase agreements                                  1.46%              .75%
  Demand notes to U.S. Treasury                          2.99%             1.11%

The Company has an available  credit  facility with the Federal  Reserve Bank in
the amount of $10,000,  secured by pledged  securities  with amortized costs and
fair values of $10,257 and $10,008 at December  31, 2005 and $10,287 and $10,231
at December 31, 2004 and with interest  rates of 5.25% and 3.25% at December 31,
2005 and December 31, 2004, respectively. There is no stated expiration date for
the credit facility as long as the Company  maintains the pledged  securities at
the Federal  Reserve Bank.  There was no outstanding  balance as of December 31,
2005 and 2004, respectively.

     The Company has the availability of a $5,000  overnight  Federal funds line
of credit  with  Wachovia  Bank,  N.A.  There was no balance  outstanding  as of
December 31, 2005 and 2004, respectively.

     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$171,053 with the Federal Home Loan Bank of Pittsburgh.


NOTE 12 -- LONG-TERM DEBT

The loans from the  Federal  Home Loan Bank,  which were  borrowed to purchase a
mortgage-backed  security,  are  secured by a general  collateral  pledge of the
Company's assets.

     A summary of long-term debt,  including  amortizing  principal and interest
payments, at December 31, 2005 is as follows:

Monthly           Fixed       Maturity
Installment        Rate         Date        Balance

$ 161             2.73%       03/13/08     $  4,202
  253             3.22%       03/13/10       12,041
  430             3.74%       03/13/13       32,728
  186             4.69%       03/13/23       26,430
---------------------------------------------------
Total                                      $ 75,401
===================================================

     The Company  has agreed to maintain  sufficient  qualifying  collateral  to
fully secure the above borrowings.

     Aggregate maturities of long-term debt at December 31, 2005 are as follows:
2006 $9,547,  2007 $9,887,  2008 $8,781, 2009 $8,612, 2010 $6,635 and thereafter
$31,939 for a total of $75,401.


NOTE 13 -- EMPLOYEE BENEFIT PLANS

The Company  provides an Employee  Stock  Ownership  Plan  (ESOP),  a Retirement
Profit  Sharing  Plan,  an  Employees'  Pension  Plan,  as well  as an  unfunded
supplemental  executive  pension plan and a Postretirement  Life Insurance Plan,
all non-contributory, covering all eligible employees.

     Under the Employee Stock Ownership Plan (ESOP),  amounts voted by the Board
of Directors  are paid into the ESOP and each  employee is credited with a share
in proportion to their annual  compensation.  All  contributions to the ESOP are
invested in or will be invested  primarily in Company stock.  Distribution  of a
participant's  ESOP account  occurs upon  retirement,  death or  termination  in
accordance with the plan provisions.

     At  December  31, 2005 and 2004,  the ESOP held  87,840 and 89,316  shares,
respectively  of the  Company's  stock,  all of which were acquired as described
above and allocated to specific participant  accounts.  These shares are treated
the same for dividend  purposes and earnings per share  calculations  as are any
other outstanding shares of the Company's stock. The Company contributed $70, $0
and $0 to the plan  during the years ended  December  31,  2005,  2004 and 2003,
respectively.

     Under the  Retirement  Profit  Sharing Plan,  amounts voted by the Board of
Directors  are paid into a fund and each  employee is  credited  with a share in
proportion to their annual compensation.  Upon retirement, death or termination,
each  employee is paid the total amount of their credits in the fund in one of a
number of optional  ways in  accordance  with the plan  provisions.  The Company
contributed  $70,  $60 and $70 to the plan during the years ended  December  31,
2005, 2004 and 2003, respectively.

     Under the Pension Plan,  amounts computed on an actuarial basis are paid by
the Company into a trust fund.  Provision is made for fixed benefits payable for
life  upon  retirement  at  the  age of 65,  based  on  length  of  service  and
compensation  levels as defined in the plan.  Plan  assets of the trust fund are
invested and  administered  by the Trust  Department  of Penn  Security Bank and
Trust Company.

     The unfunded supplemental  executive pension plan provides certain officers
with  additional  retirement  benefits  to replace  benefits  lost due to limits
imposed on qualified plans by Federal tax law.

     The postretirement life insurance plan is an unfunded,  non-vesting defined
benefit plan. The plan is non-contributory  and provides for a reducing level of
term life insurance coverage following retirement.

     For the unfunded plans above,  amounts calculated on an actuarial basis are
recorded as a liability.


34 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)

A reconciliation  of the funded status of the plans with amounts reported on the
Consolidated Balance Sheets is as follows:

                                          Pension Benefits       Other Benefits
                                          ----------------       ---------------
December 31,                                 2005       2004      2005     2004
--------------------------------------------------------------------------------
Change in benefit obligation:
  Benefit obligation, beginning          $ 11,800   $ 10,884    $  285   $  269
  Service cost                                415        385         6        6
  Interest cost                               678        664        16       16
  Change in assumptions                       947        256       (10)       3
  Actuarial (gain) loss                      (223)       (59)        -        -
  Benefits paid                              (350)      (330)      (10)      (9)
--------------------------------------------------------------------------------
  Benefit obligation, ending               13,267     11,800       287      285
--------------------------------------------------------------------------------
Change in plan assets:
  Fair value of plan assets, beginning      9,469      8,713         -        -
  Actual return on plan assets                213        713         -        -
  Employer contribution                       377        373         -        -
  Benefits paid                              (350)      (330)        -        -
-------------------------------------------------------------------------------
  Fair value of plan assets, ending         9,709      9,469         -        -
--------------------------------------------------------------------------------
Funded status                              (3,558)    (2,331)     (287)    (285)
Unrecognized net actuarial loss (gain)      3,933      2,775       (33)     (23)
Unrecognized prior service cost                53         54        41       49
--------------------------------------------------------------------------------
  Net amount recognized                  $    428   $    498    $ (279)  $ (259)
================================================================================


Amounts recognized in the balance sheet consist of:

                                           Pension Benefits     Other Benefits
                                           ----------------     --------------
December 31,                                  2005     2004       2005     2004
--------------------------------------------------------------------------------
Prepaid benefit cost                      $    580   $  643     $    0   $    0
Accrued benefit cost                        (1,683)    (145)      (279)    (259)
Deferred tax asset                             520        0          0        0
Accumulated other comprehensive income       1,011        0          0        0
--------------------------------------------------------------------------------
  Net amount recognized                   $    428   $  498     $ (279)  $ (259)
================================================================================

The  accumulated  benefit  obligation for all defined  benefit pension plans was
$10,866 and $9,510 at December 31, 2005 and 2004, respectively.


Information for pension plans with an accumulated  benefit  obligation in excess
of plan assets is as follows:

                                                 Pension Benefits
                                                 ----------------
                                                 2005          2004
-------------------------------------------------------------------
Projected benefit obligation                 $ 13,267         $ 142
Accumulated benefit obligation                 10,866           142
Fair value of plan assets                       9,709             0

The principal  portion of the unfunded  pension  liability of $1,157 at December
31, 2005 relates to the Company's  Defined  Benefit  Pension Plan for employees.
This unfunded  liability was caused primarily by the use of a 5.5% discount rate
at December 31, 2005. In 2006,  the Company made an additional  contribution  of
$1,005 which was recorded as a Prepaid Benefit Cost. The  contribution  will not
have a negative  impact on 2006  earnings.  The  remaining  $152  relates to the
Supplemental Executive Pension Plan which will be paid out to a retiring officer
during 2006.


A reconciliation of net periodic pension and other benefit costs is as follows:

                                                  Pension Benefits
                                                  ----------------
Years Ended December 31,                     2005       2004       2003
------------------------------------------------------------------------
Components of net periodic pension cost:
  Service cost                             $  415     $  385     $  385
  Interest cost                               678        664        635
  Expected return on plan assets             (755)      (700)      (624)
  Amortization of prior service cost            -          -          -
  Amortization of unrecognized net loss       114        114        175
------------------------------------------------------------------------
  Net periodic pension cost                $  452     $  463     $  571
========================================================================


                                                        Other Benefits
                                                        --------------
Years Ended December 31,                          2005       2004        2003
-----------------------------------------------------------------------------
Components of net periodic other benefit cost:
  Service cost                                    $  6       $  6       $  6
  Interest cost                                     16         16         15
  Amortization of prior service cost                 7          7          8
  Amortization of unrecognized net gain              -          -         (1)
-----------------------------------------------------------------------------
  Net periodic other benefit cost                 $ 29       $ 29       $ 28
=============================================================================

The projected benefit obligation,  accumulated benefit obligation and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $152, $152 and $0,  respectively at December 31, 2005
and $142, $142 and $0, respectively at December 31, 2004.


                Penseco Financial Services Corporation  /  2005 Annual Report 35


<PAGE>


NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)

Weighted-average assumptions used to determine benefit obligations were as
follows:

                                           Pension Benefits       Other Benefits
                                           ----------------       --------------
December 31,                              2005         2004       2005     2004
--------------------------------------------------------------------------------
Discount rate                       5.50%-6.00%        6.00%      6.00%    6.00%
Rate of compensation increase             4.00%        4.00%      4.50%    4.50%


                                           Pension Benefits       Other Benefits
                                           ----------------       --------------
Years Ended December 31,                  2005         2004       2005     2004
--------------------------------------------------------------------------------
Discount rate                       5.50%-6.00%        6.00%      6.00%    6.00%
Expected long-term return
  on plan assets                          8.00%        8.00%         -         -
Rate of compensation increase             4.00%        4.00%      4.50%    4.50%


The  expected  long-term  return on plan  assets was  determined  using  average
historical returns of the Company's plan assets.


     The Company's pension plan  weighted-average  asset allocations at December
31, 2005 and 2004 by asset category are as follows:

                                   Plan Assets at December 31,
                                   ---------------------------
                                      2005             2004
--------------------------------------------------------------
Asset Category
--------------
Equity securities                      55.7%           54.4%
Corporate bonds                        24.6%           35.1%
U.S. Government securities             19.4%            8.1%
Cash and cash equivalents                .3%            2.4%
--------------------------------------------------------------
                                      100.0%          100.0%
==============================================================


The Company investment policies and strategies include:

1.) The Trust and Investment Division's equity philosophy is Large-Cap Core with
a value bias. We invest in individual high-grade common stocks that are selected
from our approved list.

2.)  Diversification  is  maintained  by having no more than 20% in any industry
sector and no individual equity representing more than 10% of the portfolio.

3.) The fixed income style is  conservative  but also  responsive to the various
needs of our individual clients. For our "Fixed Income" securities,  we buy U.S.
Government bonds and Agencies or high-grade  Corporate rated "A" or better.  The
Company targets the following  allocation  percentages:  cash  equivalents  10%,
fixed income 40% and equities 50%.

     There is no Company  stock  included in equity  securities  at December 31,
2005 or 2004.


Contributions
-------------

The Company  expects to  contribute  $246,  in addition to the $1,005  disclosed
above, to its pension plan and $13 to its other postretirement plan in 2006.

Estimated Future Benefit Payments
---------------------------------

The following  benefit  payments,  which reflect  expected  future  service,  as
appropriate, are expected to be paid in the next five years and in the aggregate
for the five years thereafter:

                 Pension Benefits      Other Benefits
                 ----------------      --------------
2006               $    481                $ 13
2007                    482                  13
2008                    488                  13
2009                    485                  13
2010                    494                  13
2011-2015             3,412                  87


NOTE 14 -- INCOME TAXES

The total income taxes in the Statements of Income are as follows:


Years Ended December 31,                2005             2004             2003
-------------------------------------------------------------------------------
Currently payable                   $  1,447         $  1,190         $  1,810
Deferred provision (benefit)             166             (119)            (182)
-------------------------------------------------------------------------------
  Total                             $  1,613         $  1,071         $  1,628
===============================================================================


A reconciliation  of income taxes at statutory rates to applicable  income taxes
reported in the Statements of Income is as follows:


Years Ended December 31,                2005             2004             2003
-------------------------------------------------------------------------------
Tax at statutory rate               $  2,544         $  2,268         $  2,584
Reduction for non-taxable interest    (1,012)          (1,262)            (978)
Other additions                           81               65               22
-------------------------------------------------------------------------------
  Applicable Income Taxes           $  1,613         $  1,071         $  1,628
===============================================================================


The components of the deferred income tax provision (benefit), which result from
temporary differences, are as follows:

Years Ended December 31,                2005             2004             2003
-------------------------------------------------------------------------------
Accretion of discount on bonds      $     18         $     24         $   (121)
Accelerated depreciation                  (4)              21               67
Supplemental benefit plan                 (3)              (1)             (16)
Allowance for loan losses               (165)            (130)             (53)
Prepaid pension cost                     320              (33)             (59)
-------------------------------------------------------------------------------
  Total                              $   166         $   (119)        $   (182)
===============================================================================


The  significant  components  of  deferred  tax  assets and  liabilities  are as
follows:

December 31,                                   2005           2004
------------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                 $ 1,163        $   998
  Minimum pension liability                     520              -
  Accumulated depreciation                      322            318
  Accrued supplemental benefit plan              51             48
------------------------------------------------------------------
  Total Deferred Tax Assets                   2,056          1,364
==================================================================

Deferred tax liabilities:
  Prepaid pension costs                         571            251
  Unrealized securities gains                   187            364
  Accumulated accretion                          69             51
------------------------------------------------------------------
  Total Deferred Tax Liabilities                827            666
------------------------------------------------------------------
  Net Deferred Tax Assets                   $ 1,229        $   698
==================================================================


In  management's  opinion,  the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carryback potential greater than the
deferred tax assets. Management is not aware of any evidence that would preclude
the  realization  of the  benefit  in  the  future  and,  accordingly,  has  not
established a valuation allowance against the deferred tax assets.


36 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


NOTE 15 -- ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other  comprehensive  income of ($648),  $704 and $1,836 at December
31, 2005, 2004 and 2003.


Other Comprehensive Income

Other  Comprehensive  Income  (Comprehensive  income,   excluding  net  income),
beginning  with  the  2005  period,  includes  two  components,  the  change  in
unrealized  holding  gains and losses on available for sale  securities  and the
change in the minimum pension liability.  The components of other  comprehensive
income are reported net of related tax effects in the Consolidated Statements of
Changes in  Stockholders'  Equity.  Prior to 2005,  other  comprehensive  income
included only one component,  the change in unrealized  holding gains and losses
on available for sale securities, net of related tax effects.


     A reconciliation of other comprehensive income for the years ended December
31, 2005, 2004 and 2003 is as follows:


<TABLE>
<CAPTION>
                                                                                    Tax
                                                                     Before-Tax  (Expense)  Net-of-Tax
2005                                                                   Amount     Benefit     Amount
------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>        <C>
Unrealized losses on available-for-sale securities:
  Unrealized losses arising during the year                          $   (531)    $   181    $   (350)
  Less:  Reclassification adjustment for losses realized in income        (13)          4          (9)
                                                                     -----------------------  --------
  Net unrealized losses                                                  (518)        177        (341)

Change in minimum pension liability                                    (1,531)        520      (1,011)
------------------------------------------------------------------------------------------------------
  Other Comprehensive Income                                         $ (2,049)    $   697    $ (1,352)
======================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                                    Tax
                                                                     Before-Tax  (Expense)  Net-of-Tax
2004                                                                   Amount     Benefit     Amount
------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>        <C>
Unrealized losses on available-for-sale securities:
  Unrealized losses arising during the year                          $ (1,357)    $   461    $   (896)
  Less:  Reclassification adjustment for gains realized in income         357        (121)        236
------------------------------------------------------------------------------------------------------
  Net unrealized losses                                              $ (1,714)    $   582    $ (1,132)
=====================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                                    Tax
                                                                     Before-Tax  (Expense)  Net-of-Tax
2003                                                                   Amount     Benefit     Amount
------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>        <C>
Unrealized losses on available-for-sale securities:
  Unrealized losses arising during the year                          $ (1,536)    $   522    $ (1,014)
  Less:  Reclassification adjustment for gains realized in income         341        (116)        225
------------------------------------------------------------------------------------------------------
  Net unrealized losses                                              $ (1,877)    $   638    $ (1,239)
======================================================================================================
</TABLE>


NOTE 16 --COMMITMENTS AND CONTINGENT LIABILITIES

In the  normal  course  of  business,  there  are  outstanding  commitments  and
contingent   liabilities,   created  under   prevailing   terms  and  collateral
requirements  such as  commitments to extend  credit,  financial  guarantees and
letters  of  credit,  which  are not  reflected  in the  accompanying  Financial
Statements.  The  Company  does not  anticipate  any losses as a result of these
transactions.  These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.

     The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.

     Financial  instruments  whose  contract  amounts  represent  credit risk at
December 31, 2005 and 2004 are as follows:

                                        2005              2004
--------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                        $ 41,229          $ 21,152
  Variable rate                     $ 75,100          $ 67,502

Standby letters of credit           $ 15,268          $ 17,662


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

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

     Various actions and proceedings are presently  pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising  from such  actions  would  not have a  material  adverse  effect on the
financial position of the Company.

     The Company is upgrading its computer technology at an estimated total cost
of $1.5 million of which $.7 million has been incurred through December 31, 2005
and is included in fixed assets,  but not yet placed in service.  The project is
expected to be completed in the first quarter of 2006.


                Penseco Financial Services Corporation  /  2005 Annual Report 37


<PAGE>


NOTE 17 -- FAIR VALUE DISCLOSURE


GENERAL

Statement of Financial  Accounting  Standards  No.107,  "Disclosures  about Fair
Value of  Financial  Instruments"  (SFAS 107),  requires the  disclosure  of the
estimated fair value of on and off-balance sheet financial instruments.


VALUATION METHODS AND ASSUMPTIONS

Estimated fair values have been  determined  using the best  available  data, an
estimation methodology suitable for each category of financial instruments.  For
those loans and  deposits  with  floating  interest  rates it is  presumed  that
estimated fair values generally approximate the carrying amount balances.

     Financial  instruments  actively  traded in a  secondary  market  have been
valued using quoted available market prices.  Those with stated  maturities have
been valued  using a present  value  discounted  cash flow with a discount  rate
approximating   current  market  for  similar  assets  and  liabilities.   Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount  payable  on demand and the  carrying  amount  balance.  The net loan
portfolio  has been  valued  using a present  value  discounted  cash flow.  The
discount rate used in these  calculations  is the current loan rate adjusted for
non-interest  operating  costs,  credit loss and assumed  prepayment  risk.  Off
balance sheet carrying amounts and fair value of letters of credit represent the
deferred income fees arising from those unrecognized financial instruments.

     Changes in  assumptions  or  estimation  methodologies  may have a material
effect on these estimated fair values.

     All assets and liabilities which are not considered  financial  instruments
have not been valued  differently  than has been customary with  historical cost
accounting.


<TABLE>
<CAPTION>
                                                          December 31, 2005             December 31, 2004
                                                      Carrying          Fair             Carrying          Fair
                                                       Amount           Value             Amount           Value
-------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>               <C>              <C>
Financial Assets:
  Cash and due from banks                            $  11,310        $   11,310        $   7,763        $    7,763
  Interest bearing balances with banks                     263               263              534               534
-------------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents                           11,573            11,573            8,297             8,297
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities                               -                 -            5,077             5,077
      U.S. Agency obligations                          118,545           118,545          124,528           124,528
      States & political subdivisions                   21,635            21,635           31,540            31,540
      Federal Home Loan Bank stock                       4,699             4,699            5,604             5,604
      Other securities                                   3,063             3,063              661               661
    Held-to-maturity:
      U.S. Agency obligations                           52,763            51,492           66,019            65,672
      States & political subdivisions                   29,252            31,638           29,249            32,119
-------------------------------------------------------------------------------------------------------------------
      Total investment securities                      229,957           231,072          262,678           265,201
  Loans, net of unearned income:
    Real estate mortgages                              240,985           235,427          202,954           198,244
    Commercial                                          42,894            42,894           41,560            41,560
    Consumer and other                                  37,483            37,899           35,662            35,891
    Less:  Allowance for loan losses                     3,800                              3,600
-------------------------------------------------------------------------------------------------------------------
      Loans, net                                       317,562           316,220          276,576           275,695
-------------------------------------------------------------------------------------------------------------------
      Total Financial Assets                           559,092        $  558,865          547,551        $  549,193
Other assets                                            16,596                             16,157
-------------------------------------------------------------------------------------------------------------------
      Total Assets                                   $ 575,688                          $ 563,708
===================================================================================================================

Financial Liabilities:
  Demand - Non-interest bearing                      $  91,713        $   91,713        $  82,938        $   82,938
  Demand - Interest bearing                             33,094            33,094           31,161            31,161
  Savings                                               86,013            86,013           80,307            80,307
  Money markets                                         80,463            80,463           91,604            91,604
  Time                                                 106,584           107,794          109,291           110,953
-------------------------------------------------------------------------------------------------------------------
      Total Deposits                                   397,867           399,077          395,301           396,963
  Repurchase agreements                                 30,414            30,414           18,398            18,398
  Short-term borrowings                                  4,626             4,626              886               886
  Long-term borrowings                                  75,401            75,710           84,620            84,655
-------------------------------------------------------------------------------------------------------------------
      Total Financial Liabilities                      508,308        $  509,827          499,205        $  500,902
Other Liabilities                                        3,581                              2,127
Stockholders' Equity                                    63,799                             62,376
-------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity     $ 575,688                          $ 563,708
===================================================================================================================
Standby Letters of Credit                            $    (153)       $     (153)       $    (177)       $     (177)
</TABLE>


38 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


NOTE 18 -- OPERATING LEASES

The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several  locations  which are being used as remote  banking
facilities.  Rental  expense was $94 in 2005,  $90 in 2004 and $86 in 2003.  All
leases contain  renewal  options.  The Mount Pocono and the Meadow Avenue leases
contain  the right of first  refusal  for the  purchase  of the  properties  and
provisions for annual rent adjustments based upon the Consumer Price Index.

     Future minimum rental  commitments  under these leases at December 31, 2005
are as follows:

                                     Mount    Meadow      ATM
                                    Pocono    Avenue     Sites    Total
-----------------------------------------------------------------------
2006                                $   52    $   14    $   13    $  79
2007                                    52         -        10       62
2008                                    52         -         4       56
2009                                    52         -         -       52
2010                                    53         -         -       53
2011                                    22         -         -       22
-----------------------------------------------------------------------
  Total minimum payments required   $  283    $   14    $   27    $ 324
=======================================================================


NOTE 19 -- LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

The  Company  has  had,  and may be  expected  to have  in the  future,  banking
transactions  in the  ordinary  course of  business  with  directors,  principal
officers,  their immediate  families and affiliated  companies in which they are
principal  stockholders  (commonly referred to as related parties),  on the same
terms, including interest rates and collateral,  as those prevailing at the time
for  comparable  transactions  with  others.  A summary  of loans to  directors,
principal officers and related parties is as follows:


Years Ended December 31,               2005             2004
-------------------------------------------------------------
Beginning Balance                  $  9,632         $  5,265
Additions                             5,387            4,899
Reclassifications                      (217)               -
Collections                          (4,312)            (532)
-------------------------------------------------------------
  Ending Balance                   $ 10,490         $  9,632
=============================================================


In addition to the loan amounts shown above, the Bank has issued standby letters
of credit for the accounts of related parties in the amount of $6,545.


NOTE 20 -- REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the Federal banking  agencies.  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 Company and the Bank's Consolidated Financial Statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the  Company  and  the  Bank  must  meet  specific  capital
guidelines that involve quantitative measures of their assets, liabilities,  and
certain  off-balance  sheet  items as  calculated  under  regulatory  accounting
practices.  The Company and the Bank's capital amounts and  classifications  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 Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the Capital  Adequacy table on the following  page) of Tier I and Total
Capital  to  risk-weighted  assets  and of  Tier I  Capital  to  average  assets
(Leverage  ratio).  The table also presents the Company's actual capital amounts
and ratios.  The Bank's  actual  capital  amounts  and ratios are  substantially
identical to the Company's.  Management believes,  as of December 31, 2005, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject.

     As of December  31,  2005,  the most recent  notification  from the Federal
Deposit  Insurance   Corporation   (FDIC)   categorized  the  Company  as  "well
capitalized" under the regulatory  framework for prompt corrective action. To be
categorized  as "well  capitalized",  the Company must  maintain  minimum Tier I
Capital,  Total Capital and Leverage ratios as set forth in the Capital Adequacy
table. There are no conditions or events since that notification that management
believes have changed the Company's categorization by the FDIC.

     The Company and Bank are also subject to minimum capital levels which could
limit the payment of  dividends,  although the Company and Bank  currently  have
capital levels which are in excess of minimum capital level ratios required.

     The Pennsylvania Banking Code restricts capital funds available for payment
of dividends to the Retained Earnings of the Bank. Accordingly,  at December 31,
2005, the balances in the Capital Stock and Surplus accounts  totalling  $10,840
are unavailable for dividends.

     In addition,  the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's  affiliates.  These transactions include
extensions  of  credit,  purchases  of or  investments  in stock  issued  by the
affiliate,  purchases of assets  subject to certain  exceptions,  acceptance  of
securities  issued by an affiliate as collateral for loans,  and the issuance of
guarantees,  acceptances,  and letters of credit on behalf of affiliates.  These
restrictions  prevent the  Company's  affiliates  from  borrowing  from the Bank
unless the loans are secured by obligations of designated amounts.  Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's Capital Stock and Surplus,  and the aggregate
of such  transactions with all affiliates is limited to 20 percent of the Bank's
Capital Stock and Surplus.  The Federal Reserve System has interpreted  "Capital
Stock and Surplus" to include undivided profits.


                Penseco Financial Services Corporation  /  2005 Annual Report 39


<PAGE>


NOTE 20 -- REGULATORY MATTERS (CONTINUED)


<TABLE>
<CAPTION>
               Actual                                       Regulatory Requirements
----------------------------------------------    --------------------------------------------

                                                       For Capital                To Be
                                                    Adequacy Purposes       "Well Capitalized"
As of December 31, 2005        Amount   Ratio        Amount    Ratio          Amount    Ratio
----------------------------------------------------------------------------------------------

<S>                           <C>       <C>       <C>         <C>         <C>         <C>
Total Capital
(to Risk Weighted Assets)     $ 67,933  18.62%    > $ 29,188  > 8.0%      > $ 36,486  > 10.0%
                                                  -           -           -           -
Tier 1 Capital
(to Risk Weighted Assets)     $ 64,133  17.58%    > $ 14,594  > 4.0%      > $ 21,892  >  6.0%
                                                  -           -           -           -
Tier 1 Capital
(to Average Assets)           $ 64,133  11.28%    >        *  >   *       > $ 28,415  >  5.0%
                                                  -           -           -           -
</TABLE>

*3.0% ($17,049), 4.0% ($22,732) or 5.0% ($28,415) depending on the bank's CAMELS
Rating and other regulatory risk factors.


<TABLE>
<CAPTION>
               Actual                                       Regulatory Requirements
----------------------------------------------    --------------------------------------------
                                                       For Capital                To Be
                                                    Adequacy Purposes       "Well Capitalized"

December 31, 2004              Amount   Ratio        Amount    Ratio          Amount    Ratio
----------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>         <C>         <C>         <C>
Total Capital
  (to Risk Weighted Assets)   $ 64,822  20.03%    > $ 25,890  > 8.0%      > $ 32,362  > 10.0%
                                                  -           -           -
Tier I Capital
  (to Risk Weighted Assets)   $ 61,222  18.92%    > $ 12,945  > 4.0%      > $ 19,417  >  6.0%
                                                  -           -           -
Tier I Capital
  (to Average Assets)         $ 61,222  10.53%    >        *  >   *       > $ 29,068  >  5.0%
                                                  -           -           -
</TABLE>

*3.0% ($17,441), 4.0% ($23,254) or 5.0% ($29,068) depending on the bank's CAMELS
Rating and other regulatory risk factors.


NOTE 21 -- PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:


BALANCE SHEETS

December 31,                                      2005        2004
------------------------------------------------------------------
Cash                                          $      5    $      8
Interest bearing balances with banks                76           -
------------------------------------------------------------------
  Cash and Cash Equivalents                         81           8
Investment in bank subsidiary                   60,787      61,859
Equity Investments                               3,043         642
------------------------------------------------------------------
Total Assets                                  $ 63,911    $ 62,509
==================================================================

Total Liabilities                             $    112    $    133
Total Stockholders' Equity                      63,799      62,376
------------------------------------------------------------------
Total Liabilities and Stockholders' Equity    $ 63,911    $ 62,509
==================================================================


STATEMENTS OF INCOME

Years Ended December 31,                                  2005     2004     2003
--------------------------------------------------------------------------------
Dividends from bank subsidiary                         $ 5,594  $ 2,900  $ 2,900
Dividends on investment securities                          45       11       10
Interest on balances with banks                              3        -        -
--------------------------------------------------------------------------------
  Total Income                                           5,642    2,911    2,910
Other non-interest expense                                  10       10       10
--------------------------------------------------------------------------------
Net income before undistributed earnings
  of bank subsidiary                                     5,632    2,901    2,900
Undistributed earnings of bank subsidiary                  237    2,700    3,071
--------------------------------------------------------------------------------
Net Income                                             $ 5,869  $ 5,601  $ 5,971
================================================================================


STATEMENTS OF CASH FLOWS

Years Ended December 31,                            2005       2004        2003
--------------------------------------------------------------------------------
Operating Activities:
Net Income                                      $  5,869   $  5,601   $   5,971
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Equity in undistributed net income
      of bank subsidiary                            (237)    (2,700)     (3,071)
--------------------------------------------------------------------------------
    Net cash provided by operating activities      5,632      2,901       2,900
--------------------------------------------------------------------------------
Investing Activities:
Purchase of equity investments                    (2,465)         -           -
--------------------------------------------------------------------------------
    Net cash used by investing activities         (2,465)         -           -
--------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                               (3,094)    (2,900)     (2,900)
--------------------------------------------------------------------------------
    Net cash used by financing activities         (3,094)    (2,900)     (2,900)
--------------------------------------------------------------------------------
    Net increase in cash and cash equivalents         73          1           -
Cash and cash equivalents at January 1                 8          7           7
--------------------------------------------------------------------------------
Cash and cash equivalents at December 31        $     81   $      8   $       7
================================================================================


40 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>

                               Executive Officers
                               ------------------


                                  Craig W. Best
                                President and CEO

                                Richard E. Grimm
                 Executive Vice-President, Treasurer and Cashier

                                 Peter F. Moylan
        Executive Vice-President, Non-Deposit Services and Trust Officer

                             William J. Calpin, Jr.
                      Senior Vice-President, Trust Services

                              Andrew A. Kettel, Jr.
                              Senior Vice-President

                               Christe A. Casciano
                      Vice-President, Director of Marketing

                              Michael G. Ostermayer
            Vice-President, Chief Investment Officer, Trust Services

                                Richard P. Rossi
                   Vice-President, Director of Human Resources

                                Lynn Peters Thiel
                       Vice-President, Compliance Officer

                                   James Tobin
                       Vice-President, Charge Card Manager

                                 John H. Warnken
                           Vice-President, Operations

                                 Robert P. Heim
                           Director of Internal Audit

                                 Patrick Scanlon
                                   Controller

                                 P. Frank Kozik
                                    Secretary


                Penseco Financial Services Corporation  /  2005 Annual Report 41


<PAGE>


                                Company Officers
                                ----------------


ASSISTANT VICE-PRESIDENTS
John R. Anderson III
Carl M. Baruffaldi
Mark M. Bennett
  and Assistant Secretary
Denise M. Cebular
Carol Curtis McMullen
  Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
  and Assistant Treasurer
J. Patrick Dietz
Frank Gardner
Lisa A. Kearney
Eleanor Kruk
Thomas J. Malinchak
Caroline Mickelson
Louis J. Rizzo
Aleta Sebastianelli
  and Assistant Secretary
Jeffrey Solimine
Jennifer S. Wohlgemuth
Linda Wolf
  and Training Officer
Beth S. Wolff
Deborah A. Wright
  and Outside Sales
Mark J. Zakoski

ASSISTANT CASHIERS
Pamela Edwards
Barbara Garofoli
Susan T. Holweg
Susan A. Kopp
Jacqueline Lucke
Kristen A. McGoff
  and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT BRANCH OPERATIONS OFFICERS
Tanya L. Frable
Melissa McLain

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT CONTROLLER
Susan M. Bray
  and Assistant Treasurer

ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

ASSISTANT TRUST OFFICER
Dominick P. Gianuzzi

BRANCH OPERATIONS MANAGER
Robin L. Jenkins

BRANCH OPERATIONS OFFICERS
Patricia A. Bruno
Sheila Caprario
Kathleen Griffiths
Stephen A. Hoffman

COLLECTIONS OFFICER
Robert E. Diehl

COMPUTER OPERATIONS OFFICER
Charles Penn

COST ACCOUNTING OFFICER
David R. Weiland

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF SYSTEMS / NETWORKING
Robert J. Saslo

LOAN ADMINISTRATION OFFICERS
Susan D. Blascak
Carol J. Ives

LOAN OFFICER
Denise Belton

MERCHANT OFFICER
Jill Ross

OPERATIONS OFFICER
Patricia Pliske

TAX OFFICER
Robert W. McDonald

TRUST ADMINISTRATOR
Kristen R. Noll

TRUST OPERATIONS OFFICER
Carol Trezzi

TRUST INVESTMENT OFFICER
Paul J. Macknosky III


42 Penseco Financial Services Corporation / 2005 Annual Report


<PAGE>


                              Company Board Members
                              ---------------------


PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS


Craig W. Best
President and CEO

Edwin J. Butler
Retired Bank Officer

Richard E. Grimm
Executive Vice-President, Treasurer and Cashier

Russell C. Hazelton
Retired Captain, Trans World Airlines

D. William Hume
Chairman of the Board, Retired Bank Officer

James G. Keisling
CEO Compression Polymers Corp. and Vycom Corp.,
  Manufacturers of Plastic Sheet Products

P. Frank Kozik
President and CEO, Scranton Craftsmen, Inc., Manufacturer of
  Ornamental Iron and Precast Concrete Products

Robert W. Naismith, Ph.D.
Chairman and CEO, Life Science Analytics, Inc.

James B. Nicholas
President, D. G. Nicholas Co., Wholesale Auto Parts Company

Emily S. Perry
Retired Insurance Account Executive & Community Volunteer

Sandra C. Phillips
Penn State Master Gardener & Community Volunteer

Otto P. Robinson, Jr.
Attorney-at-Law, Retired Bank Officer

Steven L. Weinberger
President of G. Weinberger Company, Mechanical Contractor
  Specializing in Commercial & Industrial Construction


PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

ABINGTON OFFICE
Carl M. Baruffaldi
James L. Burne, DDS
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Attorney Patrick J. Lavelle
Sandra C. Phillips

EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Frank Gardner
Judge Carmen Minora
Mark R. Sarno

EAST STROUDSBURG OFFICE
Denise M. Cebular
Robert J. Dillman, Ph.D.
Attorney Kirby Upright
Jeffrey Weichel

GREEN RIDGE OFFICE
Joseph N. Connor
Everett Jones
Caroline Mickelson
George Noone
Jeffrey Solimine

MOUNT POCONO OFFICE
Francis Cappelloni
Robert C. Hay
David Lansdowne
Thomas J. Malinchak

NORTH POCONO OFFICE
Jacqueline A. Carling
Anthony J. Descipio
George F. Edwards, Jr.
James A. Forti
Attorney David Z. Smith
Beth S. Wolff

SOUTH SIDE OFFICE
Attorney Zygmunt R. Bialkowski, Jr.
Michael P. Brown
J. Patrick Dietz
Lois Ferrari
Jeffrey J. Leventhal
Ted M. Stampien, DDS


                Penseco Financial Services Corporation  /  2005 Annual Report 43


<PAGE>


                                Customer Services
                                -----------------


    A detailed listing of the services offered by the Company is as follows:


DEPOSIT ACCOUNTS
All Purpose Clubs
Certificates of Deposit
Christmas Clubs
Demand Accounts
Individual Retirement Accounts
Money Market Accounts
NOW Accounts
Savings Accounts
Vacation Clubs

LENDING
Automobile Loans
Business Loans
Collateral Loans
Commercial Equipment Leasing
Construction Loans
Cosmic Card (Debit Card)
Credit Lines
Educational Loans
Home Equity Loans
Home Repair and Remodeling Loans
Installment Loans
MasterCard and VISA (Credit Card)
Mortgage Loans (Residential and Commercial)
Personal Loans

OTHER SERVICES
ATM Services
Bank Money Orders
Cash Management
Cashier's Checks
College Campus Card Interface
Direct Deposit of Recurring Payments
Foreign Remittance
Internet Banking
Investor Services
  (a) Brokerage
  (b) Insurance
Lockbox Services
Merchant Card Service
Night Depository
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
  (a) Administrator
  (b) Agent
  (c) Custodian and Trustee for Pension Plans
  (d) Executor
  (e) Trustee
  (f) Trustee for Public Bond Issues
U.S. Savings Bonds


BRANCH LOCATIONS  (Each Have ATMs)


Abington
1100 Northern Boulevard
Clarks Summit, PA  18411
Carl M. Baruffaldi, Manager
(570) 587-4898

East Scranton
Prescott Avenue & Ash Street
Scranton, PA  18510
Frank Gardner, Manager
(570) 342-9101

East Stroudsburg
Route 209 & Route 447
East Stroudsburg, PA  18301
Denise M. Cebular, Manager
(570) 420-0432

Gouldsboro
Main & Second Streets
Gouldsboro, PA  18424
Robin L. Jenkins, Branch Operations Manager
(570) 842-6473

Green Ridge
1901 Sanderson Avenue
Scranton, PA  18509
Jeffrey Solimine, Manager
(570) 346-4695

Central City
150 North Washington Avenue
Scranton, PA  18503
Andrew A. Kettel, Jr., Manager
(570) 346-7741

Mount Pocono
Route 611 & Route 940
Mount Pocono, PA  18344
Thomas J. Malinchak, Manager
(570) 839-8732

North Pocono
Main & Academy Streets
Moscow, PA  18444
Beth S. Wolff, Manager
(570) 842-7626

South Scranton
526 Cedar Avenue
Scranton, PA  18505
J. Patrick Dietz, Manager
(570) 343-1151


                               OTHER ATM LOCATIONS
                               -------------------


Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA

Dino & Francesco's Restaurant
Birney Plaza
Moosic, PA

Drive-Up ATM
Meadow Avenue & Hemlock Street
Scranton, PA

Hilton Hotel & Conference Center
Adams Avenue
Scranton, PA

Lackawanna College
501 Vine Street
Scranton, PA

Met Life
Morgan Highway
Clarks Summit, PA

Met Life
Montage Mountain
Moosic, PA

Red Barn Village
Newton Ransom Boulevard
Newton, PA

Skytop Lodge
One Skytop
Skytop, PA


Website: www.pennsecurity.com