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
Time Open Accounts
Vacation Clubs

LENDING
Appliance Loans
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
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking Services
Internet Banking
Investor Services
  (a) Brokerage
  (b) Insurance
Lockbox Services
Night Depository
Point-of-Sale Banking
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
  (a) Administrator (b) Agent
  (c) Custodian and Trustee for Pension Plans
  (d) Executor (e) Guardian
  (f) Securities Depository Service (g) Trustee (h) Trustee for Public Bond
  Issues
U.S. Savings Bonds

BRANCH LOCATIONS  (with ATMs)

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

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

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

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

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

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

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

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

South Scranton
526 Cedar Avenue
Scranton, PA
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

Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA

One Stop Quick Mart, Inc.
Milford Road
East Stroudsburg, PA

Red Barn Village
Newton Ransom Boulevard
Newton, PA

Skytop Lodge
One Skytop
Skytop, PA

                              www.pennsecurity.com

<PAGE>

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

In thousands, except per share data

                                2004         2003         2002
--------------------------------------------------------------
Earnings per share         $    2.61    $    2.78    $    3.14
Dividends per share        $    1.35    $    1.35    $    1.35
Total Capital              $  62,376    $  60,807    $  58,975
Total Deposits             $ 395,301    $ 407,944    $ 414,664
Total Assets               $ 563,708    $ 584,590    $ 496,956

                                    Contents
                                    --------

Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................4
Promotions and Appointments....................................................5

                                    Form 10-K

Part I,   Item 1  Business.....................................................7
          Item 2  Properties...................................................8
          Item 3  Legal Proceedings............................................8
          Item 4  Submission of Matters to a Vote of Security Holders..........8
Part II,  Item 5  Market for Registrant's Common Equity, Related
                    Stockholder Matters and Issuer Purchases
                    of Equity Securities.......................................9
          Item 6  Selected Financial Data.....................................10
          Item 7  Management Discussion and Analysis of Financial
                    Condition and Results of Operations.......................11
          Item 7A Quantitative and Qualitative Disclosures About
                    Market Risk...............................................20
          Item 8  Financial Statements and Supplementary Data.................22
                  Consolidated Balance Sheets.................................22
                  Consolidated Statements of Income...........................23
                  Consolidated Statements of Stockholders' Equity.............24
                  Consolidated Statements of Cash Flows.......................25
                  General Notes to Financial Statements.......................26
                  Report of Independent Registered Public Accounting Firm.....37
          Item 9 Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure.........................38
          Item 9A Controls and Procedures.....................................38
          Item 9B Other Information...........................................38
Part III, Item 10 Directors and Executive Officers of the Registrant..........38
          Item 11 Executive Compensation......................................39
          Item 12 Security Ownership of Certain Beneficial Owners and
                    Management and Related Stockholder Matters................39
          Item 13 Certain Relationships and Related Transactions..............39
          Item 14 Principal Accountant Fees and Services......................39
Part IV,  Item 15 Exhibits and Financial Statements Schedules.................39
Signatures....................................................................40
Certifications................................................................41
Index to Exhibits.............................................................43
Company Officers..............................................................44
Company Board Members..........................................Inside Back Cover

                  Penseco Financial Services Corporation / 2004 Annual Report  1

<PAGE>

                               President's Letter
                               ------------------

Dear Shareholder

Net  income  in 2004 was  $2.61 per  share as  opposed  to $2.78 for year  2003.
Dividends  for the two  years  remained  the same at $1.35  per  share.  Capital
increased to $62.4  million from $60.8  million at the prior year end.  Although
our total  deposits  declined  from  $407.9  million  at year end 2003 to $395.3
million at year end 2004 and total assets  declined from $584.6 million year end
2003 to $563.7 million for year end 2004, net loans  outstanding  increased from
$236.9  million at year end 2003 to $276.6  million at year end 2004.  Net loans
outstanding still are $44 million below their peak in 2001. A 26% decline in net
loans  outstanding  from  December 31, 2001,  to December 31, 2003,  was brought
about  by  the  flood  of  refinancing  of  mortgages  during  that  period  and
management's   reluctance  to  portfolio  these   longer-term,   low-rate  fixed
mortgages.

     During the first part of 2004, interest rates continued at historical lows.
Beginning in July and continuing  through the end of 2004,  the Federal  Reserve
raised the Federal Funds target rate from 1.00% to 2.25%. It is anticipated that
the Federal  Reserve will continue to raise rates during 2005. It is encouraging
that our loans grew 17% for 2004 and we are  focusing on ways to  continue  loan
growth  this  year.  The  increase  in  short-term  rates,  later  in  2004,  in
conjunction  with the loan growth in 2004  resulted in  increased  net  interest
income,  from which the bank receives  most of its  earnings.  The effect of the
rate  changes  and  changes  in net loans  outstanding  is more  easily  seen by
referring to the following  graphs of net interest income and prime rate in each
quarter from the  beginning of 2001 through the end of 2004. As you can see, net
interest income is again increasing which should bode well for the future.  With
loans growing,  we should be able to keep pace with increasing interest costs on
deposits.

Chart 1

Prime Rate Movement

         2001 1st Qtr.          9.50%
              2nd Qtr.          8.00%
              3rd Qtr.          6.75%
              4th Qtr.          4.75%
         2002 1st Qtr.          4.75%
              2nd Qtr.          4.75%
              3rd Qtr.          4.75%
              4th Qtr.          4.25%
         2003 1st Qtr.          4.25%
              2nd Qtr.          4.00%
              3rd Qtr.          4.00%
              4th Qtr.          4.00%
         2004 1st Qtr.          4.00%
              2nd Qtr.          4.00%
              3rd Qtr.          4.75%
              4th Qtr.          5.25%

2  Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

Chart 2

Net Interest Income Comparison
(in thousands)

         2001 1st Qtr          $4,461
              2nd Qtr          $4,795
              3rd Qtr          $5,124
              4th Qtr          $4,956
         2002 1st Qtr          $5,173
              2nd Qtr          $5,100
              3rd Qtr          $4,927
              4th Qtr          $4,688
         2003 1st Qtr          $4,686
              2nd Qtr          $4,731
              3rd Qtr          $4,246
              4th Qtr          $4,123
         2004 1st Qtr          $4,216
              2nd Qtr          $4,363
              3rd Qtr          $4,591
              4th Qtr          $4,636

     Last year in my letter to you, I stated that under the Sarbanes-Oxley  Act,
we  were  considered  to be an  accelerated  filer.  A  recalculation  of  stock
ownership  showed  us to be  slightly  less  than  the  required  level,  but we
nevertheless have been meeting the accelerated  filing dates. Also, since we are
not  an  accelerated  filer,  Section  404  of  the  Sarbanes-Oxley  Act  is not
applicable  to us until the  Annual  Report  (Form 10K) to be filed for the 2005
year.

     During  the  summer  of this  year,  I  informed  the  Board of  Directors,
primarily  due to my health (I had  broken a hip and was still  having  problems
after  two  major  surgeries),  that  they  needed  to  begin  a  search  for my
replacement a little earlier than originally anticipated. A search committee was
established  and a firm was hired to assist the  Board.  This  matter  should be
resolved sometime this year.

     During the year, the following  appointments and promotions were made: Beth
S. Wolff was named  Assistant  Vice-President  and Branch  Manager of the Moscow
Office,  Frank Gardner was named Assistant  Vice-President and Branch Manager of
the East Scranton Office, Thomas J. Malinchak was named Assistant Vice-President
and  Branch  Manager of the Mount  Pocono  Office,  Deborah A.  Wright was named
Assistant  Vice-President,  Outside  Sales,  Robin L.  Jenkins was named  Branch
Operations Manager of the Gouldsboro Office, Kathleen Griffiths was named Branch
Operations  Officer  of the  Abington  Office  and  Tanya L.  Frable  was  named
Assistant Branch Operations  Officer of the Gouldsboro  Office. We are fortunate
to have such a fine group of people  assuming  greater  responsibilities  in the
Company.

     We  think  that  our  strong  capital  position,  good  earnings,  advanced
technology and solid customer base,  both in our traditional  geographic  market
and niche national  markets,  provide an excellent  foundation for our continued
success.  In this  endeavor you can help us by  recommending  us to your family,
friends,  and business  organizations.  This is your  institution - let it serve
you.

Sincerely yours,

Otto P. Robinson, Jr.
President

                   Penseco Financial Services Corporation / 2004 Annual Report 3

<PAGE>

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

This page of the 2004 Annual  Report to  Shareholders  contains one  picture.  A
description of the picture follows:

Seated left to right:

Emily S.  Perry,  Richard E.  Grimm,  Executive  Vice-President  and  Treasurer;
Attorney  Otto P.  Robinson,  Jr.,  President;  Edwin J.  Butler,  and Sandra C.
Phillips

Standing left to right:

James B. Nicholas, Steven L. Weinberger,  P. Frank Kozik, Secretary;  Russell C.
Hazelton, D. William Hume, Robert W. Naismith, Ph.D., and James G. Keisling

4  Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

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

This page of the 2004 Annual Report to Shareholders  contains seven pictures.  A
description of each picture follows, starting at the top, from left to right:

Beth S. Wolff
Assistant Vice-President

Frank Gardner
Assistant Vice-President

Thomas J. Malinchak
Assistant Vice-President

Deborah A. Wright
Assistant Vice-President
Outside Sales

Robin L. Jenkins
Branch Operations Manager

Kathleen Griffiths
Branch Operations Officer

Tanya L. Frable
Assistant Branch Operations Officer

                  Penseco Financial Services Corporation / 2004 Annual Report  5

<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-K


  Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act
                                     of 1934


                  For the Fiscal Year Ended December 31, 2004

                        Commission File Number 000-23777


                     PENSECO FINANCIAL SERVICES CORPORATION


                             Scranton, Pennsylvania
                          Commonwealth of Pennsylvania
                I.R.S. Employer Identification Number 23-2939222
                           150 North Washington Avenue
                       Scranton, Pennsylvania 18503-1848
                         Telephone number 570-346-7741

                          Securities Registered Under
                            Section 12(g) of the Act

                    Common Stock, Par Value $ .01 per share

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

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

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

THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY  NON-AFFILIATES
OF THE REGISTRANT ON JUNE 30, 2004,  BASED ON THE CLOSING PRICE OF SUCH STOCK ON
THAT  DATE,  EQUALS  APPROXIMATELY  $68,680,954.  THE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING AS OF JUNE 30, 2004 EQUALS 2,148,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Corporation's  definitive proxy statement  relating to the 2005
Annual Meeting of Stockholders are incorporated by reference in Part III.

6  Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                     PENSECO FINANCIAL SERVICES CORPORATION

                                     PART I
                                     ------

ITEM 1  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 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  Bank  has a third  party  marketing  agreement  with  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.

EMPLOYEES

As  of  December  31,  2004,  the  Company  employed  198  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.

                  Penseco Financial Services Corporation / 2004 Annual Report  7

<PAGE>

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 differences 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.

ITEM 2  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.  During  2003,  the Company
purchased  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.

ITEM 3  Legal Proceedings

There are no material  pending legal  proceedings,  other than ordinary  routine
litigation incidental to the business of the Company, as to which the Company or
subsidiary is a party or of which any of their property is subject.

ITEM 4  Submission of Matters to a Vote of Security Holders

No  matter  was  submitted  by the  Company  to  its  shareholders  through  the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year covered by this report.

8  Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                                    PART II
                                    -------

ITEM 5 Market for Registrant's  Common Equity,  Related  Stockholder Matters and
         Issuer Purchases of Equity Securities

This Annual  Report is the  Company's  annual  disclosure  statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934.  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:

        Arthurs, Lestrange & Company, Inc.      Knight Equity Markets, LP
        Boenning & Scattergood, Inc.            Monroe Securities, Inc.
        Ferris, Baker, Watts, Inc.              Ryan, Beck & Company, Inc.
        Hill Thompson Magid, LP                 Schwab 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
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
                                 ======

                               Dividends Paid
2003              High     Low   Per Share
---------------------------------------------
First Quarter     $ 40    $ 34   $  .30
Second Quarter      41      38      .30
Third Quarter       41      39      .30
Fourth Quarter      42      41      .45
                                 ------
                                 $ 1.35
                                 ======



DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,900                     2004
             2,900                     2003
             2,899                     2002
             2,685                     2001
             2,470                     2000



As of February 11, 2005 there were approximately 942 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 18 and 35.

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
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                5,315     4,827     5,386     5,056
Net Income                    1,145     1,363     1,615     1,478
Earnings Per Share          $   .53   $   .64   $   .75   $   .69



                             First     Second    Third     Fourth
2003                        Quarter   Quarter   Quarter   Quarter
-----------------------------------------------------------------
Net Interest Income         $ 4,686   $ 4,731   $ 4,246   $ 4,123
Provision for Loan Losses       239       216         1        20
Other Income                  2,746     2,345     3,234     2,418
Other Expenses                5,269     4,840     5,422     4,923
Net Income                    1,559     1,585     1,603     1,224
Earnings Per Share          $   .73   $   .73   $   .75   $   .57

                  Penseco Financial Services Corporation / 2004 Annual Report  9

<PAGE>

ITEM 6  Selected Financial Data

(in thousands, except per share amounts)

RESULTS OF OPERATIONS:

<TABLE>
<CAPTION>
                                       2004         2003         2002         2001         2000
-----------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>          <C>
Interest Income                 $    25,385  $    26,014  $    27,899  $    31,860  $    31,043
Interest Expense                      7,579        8,228        8,011       12,524       13,698
-----------------------------------------------------------------------------------------------
Net Interest Income                  17,806       17,786       19,888       19,336       17,345
Provision for Loan Losses               144          476          813          954          233
-----------------------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                        17,662       17,310       19,075       18,382       17,112
Other Income                          9,594       10,743       11,032        9,186        8,233
Other Expenses                       20,584       20,454       21,098       20,077       19,306
Income Taxes                          1,071        1,628        2,256        1,869        1,296
-----------------------------------------------------------------------------------------------
Net Income                      $     5,601  $     5,971  $     6,753  $     5,622  $     4,743
===============================================================================================

BALANCE SHEET AMOUNTS:
Assets                          $   563,708  $   584,590  $   496,956  $   482,551  $   467,230
Investment Securities           $   262,678  $   293,125  $   139,132  $   128,623  $   125,808
Net Loans                       $   276,576  $   236,882  $   285,509  $   320,208  $   304,641
Deposits                        $   395,301  $   407,944  $   414,664  $   406,531  $   387,439
Stockholders' Equity            $    62,376  $    60,807  $    58,975  $    54,648  $    50,067

PER SHARE AMOUNTS:
Earnings per Share              $      2.61  $      2.78  $      3.14  $      2.62  $      2.21
Dividends per Share             $      1.35  $      1.35  $      1.35  $      1.25  $      1.15
Book Value per Share            $     29.04  $     28.31  $     27.46  $     25.44  $     23.31
Common Shares Outstanding         2,148,000    2,148,000    2,148,000    2,148,000    2,148,000

FINANCIAL RATIOS:
Net Interest Margin                   3.18%        3.24%        4.21%        4.30%        4.08%
Return on Average Assets               .96%        1.05%        1.37%        1.18%        1.06%
Return on Average Equity              9.11%        9.87%       11.79%       10.57%        9.96%
Average Equity to Average Assets     10.57%       10.59%       11.58%       11.19%       10.60%
Dividend Payout Ratio                51.72%       48.56%       42.99%       47.71%       52.04%
</TABLE>

10 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

ITEM  7 Management 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.

SUMMARY

Net earnings for 2004 totalled $5,601, a decrease of 6.2% from the $5,971 earned
in 2003,  which was a  decrease  of 11.6% from the  $6,753  earned in 2002.  Net
earnings per share were $2.61 in 2004,  compared with $2.78 in 2003 and $3.14 in
2002.  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 has  experienced  strong loan growth during the
second half of 2004 which will provide higher net interest income.  Net earnings
for 2003  decreased  from 2002 mainly due to the  refinancing  of the  Company's
high-yield   residential   mortgage  loan   portfolio   into  lower   fixed-rate
obligations,  which then were sold in the secondary market,  rather than held in
the Company's portfolio.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  5,601                     2004
             5,971                     2003
             6,753                     2002
             5,622                     2001
             4,743                     2000


The  Company's  return on average  assets was .96 % in 2004 compared to 1.05% in
2003 and 1.37% in 2002. Return on average equity was 9.11 %, 9.87% and 11.79% in
2004, 2003 and 2002, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
              .96%                     2004
             1.05%                     2003
             1.37%                     2002
             1.18%                     2001
             1.06%                     2000


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
             9.11%                     2004
             9.87%                     2003
            11.79%                     2002
            10.57%                     2001
             9.96%                     2000

                  Penseco Financial Services Corporation / 2004 Annual Report 11

<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 was basically  unchanged at $17.8 million.  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 was $17.8 million in 2003,  compared with $19.9 million
in 2002,  a decrease  of 10.6%.  The  decrease  in net  interest  income in 2003
resulted from the refinancing of the Company's  high-yield  residential mortgage
loans into lower fixed-rate  obligations,  which were then sold in the secondary
market. Also net interest income was negatively impacted by accelerated purchase
premium   write-downs   from   unprecedented   pre-payments   of  the  Company's
mortgage-backed   securities   portfolio  due  to  interest  rates  hovering  at
forty-five year lows.

     In 2003,  the Company  purchased a FHLMC  (Freddie  Mac) pool of new twenty
year  residential  mortgages,  with a 5 1/2%  coupon  and a face  value  of $100
million.  The Company  financed the purchase by borrowing  $100 million from the
Federal Home Loan Bank with maturities  ranging from 5 to 20 years. The interest
spread will vary  depending  on various  interest  rate  scenarios  which affect
prepayment speeds.

     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, 2004 was 3.2% compared with
3.2% for the year ended  December 31, 2003, and 4.2% for the year ended December
31, 2002.

     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%, a decrease of 10.5% from 2003.

     Interest  income in 2003 totalled $26.0 million,  compared to $27.9 million
in 2002, a decrease of 6.8%.  The yield on average  interest-earning  assets was
4.8% in  2003,  compared  to  5.9%  in  2002.  Average  interest-earning  assets
increased in 2003 to $548.2 million from $472.8 million in 2002.  Average loans,
which are typically the Company's  highest  yielding  earning assets,  decreased
$54.2  million in 2003,  while  investment  securities  increased  on average by
$103.4 million. Average loans represented 47.9% of 2003 average interest-earning
assets, compared to 67.0% in 2002.

     Interest  expense also  increased in 2003 to $8.2 million from $8.0 million
in 2002,  an increase of $.2 million or 2.5%.  The  increase  resulted  from the
Company entering into a leveraged  transaction during the first quarter of 2003,
which increased long-term interest expense.  Despite this increase,  the average
rate paid on  interest-bearing  liabilities  during  2003 was 1.9%,  compared to
2.2%, a decrease of 13.6% from 2002.

     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.


 NET INTEREST INCOME (in millions)       YEAR
---------------------------------------------
       $ 17,806                          2004
         17,786                          2003
         19,888                          2002
         19,336                          2001
         17,345                          2000

12 Penseco Financial Services Corporation / 2004 Annual Report

<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 2004,
2003 and 2002.

<TABLE>
<CAPTION>
                                                    2004                            2003                            2002
------------------------------------------------------------------------------------------------------------------------------------
                                        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           $   6,206  $    370    5.96%    $  30,127  $  1,250    4.15%    $  36,550  $  1,575    4.31%
    U.S. Agency obligations              133,231     4,340    3.26        79,520     3,660    4.60        57,544     3,267    5.68
    States & political subdivisions       41,142     1,931    7.11        20,433       947    7.02         8,962       439    7.42
    Federal Home Loan Bank stock           5,704        94    1.65         4,911        97    1.98         1,960        69    3.52
    Other                                    549        13    2.37           435        11    2.53           391        10    2.56
  Held-to-maturity:
    U.S. Agency obligations               74,291     3,334    4.49        75,194     3,365    4.48         1,862        58    3.11
    States & political subdivisions       31,103     1,545    7.53        29,730     1,621    8.26        29,715     1,641    8.37
Loans, net of unearned income:
  Real estate mortgages                  185,440    10,044    5.42       194,135    11,246    5.79       245,016    16,412    6.70
  Commercial                              36,312     1,814    5.00        31,288     1,497    4.78        32,168     1,751    5.44
  Consumer and other                      34,287     1,774    5.17        36,997     1,890    5.11        39,405     2,390    6.07
Federal funds sold                         5,434        58    1.07        35,620       340     .95        12,995       189    1.45
Interest on balances with banks            6,589        68    1.03         9,781        90     .92         6,277        98    1.56
------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                  560,288  $ 25,385    4.53%      548,171  $ 26,014    4.75%      472,845  $ 27,899    5.90%
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                    8,732                           8,760                           8,234
Bank premises and equipment                9,593                           9,984                          10,411
Accrued interest receivable                3,225                           3,144                           3,432
Other assets                               3,040                           4,482                           3,083
Less: Allowance for loan losses            3,523                           3,411                           3,662
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                           $ 581,355                       $ 571,130                       $ 494,343
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
  Demand-Interest bearing              $  31,425  $    115     .37%    $  28,738  $    144     .50%    $  26,204  $    159     .61%
  Savings                                 81,812       346     .42        76,983       472     .61        71,470       700     .98
  Money markets                           89,161       707     .79        87,973       737     .84        91,561     1,329    1.45
  Time - Over $100                        28,067       806    2.87        32,525       844    2.59        37,741     1,398    3.70
  Time - Other                            92,752     1,985    2.14       105,858     2,873    2.71       116,659     4,139    3.55
Repurchase agreements                     22,817       167     .73        22,266       183     .82        20,278       276    1.36
Short-term borrowings                        595        10    1.68           699        11    1.57           562        10    1.78
Long-term borrowings                      88,955     3,443    3.87        76,401     2,964    3.88             -         -       -
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                 435,584  $  7,579    1.74%      431,443  $  8,228    1.91%      364,475  $  8,011    2.20%
------------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing             82,757                          76,421                          69,482
All other liabilities                      1,545                           2,763                           3,124
Stockholders' equity                      61,469                          60,503                          57,262
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                 $ 581,355                       $ 571,130                       $ 494,343
====================================================================================================================================
Interest Spread                                               2.79%                           2.84%                           3.70%
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                               $ 17,806                        $ 17,786                        $ 19,888
====================================================================================================================================
FINANCIAL RATIOS
Net interest margin                                           3.18%                           3.24%                           4.21%
Return on average assets                                       .96%                           1.05%                           1.37%
Return on average equity                                      9.11%                           9.87%                          11.79%
Average equity to average assets                             10.57%                          10.59%                          11.58%
Dividend payout ratio                                        51.72%                          48.56%                          42.99%
</TABLE>

                  Penseco Financial Services Corporation / 2004 Annual Report 13

<PAGE>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2003 compared to 2002                 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>


<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2003 compared to 2002                 of Change   Volume        Rate       Volume
             ----------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>          <C>
EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities          $   (325)  $   (277)   $    (58)    $    10
                 U.S. Agency obligations                393      1,248        (621)       (234)
                 States & political subdivisions        508        562         (24)        (30)
                 Equity securities                       29        105         (30)        (46)
               Held-to-maturity:
                 U.S. Agency obligations              3,307      2,281          26       1,000
                 States & political subdivisions        (20)         1         (21)          -
             Loans, net of unearned income:
               Real estate mortgages                 (5,166)    (3,415)     (2,230)        479
               Commercial                              (254)       (48)       (212)          6
               Consumer and other                      (500)      (146)       (378)         24
             Federal funds sold                         151        328         (65)       (112)
             Interest bearing balances with banks        (8)        55         (41)        (22)
             ----------------------------------------------------------------------------------
               Total Interest Income                 (1,885)       694      (3,654)      1,075
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                (15)        15         (28)         (2)
LIABILITIES    Savings                                 (228)        54        (264)        (18)
               Money markets                           (592)       (52)       (559)         19
               Time - Over $100                        (554)      (193)       (419)         58
               Time - Other                          (1,266)      (378)       (980)         92
             Repurchase agreements                      (93)        27        (110)        (10)
             Short-term borrowings                        1          2          (1)          -
             Long-term borrowings                     2,964          -           -       2,964
             ----------------------------------------------------------------------------------
             Total Interest Expense                     217       (525)     (2,361)      3,103
             ----------------------------------------------------------------------------------
             Net Interest Income                   $ (2,102)  $  1,219    $ (1,293)    $(2,028)
             ==================================================================================
</TABLE>

14 Penseco Financial Services Corporation / 2004 Annual Report

<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 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,  among other things
described above, how well prior estimates have related to actual experience. 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,           2004       2003       2002
--------------------------------------------------------------
Trust department income        $  1,353   $  1,311   $  1,266
Service charges on
  deposit accounts                1,056      1,133      1,123
Merchant transaction income       5,001      5,005      5,519
Other fee income                  1,650      1,630      1,562
Other operating income              177      1,323        553
Realized gains on
  securities, net                   357        341      1,009
--------------------------------------------------------------
  Total Other Income           $  9,594   $ 10,743   $ 11,032
==============================================================

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  the  decrease in other
operating  income were  increases in trust  income of $42 or 3.2% and  brokerage
income of $85 or 20.0%, mainly from increased business.

     Other income decreased $289 or 2.6% during 2003 to $10,743 from $11,032 for
2002.  Merchant  transaction  income  decreased  $514 or 9.3%,  due to a loss of
service to a major merchant. Other fee income increased $68 or 4.4%, partly from
increased  fees from mortgage loans serviced for others and offset by a decrease
in brokerage  income due to the softness in the economy.  Other operating income
increased  $770,  mainly due to a $624  increase in gains on sale of  low-yield,
fixed-rate,  non-portfolio  mortgage loans. The Company also realized a security
gain of $341 due to the sale of a $5 million,  short-term U.S.  Treasury and $10
million of short-term U.S. Agency securities, which were re-deployed into longer
term U.S. Agency securities.

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,           2004       2003       2002
--------------------------------------------------------------
Salaries and employee
  benefits                     $  9,165   $  9,010   $  9,048
Occupancy expenses, net           1,255      1,388      1,384
Furniture and equipment
  expenses                        1,136      1,175      1,208
Merchant transaction
  expenses                        4,058      4,158      4,731
Other operating expenses          4,970      4,723      4,727
--------------------------------------------------------------
  Total Other Expenses         $ 20,584   $ 20,454   $ 21,098
==============================================================

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.  Occupancy expense
decreased  $133,  largely  from  lower  depreciation  expense.  Other  operating
expenses increased $247 or 5.2%, mainly due to increased professional expenses.

     Other expenses  decreased $644 or 3.1% for 2003 to $20,454 from $21,098 for
2002.  Salaries  and  employee  benefits  decreased  $38 to $9,010 for 2003 from
$9,048 for 2002, despite increased pension costs of $361.  Merchant  transaction
expenses  decreased  $573 or 12.1%,  the  result of a loss of service to a major
merchant.

INCOME TAXES

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.

     Federal  income  tax  expense  decreased  $628 or 27.8% to  $1,628  in 2003
compared  to $2,256 in 2002,  due to  increased  tax free  income and  decreased
operating income.

     The Company's  effective income tax rate for 2004, 2003 and 2002 was 16.1%,
21.4% and 25.0%, 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  decreased  $20.9 million or 3.6% during 2004 to $563.7  million at
December 31, 2004 compared to $584.6  million at December 31, 2003. For the year
ended December 31, 2003,  total assets increased $87.6 million to $584.6 million
or a 17.6% increase over $497.0  million at December 31, 2002,  largely due to a
leveraged transaction during 2003 as described elsewhere in this report.

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,                           2004        2003        2002
--------------------------------------------------------------------
U.S.Treasury securities           $   5,077   $  15,387   $  36,456
U.S. Agency obligations             190,547     221,156      52,026
States & political subdivisions      60,789      50,228      49,294
Equity securities                     6,265       6,354       1,356
--------------------------------------------------------------------
  Total Investment Securities     $ 262,678   $ 293,125   $ 139,132
===================================================================

                  Penseco Financial Services Corporation / 2004 Annual Report 15

<PAGE>

LOAN PORTFOLIO

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

<TABLE>
<CAPTION>

December 31,                           2004        2003        2002        2001        2000
-------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>         <C>
Real estate - construction
  and land development            $   6,805   $   3,078   $   5,031   $   9,124   $   9,321
Real estate mortgages               196,149     172,964     217,883     246,486     234,212
Commercial                           41,560      30,056      30,077      30,001      21,566
Credit card and related plans         2,872       2,403       2,320       2,377       2,267
Installment                          25,679      25,855      27,306      30,142      30,290
Obligations of states &
  political subdivisions              7,111       6,026       6,239       5,678      10,085
-------------------------------------------------------------------------------------------
  Loans, net of unearned income     280,176     240,382     288,856     323,808     307,741
Less: Allowance for loan losses       3,600       3,500       3,347       3,600       3,100
-------------------------------------------------------------------------------------------
  Loans, net                      $ 276,576   $ 236,882   $ 285,509   $ 320,208   $ 304,641
===========================================================================================

</TABLE>

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.

     Total net loans  decreased  $48.6 million to $236.9 million at December 31,
2003 from $285.5 million at December 31, 2002, a decrease of 17.0%. The decrease
is due to the  refinancing of higher  yielding  residential  portfolio  mortgage
loans with low  fixed-rate  obligations,  which then were sold in the  secondary
market.

NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 276,576                       2004
         236,882                       2003
         285,509                       2002
         320,208                       2001
         304,641                       2000

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.

16 Penseco Financial Services Corporation / 2004 Annual Report

<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,                                     2004      2003      2002      2001      2000
---------------------------------------------------------------------------------------------
<S>                                           <C>       <C>       <C>       <C>       <C>
Non-accrual loans                             $ 1,991   $ 1,533   $ 2,245   $ 1,917   $ 1,210
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        253       169       394       304       313
  Credit card and home equity loans                13         3         -        22        23
---------------------------------------------------------------------------------------------
  Total non-performing loans                    2,257     1,705     2,639     2,243     1,546
Other real estate owned                           176       121       59        143       201
---------------------------------------------------------------------------------------------
  Total non-performing assets                 $ 2,433   $ 1,826   $ 2,698   $ 2,386   $ 1,747
=============================================================================================
</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 $1,991,  $1,533 and $2,245 at  December  31,  2004,  2003 and 2002,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $199,  $198 and $171 for 2004, 2003 and 2002,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $16,
$29 and $77 for 2004, 2003 and 2002,  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, 2004,  there are no significant  loans as to which management
has serious doubt about their collectibility.

     At December  31,  2004,  2003 and 2002,  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,                   2004      2003      2002      2001      2000
----------------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>
Balance at beginning of year            $ 3,500   $ 3,347   $ 3,600   $ 3,100   $ 2,950
----------------------------------------------------------------------------------------
Charge-offs:
  Real estate mortgages                       -        11        91        38        37
  Commercial and all others                  12       289       944       389        51
  Credit card and related plans              34        51        44        37        27
  Installment loans                           7         4        22        19        24
----------------------------------------------------------------------------------------
Total charge-offs                            53       355     1,101       483       139
----------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                       3        24        31        20        30
  Commercial and all others                   -         6         -         -         -
  Credit card and related plans               2         2         1         1         9
  Installment loans                           4         -         3         8        17
----------------------------------------------------------------------------------------
Total recoveries                              9        32        35        29        56
----------------------------------------------------------------------------------------
Net charge-offs                              44       323     1,066       454        83
----------------------------------------------------------------------------------------
Provision charged to operations             144       476       813       954       233
----------------------------------------------------------------------------------------
  Balance at End of Year                $ 3,600   $ 3,500   $ 3,347   $ 3,600   $ 3,100
========================================================================================
Ratio of net charge-offs
to average loans outstanding              0.02%     0.12%     0.34%     0.14%     0.03%
========================================================================================
</TABLE>

                  Penseco Financial Services Corporation / 2004 Annual Report 17

<PAGE>

The allowance for loan losses is allocated as follows:

<TABLE>
<CAPTION>

December 31,                    2004             2003             2002             2001             2000
---------------------------------------------------------------------------------------------------------------
                              Amount     %1    Amount     %1    Amount     %1    Amount     %1    Amount     %1
---------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Real estate mortgages        $ 1,100   72%    $ 1,100   73%    $ 1,600   77%    $ 1,700   79%    $ 1,500   79%
Commercial
  and all others               2,070   18       1,970   15       1,222   13       1,375   11       1,100   10
Credit card and
  related plans                  180    1         180    1         175    1         175    1         150    1
Personal installment loans       250    9         250   11         350    9         350    9         350   10
---------------------------------------------------------------------------------------------------------------
  Total                      $ 3,600  100%    $ 3,500  100%    $ 3,347  100%    $ 3,600  100%    $ 3,100  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 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. Company deposits decreased $6.8 million
to $407.9 million at December 31, 2003 from $414.7 million at December 31, 2002,
a decrease of 1.6%, due to a decrease in time deposits.

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

  Three months or less                  $  6,079
  Over three months through six months     2,918
  Over six months through twelve months    3,835
  Over twelve months                      10,947
                                        --------
  Total                                 $ 23,779
                                        ========

DEPOSITS (in millions)            YEAR
--------------------------------------
       $ 395,301                  2004
         407,944                  2003
         414,664                  2002
         406,531                  2001
         387,439                  2000

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.

18 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

LIQUIDITY (continued)

     The Company remains in a highly liquid condition both in the short and long
term.  Sources of liquidity  include the Company's U.S. Treasury and 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 $186,243 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, 2004 and 2003 are as follows:

                                    2004        2003
----------------------------------------------------
Commitments to extend credit:
  Fixed rate                    $ 21,152    $ 19,147
  Variable rate                 $ 67,502    $ 52,188
Standby letters of credit       $ 17,662    $ 15,363

     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.

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 $6,932.

ASSETS (in millions)             YEAR
-------------------------------------
       $ 563,708                 2004
         584,590                 2003
         496,956                 2002
         482,551                 2001
         467,230                 2000

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 20.03% at December 31,
2004. 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.

STOCKHOLDERS' EQUITY (in millions)        YEAR
----------------------------------------------
        $ 62,376                          2004
          60,807                          2003
          58,975                          2002
          54,648                          2001
          50,067                          2000

                  Penseco Financial Services Corporation / 2004 Annual Report 19

<PAGE>

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

                        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.

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.

20 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2004

The table below presents States and political subdivisions securities on a fully
taxable equivalent basis.

<TABLE>
<CAPTION>
                                                                                                     Non-Rate
                                          2005        2006      2007      2008      2009  Thereafter Sensitive     Total  Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>         <C>       <C>       <C>       <C>        <C>        <C>        <C>
ASSETS
Fixed interest rate securities:
  U.S. Treasury securities           $   5,077  $        -  $      -  $      -  $      -  $       -  $       -  $   5,077  $   5,077
       Yield                             6.80%           -         -         -         -          -          -      6.80%
  U.S. Agency obligations               32,386      42,842     2,392     2,498     2,609     53,508          -    136,235    135,879
       Yield                             4.48%       2.80%     4.37%     4.37%     4.37%      4.37%          -      3.90%
  States & political subdivisions            -           -         -         -     7,828     52,961          -     60,789     63,659
       Yield                                 -           -         -         -     8.21%      7.24%          -      7.36%
Variable interest rate securities:
  U.S. Agency obligations               15,629      15,544    16,001     3,511     3,627          -          -     54,312     54,321
       Yield                             2.93%       2.90%     2.90%     3.28%     3.28%          -          -      2.96%
  Federal Home Loan Bank stock               -           -         -         -         -      5,604          -      5,604      5,604
       Yield                                 -           -         -         -         -      2.43%          -      2.43%
  Other                                      -           -         -         -         -        661          -        661        661
       Yield                                 -           -         -         -         -      2.03%          -      2.03%
Fixed interest rate loans:
  Real estate mortgages                  5,690       5,534     6,317     5,288     7,749     56,142          -     86,720     87,190
       Yield                             6.19%       6.21%     6.38%     6.46%     5.97%      6.24%          -      6.23%
  Consumer and other                     1,567       1,413     1,289     1,095       919      1,575          -      7,858      7,875
       Yield                             6.52%       6.34%     6.12%     5.84%     5.70%      6.56%          -      6.24%
Variable interest rate loans:
  Real estate mortgages                 20,348      10,380    11,407     9,989     9,913     54,197          -    116,234    111,054
       Yield                             5.22%       5.09%     5.09%     5.06%     5.06%      5.05%          -      5.09%
  Commercial                            41,560           -         -         -         -          -          -     41,560     41,560
       Yield                             5.00%           -         -         -         -          -          -      5.00%
  Consumer and other                    12,544       3,882     3,444     2,908     3,053      1,973          -     27,804     28,016
       Yield                             5.62%       6.85%     6.12%     4.98%     4.97%      5.06%          -      5.68%
Less: Allowance for loan losses            606         320       339       291       326      1,718          -      3,600
Interest bearing deposits with banks       534           -         -         -         -          -          -        534        534
       Yield                             1.97%           -         -         -         -          -          -      1.97%
Cash and due from banks                      -           -         -         -         -          -      7,763      7,763      7,763
Other assets                                 -           -         -                   -          -          -     16,157     16,157
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                         $ 134,729  $   79,275  $ 40,511  $ 24,998  $ 35,372  $ 224,903  $  23,920  $ 563,708  $ 549,193
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing          $       -  $   31,161  $      -  $      -  $      -  $       -  $       -  $  31,161  $  31,161
       Yield                                 -        .32%         -         -         -          -          -       .32%
  Savings                                    -      80,307         -         -         -          -          -     80,307     80,307
       Yield                                 -        .34%         -         -         -          -          -       .34%
  Money markets                         91,604           -         -         -         -          -          -     91,604     91,604
       Yield                              .92%           -         -         -         -          -          -       .92%
  Time - Other                           9,102           -         -         -         -          -          -      9,102      9,102
       Yield                             3.49%           -         -         -         -          -          -      3.49%
Fixed interest rate deposits:
  Time - Over $100,000                  12,832       4,143     3,999     2,093       712          -          -     23,779     24,184
       Yield                             1.83%       3.20%     3.95%     3.77%     3.62%          -          -      2.65%
  Time - Other                          38,877      11,498    14,409     6,673     3,853      1,100          -      76,410    77,667
       Yield                             1.62%       2.74%     4.10%     3.61%     3.35%      3.75%          -      2.55%
Demand - Non-interest bearing                -           -         -         -         -          -     82,938     82,938     82,938
Repurchase agreements                   18,398           -         -         -         -          -          -     18,398     18,398
       Yield                              .75%           -         -         -         -          -          -       .75%
Short-term borrowings                      886           -         -         -         -          -          -        886        886
       Yield                             1.72%           -         -         -         -          -          -      1.72%
Long-term borrowings                     9,220       9,547     9,887     8,780     8,612     38,574          -     84,620     84,655
       Yield                             3.50%       3.50%     3.50%     3.64%     3.69%      4.27%          -      3.88%
Other liabilities                            -           -         -         -         -          -      2,127      2,127
Stockholders' equity                         -           -         -         -         -          -     62,376     62,376
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity                 $ 180,919  $  136,656  $ 28,295  $ 17,546  $ 13,177  $  39,674  $ 147,441  $ 563,708 $ 500,902
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change      $ (46,190) $  (57,381) $ 12,216  $  7,452  $ 22,195  $ 185,229  $(123,521) $       -
====================================================================================================================================
</TABLE>

                  Penseco Financial Services Corporation / 2004 Annual Report 21

<PAGE>

ITEM  8 Financial Statements and Supplementary Data

                          Consolidated Balance Sheets

(in thousands, except per share amounts)

                 December 31,                                    2004       2003
                 ---------------------------------------------------------------
ASSETS           Cash and due from banks                    $   7,763  $  10,062
                 Interest bearing balances with banks             534      4,693
                 Federal funds sold                                 -     23,600
                 ---------------------------------------------------------------
                   Cash and Cash Equivalents                    8,297     38,355

                 Investment securities:
                   Available-for-sale, at fair value          167,410    179,600
                   Held-to-maturity (fair value of $97,791
                     and $115,672, respectively)               95,268    113,525
                 ---------------------------------------------------------------
                   Total Investment Securities                262,678    293,125

                 Loans, net of unearned income                280,176    240,382
                   Less: Allowance for loan losses              3,600      3,500
                 ---------------------------------------------------------------
                   Loans, Net                                 276,576    236,882
                 Bank premises and equipment                    9,233      9,935
                 Other real estate owned                          176        121
                 Accrued interest receivable                    3,406      3,298
                 Other assets                                   3,342      2,874
                 ---------------------------------------------------------------
                   Total Assets                             $ 563,708  $ 584,590
                 ===============================================================

LIABILITIES      Deposits:
                   Non-interest bearing                     $  82,938  $  79,726
                   Interest bearing                           312,363    328,218
                 ---------------------------------------------------------------
                   Total Deposits                             395,301    407,944
                 Other borrowed funds:
                   Repurchase agreements                       18,398     19,454
                   Short-term borrowings                          886        823
                   Long-term borrowings                        84,620     93,523
                 Accrued interest payable                         886      1,158
                 Other liabilities                              1,241        881
                 ---------------------------------------------------------------
                   Total Liabilities                          501,332    523,783
                 ---------------------------------------------------------------

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                             50,832     48,131
                 Accumulated other comprehensive income          704       1,836
                 ---------------------------------------------------------------
                   Total Stockholders' Equity                  62,376     60,807
                 ---------------------------------------------------------------
                   Total Liabilities and
                   Stockholders' Equity                     $ 563,708  $ 584,590
                 ===============================================================

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

22 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                       Consolidated Statements of Income

(in thousands, except per share amounts)

<TABLE>
<CAPTION>
              Years Ended December 31,                      2004       2003       2002
              -------------------------------------------------------------------------
              <S>                                       <C>        <C>        <C>
INTEREST      Interest and fees on loans                $ 13,632   $ 14,632   $ 20,553
INCOME        Interest and dividends on investments:
                U.S. Treasury securities and U.S.
                  Agency obligations                       8,044      8,275      4,900
                States & political subdivisions            3,476      2,569      2,080
                Other securities                             107        108         79
              Interest on Federal funds sold                  58        340        189
              Interest on balances with banks                 68         90         98
              -------------------------------------------------------------------------
                Total Interest Income                     25,385     26,014     27,899
              -------------------------------------------------------------------------
INTEREST      Interest on time deposits
EXPENSE         of $100,000 or more                          806        844      1,398
              Interest on other deposits                   3,153      4,226      6,327
              Interest on other borrowed funds             3,620      3,158        286
              -------------------------------------------------------------------------
                Total Interest Expense                     7,579      8,228      8,011
              -------------------------------------------------------------------------
                Net Interest Income                       17,806     17,786     19,888
              Provision for loan losses                      144        476        813
              -------------------------------------------------------------------------
                Net Interest Income After Provision
                  for Loan Losses                         17,662     17,310     19,075
              -------------------------------------------------------------------------
OTHER         Trust department income                      1,353      1,311      1,266
INCOME        Service charges on deposit accounts          1,056      1,133      1,123
              Merchant transaction income                  5,001      5,005      5,519
              Other fee income                             1,650      1,630      1,562
              Other operating income                         177      1,323        553
              Realized gains on securities, net              357        341      1,009
              -------------------------------------------------------------------------
                Total Other Income                         9,594     10,743     11,032
              -------------------------------------------------------------------------
OTHER         Salaries and employee benefits               9,165      9,010      9,048
EXPENSES      Occupancy expenses, net                      1,255      1,388      1,384
              Furniture and equipment expenses             1,136      1,175      1,208
              Merchant transaction expenses                4,058      4,158      4,731
              Other operating expenses                     4,970      4,723      4,727
              -------------------------------------------------------------------------
                Total Other Expenses                      20,584     20,454     21,098
              -------------------------------------------------------------------------
              Income before income taxes                   6,672      7,599      9,009
              Applicable income taxes                      1,071      1,628      2,256
              -------------------------------------------------------------------------
NET INCOME      Net Income                              $  5,601   $  5,971   $  6,753
              =========================================================================
PER SHARE       Earnings Per Share                      $   2.61   $   2.78   $   3.14
              =========================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2004 Annual Report 23

<PAGE>

                Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------

<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   $ 41,206     $ 2,602         $ 54,648

Comprehensive income:
  Net income, 2002                             -              -      6,753           -            6,753
  Unrealized gains on securities,
    net of reclassification adjustment
    and taxes                                  -              -          -         473              473
                                                                                                 -------
Comprehensive income                                                                              7,226

Cash dividends declared ($1.35 per share)      -              -     (2,899)          -           (2,899)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002                    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
==========================================================================================================
</TABLE>

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

24 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                     Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

(in thousands)   Years Ended December 31,                                 2004          2003          2002
                 ------------------------------------------------------------------------------------------
                 <S>                                                 <C>           <C>           <C>
OPERATING        Net Income                                          $   5,601     $   5,971     $   6,753
ACTIVITIES       Adjustments to reconcile net income to net
                   cash provided by operating activities:
                     Depreciation                                          813         1,119         1,240
                     Provision for loan losses                             144           476           813
                     Deferred income tax (benefit) provision              (119)         (182)           95
                     Amortization of securities
                       (net of accretion)                                1,573         1,050           201
                     Net realized gains on securities                     (357)         (341)       (1,009)
                     (Gain) loss on other real estate                       (2)           15             2
                     Loss on disposition of fixed assets                     -             -             7
                     (Increase) decrease in interest receivable           (108)          101           200
                     Decrease (increase) in other assets                   366         1,441        (2,419)
                     Increase (decrease) in income taxes payable           117           252          (252)
                     Decrease in interest payable                         (272)         (159)         (260)
                     Increase (decrease) in other liabilities              110          (239)          (34)
                 ------------------------------------------------------------------------------------------
                     Net cash provided by
                       operating activities                              7,866         9,504         5,337
                 ------------------------------------------------------------------------------------------
INVESTING        Purchase of investment securities
ACTIVITIES         available-for-sale                                  (49,975)     (122,157)      (34,798)
                 Proceeds from sales and maturities of investment
                   securities available-for-sale                        41,938        41,407        24,797
                 Purchase of investment securities to be held-to-maturity    -      (103,031)            -
                 Proceeds from repayments of investment
                   securities available-for-sale                        17,893         7,308             -
                 Proceeds from repayments of investment
                   securities to be held-to-maturity                    17,661        19,894         1,017
                 Net loans (originated) repaid                         (40,015)       47,677        33,629
                 Proceeds from other real estate                           124           397           339
                 Proceeds from sale of fixed assets                          -             -             5
                 Investment in premises and equipment                     (111)       (1,134)         (389)
                 ------------------------------------------------------------------------------------------
                     Net cash (used) provided by
                       investing activities                            (12,485)     (109,639)       24,600
                 ------------------------------------------------------------------------------------------
FINANCING        Net increase in demand and savings deposits             5,977         6,862        18,906
ACTIVITIES       Net (payments) proceeds on time deposits              (18,620)      (13,582)      (10,773)
                 (Decrease) increase in repurchase agreements           (1,056)           35         1,279
                 Net increase (decrease) in short-term borrowings           63           (67)          873
                 Proceeds from long-term borrowings                          -       100,000             -
                 Payments on long-term borrowings                       (8,903)       (6,477)            -
                 Cash dividends paid                                    (2,900)       (2,900)       (2,899)
                 ------------------------------------------------------------------------------------------
                 Net cash (used) provided by
                   financing activities                                (25,439)       83,871         7,386
                 ------------------------------------------------------------------------------------------
                 Net (decrease) increase in cash
                   and cash equivalents                                (30,058)      (16,264)       37,323

                 Cash and cash equivalents at January 1                 38,355        54,619        17,296
                 ------------------------------------------------------------------------------------------
                 Cash and cash equivalents at December 31            $   8,297     $  38,355     $  54,619
                 ==========================================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2004 Annual Report 25

<PAGE>

                     General Notes To Financial Statements

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 January 2003,  the Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  No.  46,   Consolidation  of  Variable  Interest  Entities,   an
Interpretation of ARB No.51 (FIN 46). This interpretation  provides guidance for
identifying a controlling  interest in a variable interest entity established by
means other than  voting  interests.  FIN 46 also  requires  consolidation  of a
variable  interest  entity (VIE) by an enterprise  that holds such a controlling
interest.  In December  2003,  the FASB issued FASB  Interpretation  No.  46(R),
Consolidation of Variable  Interest  Entities - an Interpretation of ARB 51 (FIN
46(R)). This revision to FIN 46 primarily classifies the required accounting for
VIEs and included a deferral of the effective date and provisions for additional
scope exceptions for certain types of variable interests.  Application of FIN 46
(R) was required in financial  statements of public entities that have interests
in variable interest  entities or potential  variable interest entities commonly
referred to as special - purpose  entities for periods ending after December 15,
2003.  Application by public  entities (other than small business users) for all
other types of entities was required in financial  statements for periods ending
after March 15, 2004. The adoption of FIN 46 (R) did not have a material  impact
on the Company's consolidated financial position,  results of operations or cash
flows.

     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 a public  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.  This  statement is  effective  as of the  beginning of the first
interim or annual reporting period that begins after June 15, 2005.

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

     In December 2004, the Financial  Accounting  Standards  Board (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 the adoption of Statement No. 153.

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.

26 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

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

     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.

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,  2004,  2003 and  2002,  amounted  to $476,  $473 and $650,
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,
2004, 2003 and 2002 as follows:

                           2004       2003       2002
-----------------------------------------------------
Income taxes paid      $    802   $  1,698   $  2,636
Interest paid          $  7,851   $  8,387   $  8,271

Non-cash  transactions  during the years ended December 31, 2004, 2003 and 2002,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $177, $474 and $257, 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 2004

                  Penseco Financial Services Corporation / 2004 Annual Report 27

<PAGE>

2  CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                               2004        2003
-----------------------------------------------------------
Cash items in process of collection    $  2,951    $  5,452
Non-interest bearing balances             1,952       1,371
Cash on hand                              2,860       3,239
-----------------------------------------------------------
  Total                                $  7,763    $ 10,062
===========================================================

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.

--------------------------------------------------------------------------------

3  INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 2004
and 2003 are as follows:

                              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
===========================================================================


                              AVAILABLE-FOR-SALE

                                           Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2003                          Cost       Gains        Losses       Value
---------------------------------------------------------------------------
U.S. Treasury securities   $  15,008   $      379   $        -    $ 15,387
U.S. Agency securities        63,568        1,435            -      65,003
Mortgage-backed
  securities                  71,975          147          107      72,015
States & political
  subdivisions                20,158          683            -      20,841
---------------------------------------------------------------------------
  Total Debt Securities      170,709        2,644          107     173,246
Equity securities              6,109          245            -       6,354
---------------------------------------------------------------------------
  Total Available -
    for-Sale               $ 176,818   $    2,889   $      107    $179,600
===========================================================================

Equity securities at December 31, 2004 and 2003,  consisted primarily of Federal
Home Loan Bank stock, which is a required  investment in order to participate in
an available line of credit  program.  The 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 2004,
2003 and 2002 are as follows:

December 31,                    2004        2003        2002
------------------------------------------------------------
Proceeds from sales        $  18,380   $  15,640   $  13,832
Gross realized gains             385         341       1,009
Gross realized losses             28           -           -

                                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
===========================================================================

                                Held-to-Maturity

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2003                          Cost       Gains        Losses       Value
---------------------------------------------------------------------------
Mortgage-backed
  securities               $  84,138   $        8   $      580   $  83,566
States & political
  subdivisions                29,387        2,719            -      32,106
---------------------------------------------------------------------------
  Total Held-to-
    Maturity               $ 113,525   $    2,727   $      580   $ 115,672
===========================================================================

Investment  securities  with  amortized  costs and fair values of  $104,700  and
$107,574 at December 31, 2004 and $81,461 and $85,653 at December 31, 2003, 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, 2004
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. Treasury securities      $   5,000    $   5,077    $       -    $       -
  U.S. Agency securities           30,019       30,364            -            -
After one year through
  five years:
  U.S. Agency securities           40,758       40,382            -            -
After ten years:
  States & political
    subdivisions                   30,910       31,540       29,249       32,119
--------------------------------------------------------------------------------
  Subtotal                        106,687      107,363       29,249       32,119
Mortgage-backed
  securities                       53,782       53,782       66,019       65,672
--------------------------------------------------------------------------------
  Total Debt Securities         $ 160,469    $ 161,145    $  95,268    $  97,791
================================================================================

28 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

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, 2004 and
2003 are as follows:

<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>

<TABLE>
<CAPTION>

                                  Less than twelve months   Twelve months or more             Totals
------------------------------------------------------------------------------------------------------------
                                     Fair     Unrealized       Fair     Unrealized       Fair     Unrealized
December 31, 2003                    Value      Losses         Value      Losses         Value      Losses
------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>            <C>        <C>            <C>        <C>
Mortgage-backed securities         $ 130,285  $      687     $       -  $        -     $ 130,285  $      687
------------------------------------------------------------------------------------------------------------
  Total                            $ 130,285  $      687     $       -  $        -     $ 130,285  $      687
============================================================================================================
</TABLE>

The table above at December 31, 2004,  includes  seventeen (17)  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, 2004.

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,
2004.

State and Political Subdivisions

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, 2004.

                  Penseco Financial Services Corporation / 2004 Annual Report 29

<PAGE>

4  LOANS

Major classifications of loans are as follows:

December 31,                                      2004         2003
-------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development          $   6,805    $   3,078
  Secured by farmland                                -            -
  Secured by 1-4 family residential
    properties:
    Revolving, open-end loans                   19,356       18,945
    Secured by first liens                     102,583       93,380
    Secured by junior liens                     17,761       15,588
  Secured by multi-family properties               411          165
  Secured by non-farm, non-residential
    properties                                  56,038       44,886
Commercial and industrial loans
  to U.S. addressees                            41,560       30,056
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                  2,872        2,403
  Other (installment and
    student loans, etc.)                        24,091       25,192
Obligations of states &
  political subdivisions                         7,111        6,026
All other loans                                  1,588          663
-------------------------------------------------------------------
  Gross Loans                                  280,176      240,382
Less: Unearned income on loans                       -            -
-------------------------------------------------------------------
  Loans, Net of Unearned Income              $ 280,176    $ 240,382
===================================================================

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,991, $1,533 and $2,245 at December 31, 2004, 2003 and 2002,  respectively.
If interest on those loans had been  accrued,  such income would have been $199,
$198 and $171 for 2004,  2003 and 2002,  respectively.  Interest income on those
loans,  which is recorded only when  received,  amounted to $16, $29 and $77 for
2004, 2003 and 2002, respectively. Also, at December 31, 2004 and 2003, the Bank
had loans totalling $266 and $172, respectively,  which were past due 90 days or
more and still accruing interest (credit card and guaranteed student loans).

--------------------------------------------------------------------------------

5  ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,                   2004       2003       2002
---------------------------------------------------------------------
Balance at beginning of year            $ 3,500    $ 3,347    $ 3,600
Provision charged to operations             144        476        813
Recoveries credited to allowance              9         32         35
---------------------------------------------------------------------
                                          3,653      3,855      4,448
Losses charged to allowance                 (53)      (355)    (1,101)
---------------------------------------------------------------------
    Balance at End of Year              $ 3,600    $ 3,500    $ 3,347
=====================================================================

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
------------------------        --------------       -------------
        2004                        $  144              $    44
        2003                        $  476              $   323
        2002                        $  813              $ 1,066

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $664,  $948  and  $948 at  December  31,  2004,  2003  and  2002,
respectively.

--------------------------------------------------------------------------------

6  LOAN SERVICING

The Company  services  $61,767 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  $620 and $709,  at
December 31, 2004 and 2003,  respectively.  The balance of the servicing  rights
was  $450  and  $647  at  December  31,  2004  and  2003,  respectively,  net of
amortization.

     The Company  recorded $0 and $569 in new mortgage  servicing rights in 2004
and 2003,  respectively.  Amortization expense of $197 and $149 was recorded for
the years ended December 31, 2004 and 2003, respectively.

     There was no  allowance  for  impairment  recorded at December  31, 2004 or
2003.

--------------------------------------------------------------------------------

7  BANK PREMISES AND EQUIPMENT

December 31,                           2004         2003
--------------------------------------------------------
Land                               $  3,122     $  3,122
Buildings and improvements           14,550       14,531
Furniture and equipment              12,550       12,458
--------------------------------------------------------
                                     30,222       30,111
--------------------------------------------------------
Less: Accumulated depreciation       20,989       20,176
--------------------------------------------------------
  Net Bank Premises
    and Equipment                  $  9,233     $  9,935
========================================================

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 $813
in 2004, $1,119 in 2003 and $1,240 in 2002.

     Occupancy  expenses were reduced by rental income received in the amount of
$63,  $64  and  $63 in the  years  ended  December  31,  2004,  2003  and  2002,
respectively.

--------------------------------------------------------------------------------

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, 2004
and 2003 was $176 and $121,  respectively,  supported by  appraisals of the real
estate involved.

--------------------------------------------------------------------------------

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
--------------------------------------------------------------------------
2004         100%        $ 3,350     $ 3,335       None        $     -
2003         100%        $ 3,450     $ 3,435       None        $     -
2002         100%        $ 3,550     $ 3,535       None        $     -

30 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

10 DEPOSITS

December 31,                            2004         2003
---------------------------------------------------------
Demand - Non-interest
  bearing                          $  82,938    $  79,726
Demand - Interest bearing             31,161       30,515
Savings                               80,307       80,689
Money markets                         91,604       89,103
Time - Over $100,000                  23,779       30,321
Time - Other                          85,512       97,590
---------------------------------------------------------
  Total                            $ 395,301    $ 407,944
=========================================================

Scheduled maturities of time deposits are as follows:

        2005                 $  60,811
        2006                    15,641
        2007                    18,408
        2008                     8,766
        2009                     4,565
        2010 and thereafter      1,100
--------------------------------------
            Total            $ 109,291
======================================

--------------------------------------------------------------------------------

11 OTHER BORROWED FUNDS

At December 31, 2004 and 2003, 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  $28,007  and
$28,360 at December 31, 2004 and $28,025 and $29,289 at December 31, 2003,  were
pledged to secure repurchase agreements.

Years Ended December 31,                    2004        2003
------------------------------------------------------------
Amount outstanding at year end          $ 19,284    $ 20,277
Average interest rate at year end           .75%        .75%
Maximum amount outstanding at
  any month end                         $ 30,176    $ 19,948
Average amount outstanding              $ 22,776    $ 22,176
Weighted average interest rate
  during the year:
    Federal funds purchased                2.21%       2.12%
    Repurchase agreements                   .75%        .88%
    Demand notes to U.S. Treasury          1.11%        .90%

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 $10,287 and $10,231 at December  31, 2004 and $10,298 and $10,226
at December 31, 2003 and with interest  rates of 3.25% and 2.00% at December 31,
2004 and December 31, 2003, 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,
2004 and 2003, 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, 2004 and 2003, respectively.

     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$186,243 with the Federal Home Loan Bank of Pittsburgh (FHLB).

--------------------------------------------------------------------------------

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, 2004 is as follows:

Monthly        Fixed   Maturity
Installment     Rate       Date          Balance
------------------------------------------------

$ 161          2.73%   03/13/08         $  5,989
  253          3.22%   03/13/10           14,643
  430          3.74%   03/13/13           36,585
  186          4.69%   03/13/23           27,403
------------------------------------------------
  Total                                 $ 84,620
================================================

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

Aggregate maturities of long-term debt at December 31, 2004 are as follows: 2005
$9,220,  2006 $9,547,  2007  $9,887,  2008  $8,780,  2009 $8,612 and  thereafter
$38,574 for a total of $84,620.

--------------------------------------------------------------------------------

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, 2004 and 2003,  the ESOP held  89,316 and 89,204  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 $0, $0
and $140 to the plan during the years ended  December 31,  2004,  2003 and 2002,
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  $60,  $70 and $0 to the plan  during the years ended  December  31,
2004, 2003 and 2002, 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.

                  Penseco Financial Services Corporation / 2004 Annual Report 31

<PAGE>

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,                          2004       2003         2004     2003
----------------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation,
      beginning                   $ 10,884   $  9,855       $  269   $  250
    Service cost                       385        385            6        6
    Interest cost                      664        635           16       15
    Change in assumptions              256        237            3        7
    Actuarial (loss) gain              (59)        88            -        -
    Benefits paid                     (330)      (316)          (9)      (9)
----------------------------------------------------------------------------
  Benefit obligation,
    ending                          11,800     10,884          285      269
----------------------------------------------------------------------------
Change in plan assets:
  Fair value of plan
    assets, beginning                8,713      7,804            -        -
  Actual return on plan
    assets                             713        897            -        -
  Employer contribution                373        328            -        -
  Benefits paid                       (330)      (316)           -        -
----------------------------------------------------------------------------
  Fair value of plan
    assets, ending                   9,469      8,713            -        -
----------------------------------------------------------------------------
Funded status                       (2,331)    (2,171)        (285)    (269)
Unrecognized net actuarial
    loss (gain)                      2,775      2,723          (23)     (27)
Unrecognized prior service
    cost                                54         55           49       57
----------------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                          $    498   $    607       $ (259)  $ (239)
============================================================================

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

                                               Pension Benefits
                                              ------------------
Years Ended December 31,                  2004       2003       2002
---------------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                        $  385     $  385     $  370
    Interest cost                          664        635        588
    Expected return on plan assets        (700)      (624)      (726)
    Amortization of prior service cost       -          -       (104)
    Amortization of unrecognized
      net loss                             114        175         82
---------------------------------------------------------------------
      Net periodic pension cost         $  463     $  571     $  210
=====================================================================

                                                Other Benefits
                                              ------------------
Years Ended December 31,                  2004       2003       2002
---------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                        $    6     $    6     $    5
    Interest cost                           16         15         15
    Amortization of prior service cost       7          8          7
    Amortization of unrecognized
      net gain                               -         (1)        (1)
---------------------------------------------------------------------
      Net periodic other benefit cost   $   29     $   28     $   26
=====================================================================

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 $142, $142 and $0,  respectively at December 31, 2004
and $153, $153 and $0, respectively at December 31, 2003.

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

                               Pension Benefits          Other Benefits
                               ----------------          --------------
December 31,                   2004        2003            2004    2003
-----------------------------------------------------------------------
Discount rate                 6.00%       6.25%           6.00%   6.25%
Rate of compensation
  increase                    4.00%       4.25%           4.50%   4.50%


                               Pension Benefits          Other Benefits
                               ----------------          --------------
Years Ended December 31,       2004        2003            2004    2003
-----------------------------------------------------------------------
Discount rate                 6.00%       6.25%           6.00%   6.25%
Expected return on
  plan assets                 8.00%       8.00%              -       -
Rate of compensation
  increase                    4.00%       4.25%           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 rate was reduced  during
2003 due to the reduction in returns for the prior year.

     The Company's pension plan  weighted-average  asset allocations at December
31, 2004 and 2003 by asset category are as follows:

                              Plan Assets at December 31,
                              ---------------------------
                                         2004       2003
---------------------------------------------------------
Asset Category
--------------
Equity securities                        54.4%      52.4%
Corporate bonds                          35.1%      33.3%
U.S. Government securities                8.1%      13.1%
Cash and cash equivalents                 2.4%       1.2%
---------------------------------------------------------
                                        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,
2004 or 2003.

Contributions
-------------
The Company  expects to contribute $375 to its pension plan and $13 to its other
postretirement plan in 2005.

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
                ----------------                --------------
2005                $   481                          $ 13
2006                    482                            13
2007                    488                            13
2008                    485                            13
2009                    494                            13
2010-2014           $  3,412                           82

32 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

14 INCOME TAXES

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

Years Ended December 31,           2004         2003         2002
------------------------------------------------------------------
Currently payable               $ 1,190      $ 1,810      $ 2,161
Deferred (benefit) provision       (119)        (182)          95
------------------------------------------------------------------
  Total                         $ 1,071      $ 1,628      $ 2,256
==================================================================

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,           2004         2003         2002
------------------------------------------------------------------
Tax at statutory rate           $ 2,268      $ 2,584      $ 3,063
Reduction for non-taxable
  interest                       (1,262)        (978)        (828)
Other additions                      65           22           21
------------------------------------------------------------------
  Applicable Income Taxes       $ 1,071      $ 1,628      $ 2,256
==================================================================

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

Years Ended December 31,           2004         2003         2002
------------------------------------------------------------------
Accretion of discount on bonds  $    24      $  (121)     $    53
Accelerated depreciation             21           67          (36)
Supplemental benefit plan            (1)         (16)           4
Allowance for loan losses          (130)         (53)          86
Prepaid pension cost                (33)         (59)         (12)
------------------------------------------------------------------
  Total                         $  (119)     $  (182)     $    95
==================================================================

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

December 31,                                   2004         2003
-----------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                 $   998      $   868
  Accumulated depreciation                      318          339
  Accrued supplemental benefit plan              48           47
-----------------------------------------------------------------
    Total Deferred Tax Assets                 1,364        1,254
=================================================================
Deferred tax liabilities:
  Unrealized securities gains                   364          946
  Prepaid pension costs                         251          284
  Accumulated accretion                          51           27
-----------------------------------------------------------------
    Total Deferred Tax Liabilities              666        1,257
-----------------------------------------------------------------
    Net Deferred Tax Assets (Liabilities)   $   698      $    (3)
=================================================================

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.

--------------------------------------------------------------------------------

15 ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated  other  comprehensive  income of $704, $1,836 and $3,075 at December
31, 2004, 2003 and 2002,  respectively consisted entirely of unrealized gains or
losses on available-for-sale securities, net of tax.

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

                                                        Tax
                                         Before-Tax   (Expense)    Net-of-Tax
2004                                       Amount      Benefit       Amount
------------------------------------------------------------------------------
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)
==============================================================================

                                                        Tax
                                         Before-Tax   (Expense)    Net-of-Tax
2003                                       Amount      Benefit       Amount
------------------------------------------------------------------------------
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)
==============================================================================

--------------------------------------------------------------------------------

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, 2004 and 2003 are as follows:

                                        2004        2003
--------------------------------------------------------
Commitments to extend credit:
  Fixed rate                        $ 21,152    $ 19,147
  Variable rate                     $ 67,502    $ 52,188

Standby letters of credit           $ 17,662    $ 15,363

     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.

                  Penseco Financial Services Corporation / 2004 Annual Report 33

<PAGE>

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, 2004          December 31, 2003
--------------------------------------------------------------------------------------------
                                           Carrying       Fair        Carrying      Fair
                                            Amount        Value        Amount       Value
--------------------------------------------------------------------------------------------
<S>                                       <C>           <C>          <C>          <C>
Financial Assets:
  Cash and due from banks                 $   7,763     $   7,763    $  10,062    $  10,062
  Interest bearing balances with banks          534           534        4,693        4,693
  Federal funds sold                              -             -       23,600       23,600
--------------------------------------------------------------------------------------------
        Cash and cash equivalents             8,297         8,297       38,355       38,355
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities                5,077         5,077       15,387       15,387
      U.S. Agency obligations               124,528       124,528      137,018      137,018
      States & political subdivisions        31,540        31,540       20,841       20,841
      Federal Home Loan Bank stock            5,604         5,604        5,840        5,840
      Other securities                          661           661          514          514
    Held-to-maturity:
      U.S. Agency obligations                66,019        65,672       84,138       83,566
      States & political subdivisions        29,249        32,119       29,387       32,106
--------------------------------------------------------------------------------------------
        Total investment securities         262,678       265,201      293,125      295,272
  Loans, net of unearned income:
    Real estate mortgages                   202,954       198,244      176,042      177,519
    Commercial                               41,560        41,560       30,056       30,056
    Consumer and other                       35,662        35,891       34,284       34,524
    Less:  Allowance for loan losses          3,600                      3,500
--------------------------------------------------------------------------------------------
        Loans, net                          276,576       275,695      236,882      242,099
--------------------------------------------------------------------------------------------
        Total Financial Assets              547,551     $ 549,193      568,362    $ 575,726
Other assets                                 16,157                     16,228
--------------------------------------------------------------------------------------------
        Total Assets                      $ 563,708                  $ 584,590
============================================================================================
Financial Liabilities:
  Demand - Non-interest bearing           $  82,938     $  82,938    $  79,726    $  79,726
  Demand - Interest bearing                  31,161        31,161       30,515       30,515
  Savings                                    80,307        80,307       80,689       80,689
  Money markets                              91,604        91,604       89,103       89,103
  Time                                      109,291       110,953      127,911      129,307
--------------------------------------------------------------------------------------------
        Total Deposits                      395,301       396,963      407,944      409,340
  Repurchase agreements                      18,398        18,398       19,454       19,454
  Short-term borrowings                         886           886          823          823
  Long-term borrowings                       84,620        84,655       93,523       93,549
--------------------------------------------------------------------------------------------
        Total Financial Liabilities         499,205     $ 500,902      521,744    $ 523,166
Other Liabilities                             2,127                      2,039
Stockholders' Equity                         62,376                     60,807
--------------------------------------------------------------------------------------------
        Total Liabilities and
        Stockholders' Equity              $ 563,708                  $ 584,590
============================================================================================

Standby Letters of Credit                 $    (177)    $    (177)   $    (153)   $    (153)

</TABLE>

34 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

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 $90 in 2004,  $86 in 2003 and $80 in 2002.  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, 2004
are as follows:

                            Mount   Meadow    ATM
                           Pocono   Avenue   Sites    Total
-----------------------------------------------------------
2005                       $   50   $   20   $  16    $  86
2006                           50       14       6       70
2007                           50        -       -       50
2008                           51        -       -       51
2009                           51        -       -       51
2010 to 2012                   72        -       -       72
-----------------------------------------------------------
  Total minimum
    payments required      $  324   $   34   $  22    $ 380
===========================================================

--------------------------------------------------------------------------------

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,       2004         2003
-------------------------------------------------
Beginning Balance           $ 5,265      $ 4,483
Additions                     4,899        2,065
Collections                    (532)      (1,283)
-------------------------------------------------
  Ending Balance            $ 9,632      $ 5,265
=================================================

In  addition  to the loan  amounts  shown  above,  the Bank has issued a standby
letters of credit for the accounts of related parties in the amount of $6,932.

--------------------------------------------------------------------------------

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, 2004, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject.

     As of December  31,  2004,  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,
2004, 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 / 2004 Annual Report 35

<PAGE>

20 REGULATORY MATTERS (CONTINUED)

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

December 31, 2003              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.


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

December 31, 2003              Amount   Ratio        Amount    Ratio          Amount    Ratio
----------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>         <C>         <C>         <C>
Total Capital
  (to Risk Weighted Assets)   $ 61,824  21.99%    > $ 22,490  > 8.0%      > $ 28,112  >  10.0%
                                                  -           -           -           -
Tier I Capital
  (to Risk Weighted Assets)   $ 58,324  20.75%    > $ 11,245  > 4.0%      > $ 16,867  >  6.0%
                                                  -           -           -           -
Tier I Capital
  (to Average Assets)         $ 58,324  10.21%    >        *  >   *       > $ 28,556  >  5.0%
                                                  -           -           -           -
</TABLE>

* 3.0%  ($17,134),  4.0%  ($22,845)  or 5.0%  ($28,556)  depending on the bank's
CAMELS Rating and other regulatory risk factors.

--------------------------------------------------------------------------------

21 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:

BALANCE SHEETS

December 31,                                        2004          2003
----------------------------------------------------------------------
Cash                                            $      8      $      7
Investment in bank subsidiary                     61,859        60,389
Equity Investments                                   642           494
----------------------------------------------------------------------
Total Assets                                    $ 62,509      $ 60,890
======================================================================
Total Liabilities                               $    133      $     83
Total Stockholders' Equity                        62,376        60,807
----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity      $ 62,509      $ 60,890
======================================================================

STATEMENTS OF INCOME

Years Ended December 31,                2004        2003       2002
-------------------------------------------------------------------
Dividends from bank subsidiary      $  2,900    $  2,900    $ 2,899
Dividends on investment securities        11          10          9
-------------------------------------------------------------------
  Total Income                         2,911       2,910      2,908
Other non-interest expense                10          10          8
-------------------------------------------------------------------
Net income before undistributed
  earnings of bank subsidiary          2,901       2,900      2,900
Undistributed earnings of bank
  subsidiary                           2,700       3,071      3,853
-------------------------------------------------------------------
Net Income                          $  5,601    $  5,971    $ 6,753
===================================================================

STATEMENTS OF CASH FLOWS

Years Ended December 31,                      2004        2003       2002
--------------------------------------------------------------------------
Operating Activities:
Net Income                                $  5,601    $  5,971    $ 6,753
Adjustments to reconcile net income
  to net cash provided by
    operating activities:
      Equity in undistributed net
        income of bank subsidiary           (2,700)     (3,071)    (3,853)
--------------------------------------------------------------------------
      Net cash provided by
        operating activities                 2,901       2,900      2,900
--------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment                    -           -          -
--------------------------------------------------------------------------
      Net cash used by
        investing activities                     -           -          -
--------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                         (2,900)     (2,900)    (2,899)
--------------------------------------------------------------------------
      Net cash used by
        financing activities                (2,900)     (2,900)    (2,899)
--------------------------------------------------------------------------
      Net increase in cash and
        cash equivalents                         1           -          1
Cash and cash equivalents at January 1           7           7          6
--------------------------------------------------------------------------
Cash and cash equivalents at December 31  $      8    $      7    $     7
==========================================================================

36 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                                                      Francis J. Merkel, CPA
                                                      Josephn J. Quinn, CPA, CVA
                                                      John H. Marx, Jr., CPA
                                                      Daniel J. Gerrity, CPA
                                                      Mary Ann E. Novak, CPA

McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants



             Report of Independent Registeres 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, 2004 and 2003,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 2004.  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 the significant  estimates made by managements,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Penseco
Financial Services  Corporation and subsidiary as of December 31, 2004 and 2003,
and the results of their  operations  and their cash flows for each of the three
years in the period ended  December  31, 2004,  in  conformity  with  accounting
principles generally accepted in the United States of America.

/s/ McGrail, Merkel, Quinn & Associates

Scranton, Pennsylvania
March 4, 2005

                             RSM McGladrey Network
                           An Indepently Owned Member

      Clay Avenue Professional Plaza, 1173 Clay Avenue, Scranton, PA 18510
                         570 961-0345 Fax: 570 961-8650

                                  www.mmq.com

                  Penseco Financial Services Corporation / 2004 Annual Report 37

<PAGE>

ITEM 9  Changes   in  and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

There  were no  changes  in or  disagreements  with  accountants  on  matters of
accounting principles or practices or financial statement disclosures in 2004.

ITEM 9A Controls and Procedures

Based on the Company's  principal  executive  officer,  Otto P.  Robinson,  Jr.,
President  and the  Company's  principal  financial  officer,  Patrick  Scanlon,
Controller,  evaluations of the Company's  Disclosure Controls and Procedures as
of February 17, 2005 (evaluation  date),  they have concluded that the Company's
disclosure controls are effective,  reasonably ensure that material  information
relating to the Company and its consolidated  subsidiaries is made known to them
by others within those  entities,  particularly  during the period in which this
report is being  prepared,  and identify  significant  deficiencies  or material
weaknesses  in internal  controls  which could  adversely  affect the  Company's
ability to record, process, summarize and report financial data.

     Based on information  available to them,  they are not aware of significant
deficiencies or material weaknesses in the Company's internal control system.

     Based  on  information  available  to  them,  they  are  not  aware  of any
significant  changes  made in internal  controls or in other  factors that could
significantly  affect those controls subsequent to February 17, 2005 (evaluation
date) and prior to the date of their certifications.

     Based on  information  available  to them,  they are not aware of any fraud
that involves management or other employees of the Company.

     Despite these and other controls and procedures,  the Company's two hundred
or so employees process over 10 million financial  transactions  every year. The
Company's  computer systems consist of some 17 million lines of code used in the
processing of this financial  information.  Financial accounting rules encompass
thousands of pages of instructions  and contain many confusing and "gray" areas.
From time to time honest errors in the entry,  processing,  or reporting of this
information  are  discovered  or a  dishonest  or  disloyal  employee  surfaces.
Fortunately,  in the past any such errors or discoveries  have not been material
and therefore we have never had to restate the Company's financial results.  The
probability is that we won't in the future,  but the possibility  does exist and
the  certifications  marked  as  exhibits  31 and 32 are made  subject  to these
contingencies.

ITEM 9B Other Information

There are no items required to be reported.

                                    PART III
                                    --------

ITEM 10 Directors and Executive Officers of the Registrant

                                 CODE OF ETHICS
                                 --------------
The Company has had for many years a Code of Ethics  applicable to all employees
including  the Company's  principal  Executive  Officer and principal  Financial
Officer  (Controller).  The purpose of the Code is to promote honest and ethical
conduct,  full and fair  disclosures of financial  information,  compliance with
laws and regulations and accountability for actions.

     A copy  of  the  Code  of  Ethics  may  be  obtained,  without  charge,  by
contacting:

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

                        AUDIT COMMITTEE FINANCIAL EXPERT
                        --------------------------------
The  Sarbanes-Oxley  Act of 2002 requires the Company to disclose whether or not
its Audit Committee has, as one of its members,  an "Audit  Committee  Financial
Expert", as that term is defined by the U. S. Securities and Exchange Commission
(SEC).

     The Board of Directors has elected not to designate any member as an "Audit
Committee  Financial  Expert".  The audit program at our organization has always
been strong. We have our own, full-time, Internal Auditor reporting to the Audit
Committee who has a staff of four full-time assistants. Our financial statements
are  audited  by an  independent  public  accounting  firm,  which has  received
approval from the Public Company  Accounting  Oversight Board to audit financial
reports of SEC reporting companies.  In addition to that, since we are a banking
company, our bank, Penn Security Bank & Trust Company, is examined every year on
an  alternate  basis by either  the  Pennsylvania  Department  of Banking or the
Federal Deposit  Insurance  Corporation and our parent holding company,  Penseco
Financial Services  Corporation,  is examined yearly by the Federal Reserve. Our
four member Audit Committee  includes three members with  substantial  education
and experience in accounting and financial  management,  of which, two are Chief
Executive Officers of Companies and one is a former Executive  Vice-President of
our organization. The Audit Committee, as well as the entire Board of Directors,
are ethical people who will act  responsibly if anything is wrong. We think that
our Committee members acting together have the expertise, information and advice
to assure that our financial statements are fairly presented.

     Other  information  required  by this Item as to  Directors  of the Company
contained under the headings "Voting  Securities & Principal  Holders  Thereof",
"Election  of   Directors",   "Board  and   Committee   Meetings"  and  "Certain
Relationships  and Related  Transactions"  within the definitive proxy statement
relating to the  Company's  Annual  Meeting of  Shareholders,  to be held May 3,
2005, is incorporated herein by reference thereto.

38 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

ITEM 11 Executive Compensation

The  information   contained  under  the  headings   "Executive   Compensation",
"Directors   Compensation",   "Compensation   Committee   Report  on   Executive
Compensation" and "Compensation  Committee Interlocks and Insider Participation"
in the definitive  proxy statement  relating to the Company's  Annual Meeting of
stockholders,  to be held May 3,  2005,  is  incorporated  herein  by  reference
thereto.

ITEM 12 Security  Ownership  of Certain  Beneficial  Owners and  Management  and
          Related Stockholder Matters

The  information  contained  under the heading  "Voting  Securities  & Principal
Holders  Thereof" in the definitive  proxy  statement  relating to the Company's
Annual Meeting of stockholders,  to be held May 3, 2005, is incorporated  herein
by reference thereto.

ITEM 13 Certain Relationships and Related Transactions

The information  contained under the heading "Certain  Relationships and Related
Transactions"  and "Transactions  with Directors and Principal  Officers" in the
definitive  proxy  statement   relating  to  the  Company's  annual  meeting  of
stockholders,  to be  held  May 3,  2005 is  incorporated  herein  by  reference
thereto.

ITEM 14 Principal Accountant Fees and Services

The information contained under the heading "Our Relationship with Our Auditors"
in the definitive  proxy statement  relating to the Company's  Annual Meeting of
Stockholders,  to be  held  May 3,  2005 is  incorporated  herein  by  reference
thereto.

                                    PART IV
                                    -------

ITEM 15 Exhibits and Financial Statements Schedules

(a)  (1)  Financial   Statements  -  The  following  financial   statements  are
          incorporated by reference in Part II, Item 8 hereof:

          Balance Sheets
          Consolidated Statements of Income
          Consolidated Statements of Stockholders' Equity
          Consolidated Statements of Cash Flows
          General Notes to Financial Statements
          Report of Independent Registered Public Accounting Firm

     (2)  Financial Statement  Schedules - The Financial Statement Schedules are
          incorporated by reference in Part II, Item 8 hereof.

     (3)  Exhibits

          The following exhibits are filed herewith or incorporated by reference
          as part of this Annual Report.

          3(i) Registrant's  Articles of Incorporation  (Incorporated  herein by
               reference  to Exhibit  3(i) of  Registrant's  report on Form 10-K
               filed with the SEC on March 30, 1998.)

          3(ii)Registrant's   By-Laws   (Incorporated  herein  by  reference  to
               Exhibit 3(ii) of Registrant's  report on Form 10-K filed with the
               SEC on March 30, 1998.)

          10   Material   contracts  -   Supplemental   Benefit  Plan  Agreement
               (Incorporated  herein by reference to Exhibit 10 of  Registrant's
               report on Form 10-Q filed with the SEC on May 10, 1999.)

          13   Annual report to security  holders  (Included herein by reference
               on pages 1- 40.)

          21   Subsidiaries of the registrant  (Incorporated herein by reference
               to Exhibit 21 of Registrant's  report on Form 10-K filed with the
               SEC on March 30, 1998.)

(b)       No current report on Form 8-K  was filed for the fourth quarter of the
          fiscal year ended December 31, 2004.

(c)       The exhibits required  to be filed  by this Item are listed under Item
          15(a)(3), above.

(d)       There are no  financial statement schedules required to be filed under
          this item.

                  Penseco Financial Services Corporation / 2004 Annual Report 39

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 8, 2005.


By:  /s/ Otto P. Robinson, Jr.
         -------------------------
         Otto P. Robinson, Jr.
         President


By:  /s/ Richard E. Grimm
         -------------------------
         Richard E. Grimm
         Executive Vice-President


By:  /s/ Patrick Scanlon
         -------------------------
         Patrick Scanlon
         Controller


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on March 8, 2005.


By:  /s/ Edwin J. Butler                  By:   /s/ Robert W. Naismith, Ph.D.
         -------------------------                  -------------------------
         Edwin J. Butler                            Robert W. Naismith, Ph.D.
         Director                                   Director


By:  /s/ Richard E. Grimm                 By:   /s/ James B. Nicholas
         -------------------------                  -------------------------
         Richard E. Grimm                           James B. Nicholas
         Director                                   Director


By:  /s/ Russell C. Hazelton              By:   /s/ Emily S. Perry
         -------------------------                  -------------------------
         Russell C. Hazelton                        Emily S. Perry
         Director                                   Director


By:  /s/ D. William Hume                  By:   /s/ Sandra C. Phillips
         -------------------------                  -------------------------
         D. William Hume                            Sandra C. Phillips
         Director                                   Director


By:  /s/ James G. Keisling                By:   /s/ Otto P. Robinson, Jr.
         -------------------------                  -------------------------
         James G. Keisling                          Otto P. Robinson, Jr.
         Director                                   Director


By:  /s/ P. Frank Kozik                   By:   /s/ Steven L. Weinberger
         -------------------------                  -------------------------
         P. Frank Kozik                             Steven L. Weinberger
         Director                                   Director


40 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                                 CERTIFICATIONS

I, Otto P. Robinson, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact  necessary to make the statements
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure  controls and procedures,  or caused such disclosure
controls and  procedures to be designed  under our  supervision,  to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this report is being prepared;

b) Evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure  controls and procedures,  as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial  reporting that occurred  during the  registrant's  most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected,  or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent  evaluation of internal  control over  financial  reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors:

a) All  significant  deficiencies  and  material  weaknesses  in the  design  or
operation of internal  control over  financial  reporting  which are  reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information; and

b) Any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's  internal control over
financial reporting.

Date:  February 17, 2005

/s/  OTTO P. ROBINSON JR.
-------------------------
Otto P. Robinson, Jr.
President

--------------------------------------------------------------------------------

I, Patrick Scanlon, certify that:

1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact  necessary to make the statements
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure  controls and procedures,  or caused such disclosure
controls and  procedures to be designed  under our  supervision,  to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this report is being prepared;

b) Evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure  controls and procedures,  as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial  reporting that occurred  during the  registrant's  most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected,  or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent  evaluation of internal  control over  financial  reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors:

a) All  significant  deficiencies  and  material  weaknesses  in the  design  or
operation of internal  control over  financial  reporting  which are  reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information; and

b) Any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's  internal control over
financial reporting.

Date:  February 17, 2005


/s/  PATRICK SCANLON
--------------------
Patrick Scanlon
Controller

                  Penseco Financial Services Corporation / 2004 Annual Report 41

<PAGE>

CERTIFICATION  OF  PERIODIC  FINANCIAL  REPORT  PURSUANT  TO SECTION  906 OF THE
SARBANES-OXLEY ACT OF 2002


Pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002  (subsection (a) and
(b)  of  Section  1350,  Chapter  63 of  Title  18,  United  States  Code),  the
undersigned  officer of Penseco Financial  Services  Corporation (the "Company")
certifies to his knowledge that:

     (1) The  Annual  Report  on Form  10-K of the  Company  for the year  ended
     December 31, 2004 (the "Form 10-K") fully complies with the requirements of
     Section 13(a) or 15(d) of the Securities  Exchange Act of 1934 (the "Act");
     and

     (2) The  information  contained  in the Form 10-K fairly  presents,  in all
     material  respects,  the financial  conditions and results of operations of
     the  Company as for the dates and for the  periods  referred to in the Form
     10-K.

                             /s/ OTTO P. ROBINSON JR
                             -----------------------
                             Otto P. Robinson, Jr.
                             President
                             February 17, 2005

The foregoing certification is being furnished solely pursuant to Section 906 of
the  Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code).

A signed  original  of the  foregoing  certification  has been  provided  to the
Company and will be retained by the Company in accordance with Rule 12b-11(d) of
the Act and  furnished to the  Securities  and Exchange  Commission or its staff
upon request.

This  certification  is  qualified  in its entirety by the report to which it is
attached as an exhibit.

--------------------------------------------------------------------------------

CERTIFICATION  OF  PERIODIC  FINANCIAL  REPORT  PURSUANT  TO SECTION  906 OF THE
SARBANES-OXLEY ACT OF 2002


Pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002  (subsection (a) and
(b)  of  Section  1350,  Chapter  63 of  Title  18,  United  States  Code),  the
undersigned  officer of Penseco Financial  Services  Corporation (the "Company")
certifies to his knowledge that:

     (1) The  Annual  Report  on Form  10-K of the  Company  for the year  ended
     December 31, 2004 (the "Form 10-K") fully complies with the requirements of
     Section 13(a) or 15(d) of the Securities  Exchange Act of 1934 (the "Act");
     and

     (2) The  information  contained  in the Form 10-K fairly  presents,  in all
     material  respects,  the financial  conditions and results of operations of
     the  Company as for the dates and for the  periods  referred to in the Form
     10-K.

                             /s/ PATRICK SCANLON
                             -----------------------
                             Patrick Scanlon
                             Controller
                             February 17, 2005

The foregoing certification is being furnished solely pursuant to Section 906 of
the  Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code).

A signed  original  of the  foregoing  certification  has been  provided  to the
Company and will be retained by the Company in accordance with Rule 12b-11(d) of
the Act and  furnished to the  Securities  and Exchange  Commission or its staff
upon request.

This  certification  is  qualified  in its entirety by the report to which it is
attached as an exhibit.

42 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                              INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Exhibit Number
Referred to
Item 601 of                                                            Prior Filing or Exhibit
Regulation S-K    DESCRIPTION OF EXHIBIT                               Page Number Herein
----------------------------------------------------------------------------------------------------------------------------
  <S>             <C>                                                  <C>
   2              Plan of acquisition, reorganization, arrangement,    None
                  liquidation or succession

   3              (i)  Articles of Incorporation                       Incorporated herein by reference to Exhibit 3 (i) of
                                                                       Registrant's report on Form 10-K filed with the
                                                                       SEC on March 30, 1998.

                  (ii) By-Laws                                         Incorporated herein by reference to Exhibit 3 (ii) of
                                                                       Registrant's report on Form 10-K filed with the
                                                                       SEC on March 30, 1998.

   4              Instruments defining the rights of security holders, None
                  including indentures

   9              Voting trust agreement                               None

  10              Material contracts - Supplemental Benefit Plan       Incorporated herein by reference to Exhibit 10 of
                  Agreement                                            Registrant's report on Form 10-Q filed with the
                                                                       SEC on May 10, 1999.

  11              Statement re:  Computation of per share earnings     None

  12              Statements re:  Computation of ratios                None

  13              Annual report to security holders, Form 10-Q or      Included herein by reference on pages 1-40,
                  quarterly report to security holders                 including the cover.

  14              Code of Ethics                                       Included herein by reference on page 38.

  16              Letter re:  Change in certifying accountant          None

  18              Letter re:  Change in accounting principles          None

  21              Subsidiaries of the registrant                       Incorporated herein by reference to Exhibit 21 of
                                                                       Registrant's report on Form 10-K filed with the
                                                                       SEC on March 30, 1998.

  22              Published report regarding matters submitted to      None
                  vote of security holders

  23              Consents of experts and counsel                      None

  24              Power of attorney                                    None

  31              Rule 13a-14(a)/15d-14(a) Certifications              Included herein by reference on page 41.

  32              Section 1350 Certifications                          Included herein by reference on page 42.

  99              Additional Exhibits                                  None

</TABLE>

                  Penseco Financial Services Corporation / 2004 Annual Report 43

<PAGE>

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

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

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

Audrey F. Markowski
Vice-President

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

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

Lynn Peters Thiel
Vice-President and 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


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
Carolyn E. Brown
Tanya L. Frable

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
Audit OFFICER
Ellen M. Evans

BRANCH OPERATIONS MANAGER
Robin L. Jenkins

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

BUSINESS DEVELOPMENT OFFICER
Mary Carol Cicco

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

FINANCIAL ANALYST
Chad J. Hazelton

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
Katherine M. Oven

44 Penseco Financial Services Corporation / 2004 Annual Report

<PAGE>

                              (INSIDE BACK COVER)

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

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

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
Retired Bank Officer

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

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

Robert W. Naismith, Ph.D.
Chairman & 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, President

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
Judge Carmen Minora
Mark R. Sarno
Frank Gardner

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
Howard J. Snowdon
Jeffrey Solimine

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

NORTH POCONO OFFICE
Jacqueline A. Carling
Anthony J. Descipio
George F. Edwards
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


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