COVER PAGE

The cover for our 1999  Annual  Report  portrays a  graphical  depiction  of the
expansion and integration of the financial universe.

<PAGE>

                                CUSTOMER SERVICES

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

DEPOSIT ACCOUNTS

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

LENDING

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

OTHER SERVICES

ATM Services
Bank Money Orders
Cashier's Checks
College Campus Card Interface
Credit Card Merchant Draft Capture
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking and Videotex Services
Investor Services
  (a) Brokerage
  (b) Insurance
Lockbox Services
Night Depository
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
  (a) Administrator
  (b) Agent
  (c) Custodian and Trustee for Pension Plans
  (d) Executor
  (e) Guardian
  (f) Securities Depository Service
  (g) Trustee
  (h) Trustee for Public Bond Issues
U.S. Savings Bonds

                          BRANCH LOCATIONS (with ATMs)

ABINGTON                                     CENTRAL CITY
1100 Northern Boulevard                      150 North Washington Avenue
Clarks Summit, PA                            Scranton, PA
(570) 587-4898                               (570) 346-7741

EAST SCRANTON                                MOUNT POCONO
Prescott Avenue & Ash Street                 Route 611 & Route 940
Scranton, PA                                 Mount Pocono, PA
(570) 342-9101                               (570) 839-8732

EAST STROUDSBURG                             NORTH POCONO
Route 209 & Route 247                        Main & Academy Streets
East Stroudsburg, PA                         Moscow, PA
(570) 420-0432                               (570) 842-7626

GOULDSBORO                                   SOUTH SCRANTON
Main & Second Streets                        526 Cedar Avenue
Gouldsboro, PA                               Scranton, PA
(570) 842-6473                               (570) 343-1151

GREEN RIDGE
1901 Sanderson Avenue
Scranton, PA
(570) 346-4695

                              OTHER ATM LOCATIONS

Acorn Market                                 Meadow Ave. & Hemlock St.
Route 209                                    Scranton, PA
Marshall's Creek, PA

Acorn Market                                 Metropolitan Life Insurance Company
Route 611                                    Morgan Highway
Swiftwater, PA                               Clarks Summit, PA

Convenient Food Mart                         Red Barn Village
Wyoming & Mulberry Streets                   Newton Ransom Blvd
Scranton, PA                                 Newton, PA

Kutztown University
Student Center and South Dining Hall
Kutztown, PA


                                  ON THE COVER

The cover for our 1999  Annual  Report  portrays a  graphical  depiction  of the
expansion and integration of the financial universe.

To the left of this description is a picture of the cover.


                             INSIDE FRONT COVER
<PAGE>

                              FINANCIAL HIGHLIGHTS
       -----------------------------------------------------------------
       In thousands, except
       per share data               1999            1998            1997
       -----------------------------------------------------------------
       Earnings per share      $    2.17       $    1.99       $    2.20
       Dividends per share     $    1.10       $    1.05       $    1.05
       Total Capital           $  45,743       $  44,961       $  42,924
       Total Deposits          $ 367,332       $ 377,526       $ 374,488
       Total Assets            $ 428,614       $ 436,099       $ 427,577
       -----------------------------------------------------------------


                                    CONTENTS

Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................3
Promotions and Appointments....................................................4

                                   Form 10-K

  Part 1, Item 1  Business.....................................................6
          Item 2  Properties...................................................7
          Item 3  Legal Proceedings............................................7
          Item 4  Submission of Matters to a Vote of Security Holders..........7
  Part 2, Item 5  Market for Registrant's Common Equity and Related
                  Stockholder Matters..........................................8
          Item 6  Selected Financial Data......................................9
          Item 7  Management Discussion and Analysis of Financial Condition
                    and Results of Operations.................................10
          Item 7A Quantitative and Qualitative Disclosures About Market Risk..18
          Item 8  Financial Statements and Supplementary Data.................20
                  Consolidated Balance Sheets.................................20
                  Consolidated Statements of Income...........................21
                  Consolidated Statements of Changes in Stockholders' Equity..22
                  Consolidated Statements of Cash Flows.......................23
                  General Notes to Financial Statements.......................24
                  Independent Auditor's Report................................34
          Item 9  Changes in and Disagreements with Accountants on Accounting
                    and Financial Disclosure..................................35
  Part 3, Item 10 Directors and Executive Officers of the Registrant..........35
          Item 11 Executive Compensation......................................35
          Item 12 Security Ownership of Certain Beneficial Owners and
                    Management................................................35
          Item 13 Certain Relationships and Related Transactions..............35
  Part 4, Item 14 Exhibits, Financial Statement Schedules and Reports on
                    Form 8-K..................................................36
  Signatures..................................................................37
  Index to Exhibits...........................................................38
Company Officers..............................................................39


Penseco Financial Services Corporation            1           1999 Annual Report
<PAGE>


                               PRESIDENT'S LETTER


Dear Shareholder

  I am  pleased  to  report  to you that 1999 was  another  successful  year for
Penseco Financial  Services  Corporation.  Earnings increased to $2.17 per share
for 1999 from $1.99 per share for 1998.  Dividends  increased to $1.10 per share
for 1999 from $1.05 per share for 1998.  Capital also increased to $45.7 million
at year end 1999 from $45.0 million at year end 1998. The increase in net income
was  achieved  despite  declines in total assets of $7.5 million and deposits of
$10.2  million as the Company  concentrated  on  controlling  its cost of funds,
generating  additional  fee income through  existing  services and in the future
through new services.

  To this end, the Federal government adopted  legislation which will have a far
reaching  impact  on the  financial  services  industry,  doing  away  with  the
separation of the banking,  insurance  and  securities  businesses.  The new law
provides that well managed and well capitalized  bank holding  companies may, by
filing a  declaration  with the Federal  Reserve,  become a  "financial  holding
company" and then may engage in  activities  which are  "financial in nature" or
"incidental  thereto"  or,  subject  to  Federal  Reserve  approval,   that  are
complementary thereto. These services include securities sales and underwriting,
mutual  fund  sales  and  management,  insurance  sales  and  underwriting,  and
traditional  peripheral  activities  of the  insurance  and  investment  banking
industries. We have filed such declaration and are expecting to receive approval
by March 15,  2000,  the  effective  date of the new law.

  Although we intend to approach these new  possibilities  with caution,  we do,
initially,  expect to enter some areas which we perceive have better risk/reward
profiles than we have had in traditional banking.

  We have concluded an agreement with a third party  brokerage  company  "Fiserv
Investor  Services,  Inc."  to get  our  investment  area up and  running.  Dual
employees  of the Bank and the  brokerage  company  will  provide  for sales and
purchases of investments including stocks, bonds, mutual funds and annuities. In
the future,  at the  appropriate  time,  we plan to  establish a fully  licensed
broker/dealer subsidiary of our holding company.

  We continue to explore  opportunities in the insurance area and will be moving
into high gear to bring insurance sales under the Penseco  umbrella of financial
services as soon as our investment services are up and running.

  Our Y2K efforts,  to which much of 1998 and 1999 were devoted,  met with great
success and we encountered very few problems in the century  rollover,  to which
we credit the hard work and planning of our staff. We were ready for practically
any contingency.  Now that Y2K is behind us (although we continue to be on guard
for  quarterly  and  year  end  processing  this  year)  we can  return  to some
unfinished business like check, statement, and report imaging, document imaging,
Internet services, enhanced ATM transactions,  e-mail statements, and postal bar
code savings to name a few.

  Regarding the national  economy,  in 1999 the Federal Reserve took back all of
the rate  decreases it gave in 1998 as the Fed became more  concerned  about the
economy overheating and fueling increased  inflation.  It is anticipated the Fed
will further  increase  rates to keep  inflation  under  control.  In a rates-up
environment,  it becomes more  feasible to become more  aggressive in pricing of
loans than when rates are lower, thus we expect our loans to grow  substantially
this year.  In  addition,  leveraging  techniques  which we shunned the last few
years, may make more sense now that rates are up,  therefore,  we are evaluating
this type of transaction  on a relatively  small scale.

  Donald F.  LaTorre,  the manager of our South Side Office,  is retiring and J.
Patrick Dietz,  our Mount Pocono Office manager,  has been named to replace him.
Jeffrey  Solimine  has been  named the new branch  manager  of our Mount  Pocono
Office. Jennifer S. Wohlgemuth has been named acting assistant branch manager of
our East Scranton Office. Linda Wolf has been named Assistant Vice President and
Training  Officer,  Eileen  Yanchak,  Assistant  Charge Card  Manager,  Susan D.
Blascak, Loan Administration Officer and Robert W. McDonald, Tax Officer. We are
indeed  fortunate to have such a capable and  dedicated  staff.

  I am pleased to announce that Jacqueline A. Carling,  a long time resident and
business woman in the borough of Moscow,  was named to the Advisory Board of our
North Pocono office.

  Also,  I am pleased to report to you that  Stephen  L.  Weinberger  joined the
Boards of Directors of Penseco Financial Services  Corporation and Penn Security
Bank and Trust  Company.  Stephen is the  Vice-President  of G.  Weinberger  and
Company, a mechanical contractor headquartered in Old Forge,  Pennsylvania.  Mr.
Weinberger  had  served  previously  as a  Director  of a local  bank  which was
subsequently  acquired  and  has a  great  deal  of  experience  in the  banking
industry. His experience will greatly benefit our organization.

  I regret to inform you of the death of Fred Deiter who,  although retired as a
member of the Board of Directors at the time of his death,  had spent almost all
of his  working  life  associated  with Penn  Security  Bank and  Trust  Company
(formerly the South Side Bank and Trust  Company).  Mr. Deiter started as a bank
messenger for the Bank and finished as a Director and Executive Vice  President.
His many years of dedicated  service to the Bank were instrumental in the Bank's
progress and success over the years. We extend our condolences and our gratitude
to his lovely wife,  Catherine  (Kitty) Deiter and his family.

  In looking to the future, we see our Company's strong capital  position,  good
earnings,  technological  resources,  our  positioning in the  marketplace  with
regard to niche national markets, as well as our traditional  geographic market,
all providing an excellent  foundation for continued success.  In this endeavor,
you can  help  us by  recommending  us to  your  family,  friends  and  business
acquaintances. This is your institution - let it serve you.

Sincerely yours,


/s/ Otto P. Robinson Jr.


Otto P. Robinson, Jr.
President


Penseco Financial Services Corporation            2           1999 Annual Report
<PAGE>


                               BOARD OF DIRECTORS


The top portion of this page of the 1999 Annual Report to Shareholders  contains
one picture. A description of the picture follows:


Seated left to right:
Edwin J. Butler,
Emily S. Perry,
Attorney Otto P. Robinson, Jr., President;
Sandra C. Phillips and
Russell C. Hazelton,


Standing left to right:
P. Frank Kozik, Secretary;
Steven L. Weinberger,
Robert W. Naismith, Ph.D.,
James B. Nicholas,
James G. Keisling,
D. William Hume, and
Richard E. Grimm, Executive Vice-President and Treasurer


                                  NEW MEMBERS


The  remainder of this page of the 1999 Annual Report to  Shareholders  contains
two  pictures.  A  description  of each picture  follows,  starting from left to
right:


Steven L. Weinberger
Board of Directors


Jacqueline A. Carling
North Pocono Advisory Board


Penseco Financial Services Corporation            3           1999 Annual Report
<PAGE>


                           PROMOTIONS & APPOINTMENTS


This page of the 1999 Annual Report to Shareholders  contains seven pictures.  A
description of each picture follows, starting at the top, from left to right:


J. Patrick Dietz
Assistant Vice-President


Jeffrey Solimine
Assistant Vice-President


Linda Wolf
Assistant Vice-President and Training Officer


Jennifer S. Wohlgemuth
Assistant Cashier


Eileen Yanchak
Assistant Charge Card Manager


Susan D. Blascak
Loan Administration Officer


Robert W. McDonald
Tax Officer


Penseco Financial Services Corporation            4           1999 Annual Report
<PAGE>


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


                                   FORM 10-K


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


                  For the Fiscal Year Ended December 31, 1999

                        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. ( )

THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY  NON-AFFILIATES
OF THE REGISTRANT ON MARCH 1, 2000,  BASED ON THE AVERAGE OF THE CLOSING BID AND
ASKED PRICES OF SUCH STOCK ON THAT DATE EQUALS  APPROXIMATELY  $51,552,000.  THE
NUMBER  OF  SHARES  OF  COMMON  STOCK  OUTSTANDING  AS OF MARCH 1,  2000  EQUALS
2,148,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporations 1999 Annual Report to Stockholders are incorporated
by reference in Parts I and II.

Portions of the  Corporation's  definitive proxy statement  relating to the 2000
Annual Meeting of Stockholders are incorporated by reference in Part III.


Penseco Financial Services Corporation            5           1999 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 bank holding  company.  The
Company  became  a bank  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,  marketing,   audit,  credit  card,  human  resources,   executive,  data
processing and central bookkeeping offices. There are eight additional offices.

  Through it's banking  subsidiary,  the Company generates  interest income from
it's outstanding loans receivable and it's 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 general operating expenses.  The Bank provides a variety of general
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  entered  into a third  party  marketingagreement  with  Fiserv
Investor  Services,  Inc.  and  will be  offering  a full  range  of  securities
brokerage and annuity sales to it's customers.  Investor  services will be based
in it's  headquarters  building  and the services  will be offered  through it's
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 it's
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 it's region,  and include  commercial
banks,   savings  and  loan  associations,   credit  unions  and  other  lending
institutions.

  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 other areas such as  convenience of location,
types of services, service costs and banking hours.

EMPLOYEES

As of March 1, 2000, the Company  employed 200 full-time  equivalent  employees.
The employees of the Company are not  represented by any  collective  bargaining
group.  Management of the Company  considers  relations with its employees to be
good.

SUPERVISION AND REGULATION

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


Penseco Financial Services Corporation            6           1999 Annual Report
<PAGE>


  As  a  bank   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.

  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.

  Additional  Bank assets held for sale consist of the Bank's former Green Ridge
office  located  at the  corner of East  Market  Street  and  Boulevard  Avenue,
Scranton, Pennsylvania.

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.


Penseco Financial Services Corporation            7           1999 Annual Report
<PAGE>


                                    PART II

Item 5   Market for Registrant's Common Equity and Related Stockholder Matters

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:

        Baird, Patrick & Company, Inc.           Legg Mason Wood Walker, Inc.
        Ferris, Baker, Watts, Inc.               Monroe Securities, Inc.
        F.J. Morrissey & Company, Inc.           Ryan, Beck & Company, Inc.
        Hopper Soliday & Company, Inc.           Sandler, O'Neill & Partners, LP
        Janney Montgomery Scott, 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
1999                High     Low    Per Share
---------------------------------------------
First Quarter       $ 43    $ 40    $   .21
Second Quarter        41      34        .21
Third Quarter         36      28        .21
Fourth Quarter        30      26        .47
                                    -------
                                    $  1.10
                                    =======



                                    Dividends
                                    Paid
1998                High     Low    Per Share
---------------------------------------------
First Quarter       $ 35    $ 28    $   .21
Second Quarter        41      35        .21
Third Quarter         43      39        .21
Fourth Quarter        44      40        .42
                                    -------
                                    $  1.05
                                    =======



DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,363                     1999
             2,255                     1998
             2,256                     1997
             2,148                     1996
             2,014                     1995


As of March 1 , 2000 there were approximately  1,045 stockholders of the Company
based  on  the  number  of  recordholders.

Reference should be made to the information about the Company's  dividend policy
and regulatory guidelines on pages 18 and 31.

TRANSFER AGENT

Penseco Financial Services Corporation,  150 North Washington Avenue,  Scranton,
Pennsylvania  18503-1848.  Stockholders'  questions  should be  directed  to the
Company's corporate headquarters at 570-346-7741.

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

                            First      Second     Third     Fourth
     1999                  Quarter    Quarter    Quarter    Quarter
-------------------------------------------------------------------
Net Interest Income        $ 4,226    $ 4,170    $ 4,391    $ 4,320
Provision for Loan Losses       56          -         14         19
Other Income                 2,114      1,407      2,397      1,828
Other Expenses               4,807      4,216      4,821      4,468
Net Income                   1,076      1,003      1,407      1,185
Earnings Per Share         $   .50    $   .47    $   .65    $   .55


                            First      Second     Third     Fourth
     1998                  Quarter    Quarter    Quarter    Quarter
-------------------------------------------------------------------
Net Interest Income        $ 4,356    $ 4,141    $ 4,283    $ 4,016
Provision for Loan Losses      106        104         75        310
Other Income                 1,911      1,340      2,116      1,471
Other Expenses               4,374      3,876      4,632      4,104
Net Income                   1,248      1,047      1,180        806
Earnings Per Share         $   .58    $   .49    $   .55    $   .37


Penseco Financial Services Corporation            8           1999 Annual Report
<PAGE>


Item 6   Selected Financial Data

(in thousands, except per share data)

RESULTS OF OPERATIONS:

                                1999       1998       1997       1996       1995
--------------------------------------------------------------------------------
Interest Income            $  28,320  $  29,975  $  30,099  $  27,893  $  27,474
Interest Expense              11,213     13,179     12,385     11,201     11,218
--------------------------------------------------------------------------------
Net Interest Income           17,107     16,796     17,714     16,692     16,256
Provision for Loan Losses         89        595        316        334        321
--------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                 17,018     16,201     17,398     16,358     15,935

Other Income                   7,746      6,838      6,285      5,952      6,202
Other Expenses                18,312     16,986     16,884     15,733     15,672
Income Tax                     1,781      1,772      2,074      1,975      2,009
--------------------------------------------------------------------------------
Net Income                 $   4,671  $   4,281  $   4,725  $   4,602  $   4,456
================================================================================



BALANCE SHEET DATA:

Assets                     $ 428,614  $ 436,099  $ 427,577  $ 398,035  $ 378,968
Investment Securities      $ 106,511  $ 118,762  $ 125,048  $ 125,263  $ 146,246
Net Loans                  $ 278,577  $ 280,389  $ 269,446  $ 237,915  $ 207,708
Deposits                   $ 367,332  $ 377,526  $ 374,488  $ 352,026  $ 336,386
Stockholders' Equity       $  45,743  $  44,961  $  42,924  $  40,585  $  39,239

PER SHARE DATA: (1)

Earnings per Share         $    2.17  $    1.99  $    2.20  $    2.14  $    2.07
Dividends per Share        $    1.10  $    1.05  $    1.05  $    1.00  $    .937
Book Value per Share       $   21.30  $   20.93  $   19.98  $   18.89  $   18.27
Common Shares Outstanding  2,148,000  2,148,000  2,148,000  2,148,000  2,148,000

FINANCIAL RATIOS:

Net Interest Margin            4.22%      4.12%      4.51%      4.51%      4.57%
Return on Average Assets       1.08%       .99%      1.14%      1.17%      1.19%
Return on Average Equity      10.12%      9.54%     11.22%     11.54%     11.86%
Average Equity to
  Average Assets              10.70%     10.38%     10.16%     10.14%     10.01%
Dividend Payout Ratio         50.69%     52.76%     47.73%     46.67%     45.18%


(1) Per share data is based on 2,148,000  shares  outstanding,  giving effect to
the common stock reorganization on December 31, 1997.


Penseco Financial Services Corporation            9           1999 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 1999 totalled  $4.7 million,  an increase of 9.3% from the $4.3
million  earned  in 1998,  which in turn was a  decrease  of 8.5%  from the $4.7
million earned in 1997. Net earnings per share were $2.17 in 1999, compared with
$1.99 in 1998 and  $2.20 in 1997.  Net  earnings  for 1999  increased  from 1998
results primarily due to an increase in the net interest margin,  coupled with a
lower provision for loan losses. Also, fee income increased, offset by increases
in operating costs. Net earnings for 1998 decreased over 1997 results  primarily
due to a narrowing of the net  interest  margin based on lower yields on earning
assets and increases in funding costs, together with a higher provision for loan
losses.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  4,671                     1999
             4,281                     1998
             4.725                     1997
             4.602                     1996
             4.456                     1995


The  Company's  return on average  assets was 1.08% in 1999  compared to .99% in
1998 and 1.14% in 1997. Return on average equity was 10.12%, 9.54% and 11.22% in
1999, 1998 and 1997, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
             1.08%                     1999
              .99%                     1998
             1.14%                     1997
             1.17%                     1996
             1.19%                     1995


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
            10.12%                     1999
             9.54%                     1998
            11.22%                     1997
            11.54%                     1996
            11.86%                     1995


Penseco Financial Services Corporation           10           1999 Annual Report
<PAGE>


RESULTS OF OPERATIONS


Net Interest Income

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

  Net interest income was $17.1 million in 1999,  compared with $16.8 million in
1998, an increase of 1.8%. The increase in net interest  income in 1999 resulted
from  the  Company   concentrating  on  maintaining  core  deposits  along  with
increasing  non-interest-bearing  deposits  which helped in reducing the cost of
funds.

  Net interest income was $16.8 million in 1998,  compared with $17.7 million in
1997, a decrease of 5.1%.  The decrease in net interest  income in 1998 resulted
from  the  Federal  Reserve   lowering  rates  throughout  the  year  and  local
competitive pricing, forcing banks to live with smaller margins.

  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, 1999 was 4.2% compared with
4.1% for the year ended  December 31, 1998, and 4.5% for the year ended December
31, 1997.


NET INTEREST INCOME (in millions)        YEAR
---------------------------------------------
       $ 17,107                          1999
         16,796                          1998
         17,714                          1997
         16,692                          1996
         16,256                          1995


Interest  income in 1999 totalled  $28.3  million,  compared to $30.0 million in
1998, decreasing 5.7% from the prior year. The yield on average interest-earning
assets  was 7.0% in 1999,  compared  to 7.4% in 1998.  Average  interest-earning
assets decreased in 1999 to $405.0 million from $407.8 million in 1998.  Average
loans,  which are the Company's highest yielding earning assets,  decreased $1.0
million in 1999, while investment  securities and other earning assets decreased
on average by $1.9  million.  Average  loans  represented  69.9% of 1999 average
interest-earning  assets,  compared  to  69.7% in 1998.

  Interest expense also decreased in 1999 to $11.2 million from $13.2 million in
1998, a decrease of $2 million or 15.2%.  This decrease resulted from lower time
deposit volume and rate reductions on other deposit  products.  The average rate
paid on  interest-bearing  liabilities during 1999 was 3.4%, compared to 4.0% in
1998.

  Interest  income in 1998 totalled $30.0 million,  compared to $30.1 million in
1997, remaining essentially unchanged from the prior year.

  The yield on average  interest-earning  assets was 7.4% in 1998,  compared  to
7.7% in  1997.  Average  interest-earning  assets  increased  in 1998 to  $407.8
million from $392.8 million in 1997.  Average loans  increased  $23.7 million in
1998, while investment  securities and other earning assets decreased on average
by  $8.7   million.   Average   loans   represented   69.7%   of  1998   average
interest-earning assets, compared to 66.3% in 1997.

  Interest expense increased in 1998 to $13.2 million from $12.4 million in
1997,  an increase of $.8 million or 6.5%.  This  increase  resulted from higher
time   deposit   volume  and  rate   increases.   The   average   rate  paid  on
interest-bearing liabilities during 1998 was 4.0%, compared to 3.9% in 1997.

  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.


Penseco Financial Services Corporation           11           1999 Annual Report
<PAGE>


DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'  EQUITY/INTEREST RATES AND
INTEREST DIFFERENTIAL

The table below presents  average  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 1999,  1998 and
1997.

<TABLE>
<CAPTION>

                                                   1999                           1998                           1997
-------------------------------------------------------------------------------------------------------------------------------
ASSETS                                 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>
Investment securities:
  Available-for-sale:
    U.S. Treasury securities          $  75,346  $  4,329   5.75%    $  99,405  $  6,024   6.06%    $ 113,559  $  7,092   6.25%
    U.S. Agency obligations               5,000       286   5.72         1,250        71   5.68             -         -      -
    States & political subdivisions      23,434       836   5.41         2,683        89   5.03             -         -      -
    Federal Home Loan Bank
      stock                               1,796       119   6.63           619        43   6.95             -         -      -
    Other                                    20         1   5.00            20         1   5.00            20         1   5.00
  Held-to-maturity:
    U.S. Agency obligations               4,647       279   6.00         8,228       505   6.14        11,342       712   6.28
    States & political subdivisions         640        34   8.05             -         -      -             -         -      -
Loans, net of unearned income:
  Real estate mortgages                 221,001    17,236   7.80       221,601    17,642   7.96       204,705    16,734   8.17
  Commercial                             21,164     1,818   8.59        18,508     1,562   8.44        13,465     1,207   8.96
  Consumer and other                     40,923     2,819   6.89        43,931     3,405   7.75        42,205     3,943   9.34
Federal funds sold                        7,035       369   5.25         9,994       521   5.21         7,535       410   5.44
Interest on balances with banks           3,977       194   4.88         1,565       112   7.16             -         -      -
-------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                 404,983  $ 28,320   6.99%      407,804  $ 29,975   7.35%      392,831  $ 30,099   7.66%
-------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                  11,188                         10,642                          9,629
Bank premises and equipment              12,588                         10,532                          7,950
Accrued interest receivable               2,992                          3,544                          3,573
Other assets                              2,186                          2,398                          2,988
Less: Allowance for loan losses           2,894                          2,711                          2,439
-------------------------------------------------------------------------------------------------------------------------------
Total Assets                          $ 431,043                      $ 432,209                      $ 414,532
-------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
  Demand-Interest bearing             $  23,643  $    252   1.07%    $  23,371  $    347   1.48%    $  23,057  $    349   1.51%
  Savings                                71,084     1,061   1.49        71,001     1,409   1.98        72,815     1,447   1.99
  Money markets                          59,066     1,585   2.68        63,489     1,818   2.86        68,437     2,039   2.98
  Time - Over $100                       43,397     2,172   5.00        39,769     2,165   5.44        30,697     1,616   5.26
  Time - Other                          115,764     5,633   4.87       126,737     7,035   5.55       121,201     6,729   5.55
Federal funds purchased                      78         4   5.13           265        11   4.15           278        14   5.04
Repurchase agreements                    12,169       482   3.96         8,051       364   4.52         3,971       161   4.05
Short-term borrowings                       481        24   4.99           638        30   4.70           558        30   5.38
-------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                325,682  $ 11,213   3.44%      333,321  $ 13,179   3.95%      321,014  $ 12,385  3.86%
-------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing            57,339                         51,159                         48,241
All other liabilities                     1,888                          2,868                          3,154
Stockholders' equity                     46,134                         44,861                         42,123
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                $ 431,043                      $ 432,209                      $ 414,532
-------------------------------------------------------------------------------------------------------------------------------
Interest Spread                                             3.55%                          3.40%                          3.80%
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                              $ 17,107                       $ 16,796                       $ 17,714
-------------------------------------------------------------------------------------------------------------------------------

FINANCIAL RATIOS

  Net interest margin                                       4.22%                          4.12%                          4.51%
  Return on average assets                                  1.08%                           .99%                          1.14%
  Return on average equity                                 10.12%                          9.54%                         11.22%
  Average equity to average assets                         10.70%                         10.38%                         10.16%
  Dividend payout ratio                                    50.69%                         52.76%                         47.73%

</TABLE>


Penseco Financial Services Corporation           12           1999 Annual Report
<PAGE>


DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

<TABLE>
<CAPTION>

                                                      Dollar                              Change
                                                      Amount     Change in   Change in   in Rate-
              1999 compared to 1998                  of Change    Volume       Rate       Volume
              ------------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>         <C>
EARNING       Investment securities:
ASSETS          Available-for-sale:
                  U.S. Treasury securities           $ (1,695)   $ (1,458)   $   (308)   $     71
                  U.S. Agency obligations                 215         213           -           2
                  States & political subdivisions         747         689           7          51
                  Federal Home Loan Bank stock             76          82          (2)         (4)
                Held-to-maturity:
                  U.S. Agency obligations                (226)       (220)        (11)          5
                  States & political subdivisions          34           -           -          34
              Loans, net of unearned income:
                Real estate mortgages                    (406)        (48)       (355)         (3)
                Commercial                                256         224          28           4
                Consumer and other                       (586)       (233)       (378)         25
              Federal funds sold                         (152)       (154)          4          (2)
              Interest bearing balances with banks         82         172         (35)        (55)
              ------------------------------------------------------------------------------------
                Total Interest Income                  (1,655)       (733)     (1,050)        128
              ------------------------------------------------------------------------------------
INTEREST      Deposits:
BEARING         Demand - Interest bearing                 (95)          4         (96)         (3)
LIABILITIES     Savings                                  (348)          1        (348)         (1)
                Money markets                            (233)       (126)       (114)          7
                Time - Over $100                            7         197        (175)        (15)
                Time - Other                           (1,402)       (609)       (862)         69
              Federal funds purchased                      (7)         (7)         (2)          2
              Repurchase agreements                       118         186         (45)        (23)
              Short-term borrowings                        (6)         (7)          2          (1)
              ------------------------------------------------------------------------------------
                Total Interest Expense                 (1,966)       (361)     (1,640)         35
              ------------------------------------------------------------------------------------
                Net Interest Income                  $    311    $   (372)   $    590    $     93
              ------------------------------------------------------------------------------------

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

              1998 compared to 1997
              ------------------------------------------------------------------------------------
EARNING       Investment securities:
ASSETS          Available-for-sale:
                  U.S. Treasury securities           $ (1,068)   $   (883)   $   (204)   $     19
                  U.S. Agency obligations                  71           -           -          71
                  States & political subdivisions          89           -           -          89
                  Federal Home Loan Bank stock             43           -           -          43
                Held-to-maturity
                  U.S. Agency obligations                (207)       (196)         11         (22)
              Loans, net of unearned income:
                Real estate mortgages                     908       1,380        (430)        (42)
                Commercial                                355         452         (70)        (27)
                Consumer and other                       (538)        161        (671)        (28)
              Federal funds sold                          111         134         (17)         (6)
              Interest bearing balances with banks        112           -           -         112
              ------------------------------------------------------------------------------------
                Total Interest Income                    (124)      1,048      (1,381)        209
              ------------------------------------------------------------------------------------
INTEREST      Deposits:
BEARING         Demand - Interest bearing                  (2)          5          (7)          -
LIABILITIES     Savings                                   (38)        (36)         (2)          -
                Money markets                            (221)       (149)        (82)         10
                Time - Over $100                          549         478          52          19
                Time - Other                              306         306           -           -
              Federal funds purchased                      (3)         (1)         (2)          -
              Repurchase agreements                       203         166          18          19
              Short-term borrowings                         -           -           -           -
              ------------------------------------------------------------------------------------
                Total Interest Expense                    794         769         (23)         48
              ------------------------------------------------------------------------------------
                Net Interest Income                  $   (918)   $    279    $ (1,358)   $    161
              ------------------------------------------------------------------------------------

</TABLE>


Penseco Financial Services Corporation           13           1999 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 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,               1999         1998         1997
---------------------------------------------------------------------
Trust department income           $   1,047    $   1,001    $     858
Service charges on
  deposit accounts                      695          657          648
Merchant transaction
  income                              5,166        4,500        4,083
Other fee income                        704          539          602
Other operating income                  134          141           94
Realized gains on
  securities, net                         -            -            -
---------------------------------------------------------------------
Total Other Income                $   7,746    $   6,838    $   6,285
=====================================================================

  Total  other  income  increased  $908  during  1999.  There was a  significant
increase in our merchant  transaction income of $666 or 14.8% due to an increase
in our customer base and increased business with our existing  customers.  Other
fee income  increased  $165 or 30.6%.

  Total other  income  increased  $553 during 1998.  The increase  came from new
trust  business  which was up $143 from  1997,  a 16.7%  increase,  as well as a
significant increase in our merchant transaction income of $417 or 10.2%.

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,               1999         1998         1997
---------------------------------------------------------------------
Salaries and employee
  benefits                        $   7,528    $   7,331    $   7,578
Occupancy expenses, net               1,334        1,274        1,278
Furniture and equipment
  expenses                            1,227          908          850
Merchant transaction
  expenses                            4,471        3,764        3,365
Other operating expenses              3,752        3,709        3,813
---------------------------------------------------------------------
  Total Other Expenses            $  18,312    $  16,986    $  16,884
=====================================================================

Salaries and employee  benefits  increased by $197 or 2.7% in 1999 from 1998 and
decreased by $247 or 3.3% in 1998 from 1997. The Company  employed 201 people on
a full-time equivalent basis at December 31, 1999, compared with 209 at December
31, 1998 and 202 at December 31, 1997.  The salary and benefits  expense in 1999
reflects cost of living increases granted to employees, along with a higher cost
of employee  benefits.  The salary and benefits expense in 1998 reflects cost of
living  increases  granted  to  employees,  offset by a lower  cost of  employee
benefits.

  Occupancy   expenses  and   furniture   and   equipment   expenses   increased
significantly  during the years 1999 and 1998 due to a new branch office in East
Stroudsburg,  along with the replacement of our former office in the Green Ridge
section of Scranton.  The Company  incurred  additional  expense in its merchant
transaction  business of $707 or 18.8% in 1999 and $399 or 11.9% in 1998, due to
additional growth.

INCOME TAXES

Federal  income  tax  expense  amounted  to  $1,781 in 1999  compared  to $1,772
recorded in 1998.  The  Company's  effective  income tax rate for 1999 was 27.6%
compared to 29.3% for 1998,  due to additional tax free income in 1999. In 1998,
income tax  expense  decreased  $302 from  $2,074 in 1997 due to a  decrease  in
pre-tax  income.  The effective  income tax rate for 1998 was 29.3%  compared to
30.5% for 1997.

  For further discussion  pertaining to Federal income taxes, see Note 12 to the
Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets  decreased  $7.5 million or 1.7% during 1999 and amounted to $428.6
million at December  31, 1999  compared to $436.1  million at December 31, 1998.
For the year ended  December  31, 1998 total  assets  increased  $8.5 million to
$436.1 million or a 2.0% increase over $427.6 million at December 31, 1997.

ASSETS (in millions)             YEAR
-------------------------------------
       $ 428,614                 1999
         436,099                 1998
         427,577                 1997
         398,035                 1996
         378,968                 1995

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,                           1999         1998         1997
---------------------------------------------------------------------
U.S.Treasury securities           $  66,459    $  81,916    $ 114,922
U.S. Agency obligations               9,643       11,402       10,106
States & political subdivisions      28,591       23,634            -
Other securities                      1,818        1,810           20
---------------------------------------------------------------------
  Total Investment Securities     $ 106,511    $ 118,762    $ 125,048
=====================================================================


Penseco Financial Services Corporation           14           1999 Annual Report
<PAGE>


LOAN PORTFOLIO

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

<TABLE>
<CAPTION>

December 31,                           1999         1998         1997         1996         1995
-----------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>
Real estate - construction
   and land development           $   3,241    $   4,152    $   3,731    $   3,770    $   4,042
Real estate mortgages               216,574      221,879      213,128      184,577      161,217
Commercial                           18,995       18,169       17,173       13,476       11,770
Credit card and related plans         2,203        2,286        2,293        2,298        2,404
Installment                          28,693       28,538       26,811       26,667       20,663
Obligations of states &
  political subdivisions             11,821        8,195        8,910        9,427        9,712
-----------------------------------------------------------------------------------------------
  Loans, net of unearned income     281,527      283,219      272,046      240,215      209,808
Less: Allowance for loan losses       2,950        2,830        2,600        2,300        2,100
-----------------------------------------------------------------------------------------------
  Loans, net                      $ 278,577    $ 280,389    $ 269,446    $ 237,915    $ 207,708
===============================================================================================

</TABLE>

LOANS

Total net loans  decreased  $1.8 million to $278.6  million at December 31, 1999
from $280.4 million at December 31, 1998, a decrease of .6%.

  Total net loans increased $11.0 million to $280.4 million at December 31, 1998
from $269.4 million at December 31, 1997, an increase of 4.1%.

  The  increase  in  1998  was  due to  growth  in the  Company's  real  estate,
commercial and installment loan portfolios.


NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 278,577                       1999
         280,389                       1998
         269,446                       1997
         237,915                       1996
         207,708                       1995


LOAN QUALITY

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

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

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


Penseco Financial Services Corporation           15           1999 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,                                     1999         1998         1997         1996         1995
---------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>          <C>
Non-accrual loans                            $    836     $    929     $  1,031     $    866     $    940
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        476          348          343          342          166
  Credit card and home equity loans                 -           27           98           93          133
---------------------------------------------------------------------------------------------------------
  Total non-performing loans                    1,312        1,304        1,472        1,301        1,239
Other real estate owned                            33          111          339          610          306
---------------------------------------------------------------------------------------------------------
  Total non-performing assets                $  1,345     $  1,415     $  1,811     $  1,911     $  1,545
=========================================================================================================

</TABLE>


Loans are generally placed on a nonaccrual  status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on nonaccrual 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 $836,  $929  and  $1,031  at  December  31,  1999,  1998 and  1997,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $140,  $108 and $89 for 1999,  1998 and 1997,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $22,
$30 and $35 for 1999, 1998 and 1997,  respectively.  There are no commitments to
lend additional funds to individuals 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, 1999,  there are no significant  loans as to which management
has serious doubt about their ability to continue to perform in accordance  with
their  contractual  terms.

  At  December  31,  1999,  1998 and 1997,  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,                         1999         1998         1997         1996         1995
---------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>          <C>
Balance at beginning of year                 $  2,830     $  2,600     $  2,300     $  2,100     $  2,100
Charge-offs:
  Real estate mortgages                            82           69           38           87          300
  Commercial and all others                        13          252            -            -           11
  Credit card and related plans                    65           37           52           64           67
  Installment loans                                26           25           32           32            3
---------------------------------------------------------------------------------------------------------
Total charge-offs                                 186          383          122          183          381
---------------------------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                             -            1           79           22            2
  Commercial and all others                       195            -            1            2            1
  Credit card and related plans                    10            9           17           16           11
  Installment loans                                12            8            9            9           46
---------------------------------------------------------------------------------------------------------
Total recoveries                                  217           18          106           49           60
---------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs                      (31)         365           16          134          321
---------------------------------------------------------------------------------------------------------
Provision charged to operations                    89          595          316          334          321
---------------------------------------------------------------------------------------------------------
  Balance at End of Year                     $  2,950     $  2,830     $  2,600     $  2,300     $  2,100
=========================================================================================================
Ratio of net (recoveries) charge-offs
to average loans outstanding                  (0.01)%        0.13%        0.01%        0.06%        0.17%
==========================================================================================================

</TABLE>


Penseco Financial Services Corporation           16           1999 Annual Report
<PAGE>


The allowance for loan losses is allocated as follows:

<TABLE>
<CAPTION>


December 31,                     1999            1998            1997            1996            1995
------------------------------------------------------------------------------------------------------------
                               Amount     %1   Amount     %1   Amount     %1   Amount     %1   Amount     %1
------------------------------------------------------------------------------------------------------------
<S>                           <C>      <C>    <C>      <C>    <C>      <C>    <C>      <C>    <C>      <C>
Real estate mortgages         $ 1,500   78%   $ 1,550   80%   $ 1,350   71%   $ 1,125   71%   $ 1,100   72%
Commercial
  and all others                  950   10        830    9        850   19        875   22        750   23
Credit card and
  related plans                   150    1        150    1        150    1        150    1        150    1
Personal installment loans        350   11        300   10        250    9        150    6        100    4
------------------------------------------------------------------------------------------------------------
  Total                       $ 2,950  100%   $ 2,830  100%   $ 2,600  100%   $ 2,300  100%   $ 2,100  100%
============================================================================================================

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

</TABLE>


DEPOSITS

The primary  source of funds to support the Company's  operations is its deposit
base. Company deposits decreased $10.2 million to $367.3 million at December 31,
1999 from  $377.5  million at December  31,  1998,  a decrease of 2.7%.  Company
deposits  increased  $3.0  million to $377.5  million at December  31, 1998 from
$374.5 million at December 31, 1997, an increase of .8%. The decline in deposits
in 1999 is the result of the Company concentrating on maintaining core deposits,
along with increasing its non-interest bearing deposits,  which helped to reduce
the  cost of  funds.  The  growth  in  deposits  in 1998  was due to  management
responding  to  competition  by  offering  competitively  priced or  alternative
banking products.

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

  Three months or less                       $ 15,684
  Over three months through six months         13,502
  Over six months through twelve months        10,023
  Over twelve months                            5,088
                                             --------
  Total                                      $ 44,297
                                             ========


DEPOSITS (in millions)            YEAR
--------------------------------------
$ 367,332                         1999
  377,526                         1998
  374,488                         1997
  352,026                         1996
  336,386                         1995


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.

  The Company  remains in a highly liquid  condition  both in the short and long
term. Sources of liquidity include the Company's  substantial U.S. Treasury bond
portfolio,  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 designation of securities as  "Held-To-Maturity"
lessens the ability of banks to sell securities so classified,  except in regard
to  certain  changes  in  circumstances  or  other  events  that  are  isolated,
nonrecurring and unusual.


Penseco Financial Services Corporation           17           1999 Annual Report
<PAGE>


CAPITAL RESOURCES

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

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

  The Company's total risk-based  capital ratio was 18.96% at December 31, 1999.
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.

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.


STOCKHOLDERS' EQUITY (in millions)            YEAR
--------------------------------------------------
         $ 45,743                             1999
           44,961                             1998
           42,924                             1997
           40,585                             1996
           39,239                             1995


Item 7A  Quantitative and Qualitative Disclosures About Market Risk

The Company  currently  does not enter into  derivative  financial  instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial  instruments  with similar  characteristics.  However,  the Company is
party to 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  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 party up to a stipulated amount and with specified terms and conditions.

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

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

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


Penseco Financial Services Corporation           18           1999 Annual Report
<PAGE>


MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 1999

<TABLE>
<CAPTION>

                                                                                                     Non-Rate
                                     2000        2001        2002       2003       2004  Thereafter Sensitive      Total  Fair Value
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S>                             <C>         <C>         <C>        <C>        <C>        <C>        <C>         <C>        <C>
Fixed interest rate securities:
  U.S. Treasury securities      $  19,017   $  32,731   $   4,925  $   4,866  $   4,920  $       -  $       -   $  66,459  $  66,459
    Yield                           5.88%       5.54%       5.14%      4.65%      6.01%          -          -       5.57%
  U.S. Agency obligations               -           -           -      4,800          -          -          -       4,800      4,800
    Yield                               -           -           -      5.71%          -          -          -       5.71%
  States & political subdivisions   1,094       3,402       6,731      7,462      4,263      5,639          -       28,591    28,439
    Yield                           5.08%       5.22%       5.37%      5.68%      5.56%      8.51%          -       6.04%
Variable interest rate securities:
  U.S. Agency obligations           1,800       1,800       1,243          -          -          -          -       4,843      4,691
    Yield                           6.00%       6.00%       6.00%          -          -          -          -       6.00%
  Federal Home Loan Bank stock          -           -           -          -          -      1,798          -       1,798      1,798
    Yield                               -           -           -          -          -      6.63%          -       6.63%
  Other                                 -           -           -          -          -         20          -          20         20
    Yield                               -           -           -          -          -      5.00%          -       5.00%
Fixed interest rate loans:
  Real estate mortgages            13,008      12,122      11,799     11,170     11,574     93,060          -     152,733    146,191
    Yield                           7.59%       7.58%       7.57%      7.54%      7.50%      7.48%          -       7.51%
  Consumer and other                1,896       1,791       1,649      1,400      1,190      2,077          -      10,003      9,942
    Yield                           7.99%       7.89%       7.80%      7.80%      7.85%      8.04%          -       7.91%
Variable interest rate loans:
  Real estate mortgages            16,254       6,975       6,001      5,706      5,635     26,511          -      67,082     67,082
    Yield                           8.63%       8.43%       9.34%      8.66%      8.70%      8.69%          -       8.70%
  Commercial                       18,995           -           -          -          -          -          -      18,995     18,995
    Yield                           8.59%           -           -          -          -          -          -       8.59%
  Consumer and other                8,975       5,089       4,940      4,648      4,959      4,103          -      32,714     32,714
    Yield                           8.66%       8.69%       8.34%      7.85%      7.85%      8.69%          -       8.38%
Less: Allowance for loan losses       620         272         256        240        245      1,317          -       2,950
Interest bearing deposits
  with banks                        3,961           -           -          -          -          -          -       3,961      3,961
    Yield                           5.20%           -           -          -          -          -          -       5.20%
Federal funds sold                 10,875           -           -          -          -          -          -      10,875     10,875
    Yield                           5.25%           -           -          -          -          -          -       5.25%
Cash and due from banks                 -           -           -          -          -          -     10,275      10,275     10,275
Other assets                            -           -           -          -          -          -     18,415      18,415
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                    $  95,255   $  63,638   $  37,032  $  39,812  $  32,296  $ 131,891  $  28,690   $ 428,614  $ 406,242
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing     $       -   $  23,558   $       -  $       -    $     -  $       -  $       -   $  23,558  $  23,558
    Yield                               -       1.07%           -          -          -          -          -       1.07%
  Savings                               -      68,824           -          -          -          -          -      68,824     68,824
    Yield                               -       1.49%           -          -          -          -          -       1.49%
  Money markets                    60,494           -           -          -          -          -          -      60,494     60,494
    Yield                           2.68%           -           -          -          -          -          -       2.68%
  Time - Other                     14,104           -           -          -          -          -          -      14,104     14,104
    Yield                           5.62%           -           -          -          -          -          -       5.62%
Fixed interest rate deposits:
  Time - Over $100,000             39,209       2,957       1,411        300        245        175          -      44,297     44,492
    Yield                           5.03%       5.82%       6.11%      6.00%      6.36%      6.50%          -       5.14%
  Time - Other                     75,384      12,687       7,789        482      1,074        409          -      97,825     98,095
    Yield                           4.77%       5.30%       5.94%      5.24%      5.62%      6.05%          -       4.92%
Demand - Non-interest bearing           -           -           -          -          -          -     58,230      58,230     58,230
Repurchase agreements              11,981           -           -          -          -          -          -      11,981     11,981
    Yield                           3.96%           -           -          -          -          -          -       3.96%
Short-term borrowings                 887           -           -          -          -          -          -         887        887
    Yield                           4.99%           -           -          -          -          -          -       4.99%
Other liabilities                       -           -           -          -          -          -      2,671       2,671
Stockholders' equity                    -           -           -          -          -          -     45,743      45,743
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity            $ 202,059   $ 108,026   $   9,200  $     782  $   1,319  $     584  $ 106,644   $ 428,614  $ 380,665
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change $(106,804)  $ (44,388)  $  27,832  $  39,030  $  30,977  $ 131,307  $ (77,954)  $       -
====================================================================================================================================

</TABLE>


Penseco Financial Services Corporation           19           1999 Annual Report
<PAGE>


Item 8   Financial Statements and Supplementary Data


                          Consolidated Balance Sheets

(in thousands, except per share data)

<TABLE>
<CAPTION>

                          December 31,                                      1999         1998
                          -------------------------------------------------------------------
<S>                                                                    <C>          <C>
ASSETS                    Cash and due from banks                      $  10,275    $  11,731
                          Interest bearing balances with banks             3,961          345
                          Federal funds sold                              10,875        6,650
                          -------------------------------------------------------------------
                            Cash and Cash Equivalents                     25,111       18,726

                          Investment securities:
                            Available-for-sale, at fair value             96,029      112,346
                            Held-to-maturity (fair value of $10,178
                              and $6,266, respectively)                   10,482        6,416
                          -------------------------------------------------------------------
                            Total Investment Securities                  106,511      118,762

                          Loans, net of unearned income                  281,527      283,219
                            Less: Allowance for loan losses                2,950        2,830
                          -------------------------------------------------------------------
                           Loans, Net                                    278,577      280,389

                          Bank premises and equipment                     12,296       12,631
                          Other real estate owned                             33          111
                          Accrued interest receivable                      2,927        3,234
                          Other assets                                     3,159        2,246
                          -------------------------------------------------------------------
                            Total Assets                               $ 428,614    $ 436,099
                          ===================================================================

LIABILITIES               Deposits:
                            Non-interest bearing                       $  58,230    $  56,398
                            Interest bearing                             309,102      321,128
                          -------------------------------------------------------------------
                            Total Deposits                               367,332      377,526

                          Other borrowed funds:
                            Repurchase agreements                         11,981       10,959
                            Short-term borrowings                            887            -
                          Accrued interest payable                         1,860        2,039
                          Other liabilities                                  811          614
                          -------------------------------------------------------------------
                            Total Liabilities                            382,871      391,138
                          -------------------------------------------------------------------

STOCKHOLDERS' EQUITY      Common stock, $.01 par value, 15,000,000
                            shares authorized, 2,148,000
                            shares issued and outstanding                     21           21
                          Surplus                                         10,819       10,819
                          Retained earnings                               35,996       33,688
                          Accumulated other comprehensive income          (1,093)         433
                          -------------------------------------------------------------------
                            Total Stockholders' Equity                    45,743       44,961
                          -------------------------------------------------------------------
                            Total Liabilities and
                            Stockholders' Equity                       $ 428,614    $ 436,099
                          ===================================================================

</TABLE>

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


Penseco Financial Services Corporation           20           1999 Annual Report
<PAGE>


                       Consolidated Statements of Income

(in thousands, except per share data)

<TABLE>
<CAPTION>

                          Years Ended December 31,                    1999        1998        1997
                          ------------------------------------------------------------------------
<S>                                                               <C>         <C>         <C>
INTEREST                  Interest and fees on loans              $ 21,873    $ 22,609    $ 21,884
INCOME                    Interest and dividends on investments:
                            U.S. Treasury securities and U.S.
                              Agency obligations                     4,894       6,600       7,804
                            States & political subdivisions            870          89           -
                            Other securities                           120          44           1
                          Interest on Federal funds sold               369         521         410
                          Interest on balances with banks              194         112           -
                          ------------------------------------------------------------------------
                            Total Interest Income                   28,320      29,975      30,099
                          ------------------------------------------------------------------------
INTEREST                  Interest on time deposits
EXPENSE                     of $100,000 or more                      2,172       2,165       1,616
                          Interest on other deposits                 8,531      10,609      10,564
                          Interest on other borrowed funds             510         405         205
                          ------------------------------------------------------------------------
                            Total Interest Expense                  11,213      13,179      12,385
                          ------------------------------------------------------------------------
                            Net Interest Income                     17,107      16,796      17,714
                          Provision for loan losses                     89         595         316
                          ------------------------------------------------------------------------
                            Net Interest Income After Provision
                              for Loan Losses                       17,018      16,201      17,398
                          ------------------------------------------------------------------------
OTHER                     Trust department income                    1,047       1,001         858
INCOME                    Service charges on deposit accounts          695         657         648
                          Merchant transaction income                5,166       4,500       4,083
                          Other fee income                             704         539         602
                          Other operating income                       134         141          94
                          Realized gains on securities, net              -           -           -
                          ------------------------------------------------------------------------
                            Total Other Income                       7,746       6,838       6,285
                          ------------------------------------------------------------------------
OTHER                     Salaries and employee benefits             7,528       7,331       7,578
EXPENSES                  Occupancy expenses, net                    1,334       1,274       1,278
                          Furniture and equipment expenses           1,227         908         850
                          Merchant transaction expenses              4,471       3,764       3,365
                          Other operating expenses                   3,752       3,709       3,813
                          ------------------------------------------------------------------------
                            Total Other Expenses                    18,312      16,986      16,884
                          ------------------------------------------------------------------------
                          Income before income taxes                 6,452       6,053       6,799
                          Applicable income taxes                    1,781       1,772       2,074
                          ------------------------------------------------------------------------
NET INCOME                  Net Income                            $  4,671    $  4,281    $  4,725
                          ========================================================================
PER SHARE                   Earnings Per Share                    $   2.17    $   1.99    $   2.20
                          ========================================================================

</TABLE>

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


Penseco Financial Services Corporation           21           1999 Annual Report
<PAGE>


           Consolidated Statements of Changes in Stockholders' Equity


<TABLE>
<CAPTION>

Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------

                                                                               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, 1996                    $ 21     $ 10,819    $ 29,193     $    552          $ 40,585

Comprehensive income:
  Net income, 1997                               -            -       4,725            -             4,725
  Unrealized losses on securities,
    net of taxes of $67                          -            -           -         (130)             (130)
                                                                                                     -----
Comprehensive income                                                                                 4,595

Cash dividends declared ($1.05 per share)        -            -      (2,256)           -            (2,256)
-------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                      21       10,819      31,662          422            42,924

Comprehensive income:
  Net income, 1998                               -            -       4,281            -             4,281
  Unrealized gains on securities,
    net of taxes of $6                           -            -           -           11                11
                                                                                                     -----
Comprehensive income                                                                                 4,292

Cash dividends declared ($1.05 per share)        -            -      (2,255)           -            (2,255)
-------------------------------------------------------------------------------------------------------------

Balance, December 31, 1998                      21       10,819      33,688          433            44,961

Comprehensive income:
  Net income, 1999                               -            -       4,671            -             4,671
  Unrealized losses on securities,
    net of taxes of $786                         -            -           -       (1,526)           (1,526)
                                                                                                     -----
Comprehensive income                                                                                 3,145

Cash dividends declared ($1.10 per share)        -            -      (2,363)           -            (2,363)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999                    $ 21     $ 10,819    $ 35,996     $ (1,093)         $ 45,743
=============================================================================================================

</TABLE>

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

Penseco Financial Services Corporation           22           1999 Annual Report


<PAGE>


                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

(in thousands)   Years Ended December 31,                                1999        1998        1997
                 -------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>         <C>
OPERATING        Net Income                                         $   4,671   $   4,281   $   4,725
ACTIVITIES       Adjustments to reconcile net income to net
                   cash provided by operating activities:
                     Depreciation                                       1,176       1,005         972
                     Provision for loan losses                             89         595         316
                     Deferred income tax benefit                         (165)       (284)         (8)
                     Amortization of securities
                       (net of accretion)                                 336         232         296
                     Net realized gains on securities                       -           -           -
                     Loss on other real estate                             28          41         176
                     Decrease (increase) in interest receivable           307         661        (387)
                     Decrease (increase) in other assets                   37        (475)       (136)
                     Increase (decrease) in income taxes payable          253        (182)         51
                     (Decrease) increase in interest payable             (179)       (485)        523
                     (Decrease) increase  in other liabilities            (56)        102        (105)
                 -------------------------------------------------------------------------------------
                     Net cash provided by
                       operating activities                             6,497       5,491       6,423
                 -------------------------------------------------------------------------------------
INVESTING        Purchase of investment securities
ACTIVITIES         available-for-sale                                 (48,307)    (53,579)    (48,472)
                 Proceeds from maturities of investment
                   securities available-for-sale                       62,015      56,000      46,000
                 Purchase of investment securities to be
                   held-to-maturity                                    (5,639)          -           -
                 Proceeds from repayments of investment
                   securities to be held-to-maturity                    1,535       3,650       2,194
                 Net loans repaid (originated)                          1,612     (11,664)    (32,274)
                 Proceeds from other real estate                          161         313         523
                 Investment in premises and equipment                    (841)     (4,990)     (3,196)
                 -------------------------------------------------------------------------------------
                     Net cash provided (used) by
                       investing activities                            10,536     (10,270)    (35,225)
                 -------------------------------------------------------------------------------------
FINANCING        Net increase (decrease) in demand and
ACTIVITIES         savings deposits                                       851       6,236     (12,393)
                 Net (payments) proceeds on time deposits             (11,045)     (3,198)     34,855
                 Increase in repurchase agreements                      1,022       5,037       3,925
                 Net increase (decrease) in short-term borrowings         887        (893)        422
                 Cash dividends paid                                   (2,363)     (2,255)     (2,256)
                 -------------------------------------------------------------------------------------
                     Net cash (used) provided by
                       financing activities                           (10,648)      4,927      24,553
                 -------------------------------------------------------------------------------------
                     Net increase (decrease) in cash
                       and cash equivalents                             6,385         148      (4,249)
                 -------------------------------------------------------------------------------------
                 Cash and cash equivalents at January 1                18,726      18,578      22,827
                 -------------------------------------------------------------------------------------
                 Cash and cash equivalents at December 31           $  25,111   $  18,726   $  18,578
                 =====================================================================================

</TABLE>

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

Penseco Financial Services Corporation           23           1999 Annual Report


<PAGE>


                     GENERAL NOTES TO FINANCIAL STATEMENTS

1     NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Penseco  Financial  Services  Corporation  (Company) is a bank holding  company,
incorporated  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  generally  accepted
accounting principles 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.

  On  December  31,  1997,  the  Bank was  reorganized  into a  holding  company
structure.  Each  outstanding  share of the Bank's  common  stock,  par value of
$10.00 per share,  was exchanged for four shares of Penseco  Financial  Services
Corporation  common  stock,  par  value of $.01 per  share.  As a result  of the
reorganization,  the Bank became a wholly-owned  subsidiary of the Company. This
reorganization  among  entities  under  common  control  was  accounted  for  at
historical cost in a manner similar to a pooling of interests.

  The Statements  are presented on the accrual basis of  accounting,  except for
Trust Department income which is recorded when payment is received.

  Effective  January  1,  1998,  the  Company  adopted  Statement  of  Financial
Accounting Standards No. 130, "Reporting  Comprehensive Income" (SFAS 130) which
was issued in June 1997.  SFAS 130  established  new rules for the reporting and
display of  comprehensive  income and its  components,  but had no effect on the
Company's net income or total stockholders' equity.

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

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.

PENDING ACCOUNTING PRONOUNCEMENTS

Management does not believe that any pending accounting pronouncements will have
a material impact on the Consolidated Financial Statements.

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 over the period to
maturity, which approximates the interest method.

  Securities  Available-for-Sale.  Bonds,  notes,  debentures 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.

  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.

  The Company has no derivative  financial  instruments required to be disclosed
under Statement of Financial  Accounting  Standards No. 119,  "Disclosure  about
Derivative Financial Instruments and Fair Value of Financial  Instruments" (SFAS
119).

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  on
discounted  loans is  generally  recognized  as  income  based on  methods  that
approximate the interest method. For all other loans,  interest is accrued daily
on the outstanding balances.

  Loans are generally  placed on a nonaccrual  status when principal or interest
is past due 90 days or when payment in full is not  anticipated.  When a loan is
placed on nonaccrual 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. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).

Penseco Financial Services Corporation           24           1999 Annual Report


<PAGE>


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

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).

ADVERTISING  EXPENSES

Advertising costs are expensed as incurred.  Advertising  expenses for the years
ended  December  31,  1999,  1998 and  1997,  amounted  to $387,  $442 and $432,
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.

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,
1999, 1998 and 1997 as follows:

                              1999       1998       1997
  ------------------------------------------------------
  Income taxes paid       $  1,694   $  2,238   $  1,985
  Interest paid           $ 11,392   $ 13,664   $ 11,861

Non-cash  transactions  during the years ended December 31, 1999, 1998 and 1997,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $111, $126, and $427, 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 cash basis and is not  materially
different than if it were reported on the accrual basis.

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 1999
presentation.


2     CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                                1999       1998
-----------------------------------------------------------
Cash items in process of collection     $      5   $     66
Non-interest bearing balances              4,961      6,982
Cash on hand                               5,309      4,683
-----------------------------------------------------------
    Total                               $ 10,275   $ 11,731
===========================================================


3     INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 1999
and 1998 are as follows:

                               AVAILABLE-FOR-SALE

                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
1999                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Treasury
  securities         $  67,237     $   9       $   787     $  66,459
U.S. Agency
  securities             5,000         -           200         4,800
States & political
  subdivisions          23,629         -           677        22,952
--------------------------------------------------------------------
  Total Debt
    Securities          95,866         9         1,664        94,211
Equity securities        1,818         -             -         1,818
--------------------------------------------------------------------
  Total Available -
     for-Sale        $  97,684     $   9       $ 1,664     $  96,029
====================================================================


                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
1998                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Treasury
  securities         $  81,210     $ 706       $     -     $  81,916
U.S. Agency
  securities             5,000         -            14         4,986
States & political
  subdivisions          23,669        15            50        23,634
--------------------------------------------------------------------
  Total Debt
    Securities         109,879       721            64       110,536
Equity securities        1,810         -             -         1,810
--------------------------------------------------------------------
  Total Available -
    for-Sale         $ 111,689     $ 721       $    64     $ 112,346
====================================================================

There were no sales of  available-for-sale  debt  securities  in 1999,  1998 and
1997.

Penseco Financial Services Corporation           25           1999 Annual Report


<PAGE>


3     INVESTMENT SECURITIES (continued)

                                HELD-TO-MATURITY

                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
1999                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Agency
  Obligations:
    Mortgage-backed
      securities     $   4,843     $   -       $   152     $   4,691
States & political
  subdivisions           5,639         -           152         5,487
--------------------------------------------------------------------
  Total Held-to-
    Maturity         $  10,482     $   -       $   304     $  10,178
====================================================================


                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
1998                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Agency
  Obligations:
    Mortgage-backed
      securities     $   6,416     $   -       $   150     $   6,266
--------------------------------------------------------------------
  Total Held-to-
      Maturity       $   6,416     $   -       $    150    $   6,266
====================================================================

Investment  securities  with  amortized  costs and fair  values of  $50,446  and
$49,130 at December 31, 1999 and $56,194 and $56,697 at December 31, 1998,  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, 1999 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              $ 19,008    $ 19,017    $      -    $      -
  States & political
    subdivisions               1,100       1,094           -           -
After one year through
  five years:
  U.S. Treasury
    securities                48,229      47,442           -           -
  U.S. Agency
    securities                 5,000       4,800           -           -
  States & political
    subdivisions              20,581      20,032           -           -
After five years
  through ten years:
  States & political
    subdivisions               1,156       1,092           -           -
After ten years:
  States & political
    subdivisions                 792         734       5,639       5,487
------------------------------------------------------------------------
    Subtotal                  95,866      94,211       5,639       5,487
Mortgage-backed
  securities                       -           -       4,843       4,691
------------------------------------------------------------------------
Total Debt Securities       $ 95,866    $ 94,211    $ 10,482    $ 10,178
========================================================================


4     LOANS

Major  classifications  of loans are as  follows:

December  31,                                     1999           1998
---------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development          $   3,241      $   4,152
  Secured by farmland                              526              5
  Secured by 1-4 family residential
    properties:
    Revolving, open-end loans                    7,312          7,901
    Secured by first liens                     123,955        131,564
    Secured by junior liens                     32,347         33,063
  Secured by multi-family properties               896            829
  Secured by non-farm, non-residential
    properties                                  51,538         48,517
Commercial and industrial loans
  to U.S. addressees                            18,995         18,169
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                  2,203          2,286
  Other (installment and
    student loans, etc.)                        28,615         28,486
Obligations of states &
  political subdivisions                        11,821          8,195
All other loans                                     78             58
---------------------------------------------------------------------
  Gross Loans                                  281,527        283,225
Less: Unearned income on loans                       -              6
---------------------------------------------------------------------
  Loans, Net of Unearned Income              $ 281,527      $ 283,219
=====================================================================

Loans on which the accrual of interest has been discontinued or reduced amounted
to $836, $929 and $1,031 at December 31, 1999, 1998 and 1997,  respectively.  If
interest on those loans had been accrued, such income would have been $140, $108
and $89 for 1999, 1998 and 1997,  respectively.  Interest income on those loans,
which is recorded  only when  received,  amounted to $22,  $30 and $35 for 1999,
1998 and 1997,  respectively.  Also, at December 31, 1999 and 1998, the Bank had
loans totalling $476 and $375, respectively, which were past due 90 days or more
and still accruing  interest  (credit card,  home equity and guaranteed  student
loans).


5     ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,                 1999       1998       1997
--------------------------------------------------------------------
Balance at beginning of year          $ 2,830    $ 2,600    $ 2,300
Provision charged to operations            89        595        316
Recoveries credited to allowance          217         18        106
--------------------------------------------------------------------
                                        3,136      3,213      2,722
Losses charged to allowance              (186)      (383)      (122)
--------------------------------------------------------------------
    Balance at End of Year            $ 2,950    $ 2,830    $ 2,600
====================================================================

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
------------------------         --------------           -------------
        1999                         $  89                    $   0
        1998                         $ 595                    $ 365
        1997                         $ 316                    $  16

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $979,  $948  and  $948 at  December  31,  1999,  1998  and  1997,
respectively.

Penseco Financial Services Corporation           26           1999 Annual Report


<PAGE>


6     BANK PREMISES AND EQUIPMENT

December 31,                         1999        1998
-----------------------------------------------------
Land                             $  2,929    $  2,929
Buildings and improvements         14,371      14,178
Furniture and equipment            10,282       9,634
-----------------------------------------------------
                                   27,582      26,741
Less: Accumulated depreciation     15,286      14,110
-----------------------------------------------------
  Net Bank Premises
    and Equipment                $ 12,296    $ 12,631
=====================================================

Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation expense amounted to $1,176 in
1999, $1,005 in 1998 and $972 in 1997.

  Occupancy  expenses  were reduced by rental  income  received in the amount of
$59,  $58  and  $58 in the  years  ended  December  31,  1999,  1998  and  1997,
respectively.


7     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, 1999
and 1998 was $33 and $111,  respectively,  supported by  appraisals  of the real
estate involved.


8     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
       Percent                underlying                   Bank's
      of voting    Total     net assets at   Amount     proportionate
        stock    investment     balance        of      part of loss for
        owned     and loan    sheet date    dividends     the period
-----------------------------------------------------------------------
1999    100%      $ 3,850       $ 3,835       None         $    -
1998    100%      $ 3,950       $ 3,936       None         $    -
1997    100%      $ 3,950       $ 3,936       None         $    -


9     DEPOSITS

December 31,                       1999        1998
---------------------------------------------------
Demand - Non-interest
  bearing                     $  58,230   $  56,289
Demand - Interest bearing        23,558      25,438
Savings                          68,824      71,771
Money markets                    60,494      56,707
Time - Over $100,000             44,297      46,191
Time - Other                    111,929     121,130
---------------------------------------------------
  Total                       $ 367,332   $ 377,526
===================================================

9     DEPOSITS  (continued)

Scheduled maturities of time deposits are as follows:

        2000                     $ 128,697
        2001                        15,644
        2002                         9,200
        2003                           782
        2004                         1,319
        2005 and thereafter            584
        ----------------------------------
          Total                  $ 156,226
        ==================================


10    OTHER BORROWED FUNDS

At December 31, 1999 and 1998, 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 of $12,097 and $13,069 and fair
values of $11,816 and $13,200 were pledged to secure  repurchase  agreements  at
December 31, 1999 and 1998, respectively.

Years Ended December 31,                  1999            1998
--------------------------------------------------------------
Amount outstanding at year end        $ 12,868        $ 10,959
Average interest rate at year end        4.39%           4.37%
Maximum amount outstanding at
  any month end                       $ 14,509        $ 12,382
Average amount outstanding            $ 12,728        $  8,954
Weighted average interest rate
  during the year:
  Federal funds purchased                5.13%           4.15%
  Repurchase agreements                  3.96%           4.52%
  Demand notes to U.S. Treasury          4.99%           4.70%


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 $10,130  and $9,833 at December  31, 1999 and $10,002 and $10,044
at December  31, 1998 with an interest  rate of 5.0% and 4.5% for 1999 and 1998,
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, 1999 and 1998, respectively.

  The Company has the availability of a $5,000  overnight  Federal funds line of
credit with First Union Bank.  There was no balance  outstanding  as of December
31, 1999 and 1998,  respectively.

  The Company maintains a collateralized  maximum borrowing capacity of $136,254
with the  Federal  Home Loan Bank of  Pittsburgh  (FHLB).  There was no  balance
outstanding or assets pledged as of December 31, 1999.

Penseco Financial Services Corporation           27           1999 Annual Report

<PAGE>


11    EMPLOYEE BENEFIT PLANS


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

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

  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,  1999 and 1998,  the ESOP held  86,511  and  94,725  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 $90, $0
and $140 to the plan during the years ended  December 31,  1999,  1998 and 1997,
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 $0, $20 and $0 to the plan during the years ended December 31, 1999,
1998 and 1997,  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  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.

In determining the benefit obligation the following assumptions were made:

-------------------------------------------------------------
                             Pension Benefits  Other Benefits
-------------------------------------------------------------
December 31,                   1999    1998      1999    1998
Weighted - average
  assumptions:
    Discount rate             6.50%   6.50%     6.50%   6.50%
    Expected return on
      plan assets             9.00%   9.00%         -       -
    Rate of compensation
      increase                4.50%   4.50%         -       -
-------------------------------------------------------------

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

                                 Pension Benefits       Other Benefits
-------------------------------------------------------------------------
December 31,                       1999       1998       1999       1998
-------------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation,
      beginning                 $ 7,344    $ 6,764    $    52    $    48
    Service cost                    304        295          4          2
    Interest cost                   466        444          9          3
    Actuarial (loss) gain           (69)       206         78          2
    Benefits paid                  (803)      (221)        (3)        (2)
-------------------------------------------------------------------------
  Benefit obligation,
    ending                        7,242      7,488        140         53
-------------------------------------------------------------------------
Change in plan assets:
  Fair value of plan
    assets, beginning             7,627      6,872          -          -
  Actual return on plan
    assets                          560        911          -          -
  Employer contribution               1         65         14          2
  Benefits paid                    (233)      (221)       (14)        (2)
-------------------------------------------------------------------------
  Fair value of plan
    assets, ending                7,955      7,627          -          -
-------------------------------------------------------------------------
Funded status                       713        139       (140)       (53)
Unrecognized net transition
  asset                            (132)      (198)         -          -
Unrecognized net actuarial
  loss (gain)                       488      1,008       (126)      (121)
Unrecognized prior service
  cost                              (70)       (45)        86          6
-------------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                        $   999    $    904   $  (180)   $  (168)
=========================================================================

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

                                                   Pension Benefits
                                                   ----------------
Years Ended December 31,                      1999       1998       1997
-------------------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                           $   304    $   295    $   267
    Interest cost                              466        444        414
    Expected return on plan assets            (676)      (615)      (540)
    Amortization of transition
      asset                                    (66)       (66)       (66)
    Amortization of unrecognized
      net loss                                   6         26         48
-------------------------------------------------------------------------
      Net periodic pension cost            $    34    $    84    $   123
=========================================================================

                                                    Other Benefits
                                                    --------------
Years Ended December 31,                      1999       1998       1997
-------------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                           $     5    $     2    $     2
    Interest cost                                9          3          3
    Amortization of prior service
      cost                                       7          1          1
    Amortization of unrecognized
      net loss                                  (7)        (9)       (10)
-------------------------------------------------------------------------
      Net periodic other benefit cost      $    14    $    (3)   $    (4)
=========================================================================

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 $180, $140 and $0,  respectively at December 31, 1999
and $144, $97 and $0, respectively at December 31, 1998.

Penseco Financial Services Corporation           28           1999 Annual Report

<PAGE>


12    INCOME TAXES

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

Years Ended December 31,           1999       1998       1997
--------------------------------------------------------------
Currently payable               $ 1,946    $ 2,056    $ 2,082
Deferred benefit                   (165)      (284)        (8)
--------------------------------------------------------------
  Total                         $ 1,781    $ 1,772    $ 2,074
==============================================================

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,           1999       1998       1997
--------------------------------------------------------------
Tax at statutory rate           $ 2,194    $ 2,058    $ 2,312
Reduction for non-taxable
  interest                         (471)      (269)      (299)
Other additions
  (reductions)                       58        (17)        61
--------------------------------------------------------------
  Applicable Income Taxes       $ 1,781    $ 1,772    $ 2,074
==============================================================

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

Years Ended December 31,           1999       1998       1997
--------------------------------------------------------------
Accretion of discount on bonds  $   (57)   $  (147)   $    73
Accelerated depreciation            (59)       (32)       (54)
Supplemental benefit plan            (7)        (7)        (8)
Allowance for loan losses           (30)       (78)      (102)
Prepaid pension cost                (12)       (20)        48
Loan fees/costs                       -          -         35
--------------------------------------------------------------
Total                           $  (165)   $  (284)   $    (8)
==============================================================

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

December 31,                                  1999       1998
-------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                $   670    $   640
  Depreciation                                 189        131
  Supplemental Benefit Plan                     22         15
  Unrealized securities losses                 563          -
-------------------------------------------------------------
    Total Deferred Tax Assets                1,444        786
=============================================================

Deferred tax liabilities:
  Unrealized securities gains                    -        223
  Prepaid pension costs                        340        352
  Accretion                                      8         65
-------------------------------------------------------------
    Total Deferred Tax Liabilities             348        640
-------------------------------------------------------------
    Net Deferred Tax Asset                 $ 1,096    $   146
=============================================================

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.


13    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, 1999 and 1998 are as follows:

                                              1999       1998
-------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                              $ 16,703   $ 11,722
  Variable rate                           $ 37,261   $ 36,990
Standby letters of credit                 $  1,130   $    614

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

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

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

  The  Company  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.


14     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

Penseco Financial Services Corporation           29           1999 Annual Report

<PAGE>


14    FAIR VALUE DISCLOSURE (continued)

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.

  Management is concerned that reasonable  comparability  between  companies may
not be  likely  due to the wide  range of  permitted  valuation  techniques  and
numerous  estimates  which  must be made given the  absence of active  secondary
markets for many of the financial  instruments.  This lack of uniform  valuation
methodologies  also  introduces  a  greater  degree  of  subjectivity  to  these
estimated fair values.

<TABLE>
<CAPTION>

                                           December 31, 1999             December 31, 1998
----------------------------------------------------------------------------------------------
                                          Carrying         Fair         Carrying         Fair
                                            Amount        Value           Amount        Value
----------------------------------------------------------------------------------------------
<S>                                      <C>          <C>              <C>          <C>
Financial Assets:
  Cash and due from banks                $  10,275    $  10,275        $  11,731    $  11,731
  Interest bearing balances with banks       3,961        3,961              345          345
  Federal funds sold                        10,875       10,875            6,650        6,650
----------------------------------------------------------------------------------------------
    Cash and cash equivalents               25,111       25,111           18,726       18,726
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities              66,459       66,459           81,916       81,916
      U.S. Agency obligations                4,800        4,800            4,986        4,986
      States & political
        subdivisions                        22,952       22,952           23,634       23,634
      Federal Home Loan Bank stock           1,798        1,798            1,790        1,790
      Other securities                          20           20               20           20
    Held-to-maturity:
      U.S. Agency obligations                4,843        4,691            6,416        6,266
      States & political
        subdivisions                         5,639        5,487                -            -
----------------------------------------------------------------------------------------------
        Total investment securities        106,511      106,207          118,762      118,612
  Loans, net of unearned income:
    Real estate mortgages                  219,815      213,273          226,031      226,605
    Commercial                              18,995       18,995           18,169       18,169
    Consumer and other                      42,717       42,656           39,019       38,826
    Less:  Allowance for loan losses         2,950                         2,830
----------------------------------------------------------------------------------------------
      Loans, net                           278,577      274,924          280,389      283,600
----------------------------------------------------------------------------------------------
      Total Financial Assets               410,199    $ 406,242          417,877    $ 420,938
Other assets                                18,415                        18,222
----------------------------------------------------------------------------------------------
Total Assets                             $ 428,614                     $ 436,099
==============================================================================================
Financial Liabilities:
  Demand - Non-interest bearing          $  58,230    $  58,230        $  56,289    $  56,289
  Demand - Interest bearing                 23,558       23,558           25,438       25,438
  Savings                                   68,824       68,824           71,771       71,771
  Money markets                             60,494       60,494           56,707       56,707
  Time                                     156,226      156,691          167,321      168,088
----------------------------------------------------------------------------------------------
    Total Deposits                         367,332      367,797          377,526      378,293
  Repurchase agreements                     11,981       11,981           10,959       10,959
  Short-term borrowings                        887          887                -            -
----------------------------------------------------------------------------------------------
    Total Financial Liabilities            380,200    $ 380,665          388,485    $ 389,252
Other Liabilities                            2,671                         2,653
Stockholders' Equity                        45,743                        44,961
----------------------------------------------------------------------------------------------
    Total Liabilities and
    Stockholders' Equity                 $ 428,614                     $ 436,099
==============================================================================================

Standby Letters of Credit                $     (11)   $     (11)       $      (6)   $      (6)

</TABLE>


Penseco Financial Services Corporation           30           1999 Annual Report
<PAGE>


15    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 $80 in 1999,  $71 in 1998 and $67 in 1997.  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, 1999 are
as follows:

                              Mount   Meadow    ATM
                             Pocono   Avenue   Sites   Total
------------------------------------------------------------
2000                          $  45     $ 18    $ 16   $  79
2001                             45       12      12      69
2002                             45        -       6      51
2003                             45        -       -      45
2004                             45        -       -      45
2005 to 2011                    294        -       -     294
------------------------------------------------------------
  Total minimum
    payments required         $ 519     $ 30    $ 34   $ 583
============================================================


16    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,          1999            1998
-------------------------------------------------------
Beginning Balance             $  4,008        $  4,658
Additions                        3,892           4,787
Collections                     (2,979)         (5,437)
-------------------------------------------------------
  Ending Balance              $  4,921        $  4,008
=======================================================


17    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  classification  are
also subject to qualitative judgements by the regulators about components,  risk
weightings and other factors.

  Quantitative  measures  established by regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  Capital  Adequacy  table  below)  of Tier I and Total  Capital  to
risk-weighted  asset 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, 1999, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.

  As of December 31, 1999, 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,
1999, 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           31           1999 Annual Report

<PAGE>


17    Regulatory Matters (continued)

<TABLE>
<CAPTION>

                      Actual                                   Regulatory Requirements
-----------------------------------------------------  ----------------------------------------
                                                          For Capital             To Be
                                                       Adequacy Purposes    "Well Capitalized"
December 31, 1999                   Amount     Ratio    Amount     Ratio      Amount    Ratio
-----------------------------------------------------------------------------------------------
<S>                                <C>         <C>     <C>         <C>     <C>          <C>
Total Capital
    (to Risk Weighted Assets)      $ 49,786    18.96%  > $ 21,006  > 8.0%  >  $ 26,259  > 10.0%
                                                       -           -       -            -
Tier I Capital
    (to Risk Weighted Assets)      $ 46,836    17.84%  > $ 10,503  > 4.0%  >  $ 15,755  >  6.0%
                                                       -           -       -            -
Tier I Capital
    (to Average Assets)            $ 46,836    10.87%  >        *  >   *   >  $ 21,553  >  5.0%
                                                       -           -       -            -

* 3.0% ($12,931), 4.0% ($17,242) or 5.0% ($21,553) depending
   on the bank's CAMELS Rating and other regulatory risk factors.



December 31, 1998
-----------------------------------------------------------------------------------------------
Total Capital
    (to Risk Weighted Assets)      $ 47,289    18.36%  > $ 20,610  > 8.0%  >  $ 25,764  > 10.0%
                                                       -           -       -            -
Tier I Capital
    (to Risk Weighted Assets)      $ 44,459    17.26%  > $ 10,305  > 4.0%  >  $ 15,458  >  6.0%
                                                       -           -       -            -
Tier I Capital
    (to Average Assets)            $ 44,459    10.29%  >       *   >   *   >  $ 21,610  >  5.0%
                                                       -           -       -            -

* 3.0% ($12,966), 4.0% ($17,288) or 5.0% ($21,610) depending
   on the bank's CAMELS Rating and other regulatory risk factors.

</TABLE>

Penseco Financial Services Corporation           32           1999 Annual Report

<PAGE>


18    PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

On December 31, 1997, the Bank was reorganized into a holding company structure.
Each  outstanding  share of the  Bank's  common  stock,  par value of $10.00 per
share, was exchanged for four shares of Penseco Financial  Services  Corporation
common stock,  par value of $.01 per share.  As a result of the  reorganization,
the Bank became a wholly-owned  subsidiary of the Company.

  This  reorganization  among entities under common control was accounted for at
historical  cost in a manner  similar to a pooling of  interests.

  The condensed Company-only information follows:

BALANCE SHEETS

December 31,                           1999        1998
-------------------------------------------------------
Investment in subsidiary           $ 45,743    $ 44,961
-------------------------------------------------------
  Total Assets                     $ 45,743    $ 44,961
=======================================================
  Total Stockholders' Equity       $ 45,743    $ 44,961
=======================================================


STATEMENTS OF INCOME

Years Ended December 31,               1999        1998        1997
-------------------------------------------------------------------
Earnings of subsidiary:
  Dividends received               $  2,363    $  2,255    $  2,256
  Undistributed net income
    of subsidiary                     2,308       2,026       2,469
-------------------------------------------------------------------
  Net Income                       $  4,671    $  4,281    $  4,725
===================================================================


STATEMENTS OF CASH FLOWS

Years Ended December 31,                      1999         1998         1997
-----------------------------------------------------------------------------
Operating Activities:
Net Income                                $  4,671     $  4,281     $  4,725
Adjustments to reconcile net income
  to net cash provided by
    operating activities:
      Equity in undistributed net
        income of subsidiary                (2,308)      (2,026)      (2,469)
-----------------------------------------------------------------------------
      Net cash provided by
        operating activities                 2,363        2,255        2,256
-----------------------------------------------------------------------------
Investing Activities:
Investment in Interim Bank subsidiary            -            -         (465)
Special dividend from subsidiary                 -            -          465
-----------------------------------------------------------------------------
      Net cash provided by
        investing activities                     -            -            -
-----------------------------------------------------------------------------
Financing Activities:
Proceeds from short-term debt                    -            -          470
Payment of short-term debt                       -            -         (470)
Proceeds from sale of stock                      -            -            5
Purchase of stock                                -            -           (5)
Cash dividends paid                         (2,363)      (2,255)      (2,256)
-----------------------------------------------------------------------------
      Net cash used by
        financing activities                (2,363)      (2,255)      (2,256)
-----------------------------------------------------------------------------
      Net increase in cash and
        cash equivalents                         -            -            -

Cash and cash equivalents at January 1           -            -            -
-----------------------------------------------------------------------------
Cash and cash equivalents at December 31  $      -     $      -     $      -
=============================================================================


Penseco Financial Services Corporation           33           1999 Annual Report

<PAGE>

McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants

                                                               February 18, 2000



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

                          Independent Auditor's Report
                          ----------------------------

     We have audited the  accompanying  consolidated  balance  sheets of Penseco
Financial  Services  Corporation and its wholly owned subsidiary,  Penn Security
Bank and  Trust  Company  as of  December  31,  1999 and 1998,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the years in the three year period  ended  December  31, 1999.
These  financial   statements  are  the   responsibility  of  the  Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of  Penseco
Financial Services  Corporation and subsidiary as of December 31, 1999 and 1998,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  1999,  in  conformity
with generally accepted accounting principles.



                                         /s/ McGrail, Merkel, Quinn & Associates
                                         Scranton, Pennsylvania



Penseco Financial Services Corporation           34           1999 Annual Report

<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 1999.



                                    PART III



Item 10  Directors and Executive Officers of the Registrant

The  information  on Directors of the Company on pages 4 and 5 in the definitive
proxy statement relating to the Company's Annual Meeting of stockholders,  to be
held May 2, 2000, is incorporated herein by reference thereto.

The information on Executive  Officers on pages 6 and 7 in the definitive  proxy
statement  relating to the Company's Annual Meeting of stockholders,  to be held
May 2, 2000, is incorporated herein by reference thereto.


Item 11  Executive Compensation

The information  contained under the heading "Executive  Compensation" on page 6
in the definitive  proxy statement  relating to the Company's  Annual Meeting of
stockholders,  to be held May 2,  2000,  is  incorporated  herein  by  reference
thereto.


Item 12  Security Ownership of Certain Beneficial Owners and Management

The  information  contained  under the heading  "Voting  Securities  & Principal
Holders Thereof" on pages 2,3 and 4 in the definitive  proxy statement  relating
to the  Company's  Annual  Meeting of  stockholders,  to be held May 2, 2000, is
incorporated herein by reference thereto.

Item 13  Certain Relationships and Related Transactions

The  information  contained in Note 16 under Item 8 on page 31 under the heading
"General  Notes to Financial  Statements" in the Company's 1999 Annual Report to
Shareholders is incorporated herein by reference thereto.

Penseco Financial Services Corporation           35           1999 Annual Report

<PAGE>


                                    PART IV


Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K


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

         Balance Sheets
         Consolidated Statements of Income
         Consolidated Statements of Changes in Stockholders' Equity
         Consolidated Statements of Cash Flows
         General Notes to Financial Statements
         Independent Auditor's Report

    (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, including the cover.)

               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.)

               27       Financial Data Schedule

(b)      No current Report on Form  8-K was filed for the fourth quarter of 1999
           of the fiscal year ended December 31, 1999.

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

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


Penseco Financial Services Corporation           36           1999 Annual Report

<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 7, 2000.


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 7, 2000.



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


Penseco Financial Services Corporation           37           1999 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,      None
                  arrangement, 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 Exhibit3 (ii) of Registrant's
                                                            report on Form 10-K filed with
                                                            the SEC on March 30, 1998.


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

    9             Voting trust agreement                    None

   10             Material contracts - Supplemental         Page 8 of the Definitive Proxy
                  Benefit Plan Agreement                    Statement relating to the
                                                            Company's 1999 Meeting of Stock-
                                                            holders is incorporated herein
                                                            by reference thereto.

   11             Statement re:  Computation of per         None
                  share earnings

   12             Statements re:  Computation of ratios     None

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

   16             Letter re:  Change in certifying          None
                  accountant

   18             Letter re:  Change in accounting          None
                  principles

   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        None
                  submitted to vote of security holders

   23             Consents of experts and counsel           None

   24             Power of attorney                         None

   27             Financial Data Schedule                   None

   99             Additional Exhibits                       None

</TABLE>

Penseco Financial Services Corporation           38           1999 Annual Report

<PAGE>


                                COMPANY OFFICERS

PENSECO FINANCIAL SERVICES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

Richard E. Grimm
Executive Vice-President and Treasurer

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

Robert F. Duguay
Senior Vice-President, Trust Department

Andrew A. Kettel, Jr.
Senior Vice-President

Thomas E. Clewell
Vice-President and Assistant Trust Officer

Anne M. Cottone
Vice-President and Compliance Officer

Michael Kosh
Vice-President and Assistant Trust Officer

Audrey F. Markowski
Vice-President

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

James Tobin
Vice-President, Charge Card Department Manager

John H. Warnken
Vice-President, Operations

P. Frank Kozik
Secretary

Patrick Scanlon
Controller

Robert P. Heim
Director of Internal Audit

Gerard P. Vasil
Manager, Data Processing

Henry V. Janoski
Chief Investment Officer, Trust Department

PENN SECURITY BANK AND TRUST COMPANY OFFICERS

ASSISTANT VICE-PRESIDENTS

Carl M. Baruffaldi
Nancy Burns
Denise M. Cebular
Carol Curtis McMullen
  Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Geraldine Hughes
Ann M. Kennedy
Eleanor Kruk
Donald F. LaTorre
Caroline Mickelson
Aleta Sebastianelli
  and Assistant Secretary
Jeffrey Solimine
Linda Wolf
  and Training Officer
Beth S. Wolff
Deborah A. Wright

OFFICERS (continued)

ASSISTANT CASHIERS
Pamela Edwards
Karyn Gaus Vashlishan
Susan T. Holweg
Jacqueline Lucke
Kristen A. McGoff
  and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer
Eileen Walsh
Jennifer S. Wohlgemuth

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT CONTROLLER
Susan M. Bray

ASSISTANT DIRECTOR OF Internal Audit
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

BRANCH OPERATIONS OFFICER
Lauren L. Lankford

BUSINESS DEVELOPMENT OFFICER
Christe A. Casciano

COMPUTER OPERATIONS OFFICER
Charles Penn

CREDIT REVIEW OFFICER
Mark M. Bennett
  and Assistant Secretary

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo

FINANCIAL REPORTING OFFICER
John R. Anderson III

HUMAN RESOURCES OFFICER
Sharon Rosar

LOAN ADMINISTRATION OFFICER
Susan D. Blascak

LOAN OFFICERS
Denise Belton
Frank Gardner
Barbara Garofoli
Lisa A. Kearney

OPERATIONS OFFICER
Patricia Pliske

TAX OFFICER
Robert W. McDonald

TRUST OPERATIONS OFFICER
Carol Trezzi

Penseco Financial Services Corporation           39           1999 Annual Report

<PAGE>

                                COMPANY OFFICERS

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 and Treasurer

Russell C. Hazelton
Retired Captain, Trans World Airlines

D. William Hume
Retired Bank Officer

James G. Keisling
Partner, Compression Polymers Group, Manufacturer of Plastic Sheet Products

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

Robert W. Naismith, Ph.D.
Chairman & CEO, eMedsecurities, Inc.

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

Emily S. Perry
Account Executive, Murray Insurance Company

Sandra C. Phillips
Penn State Master Gardener Community Volunteer

Otto P. Robinson, Jr.
Attorney-at-Law, President

Steven L. Weinberger
Vice-President of G. Weinberger Company


PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

ABINGTON OFFICE
James L. Burne, DDS
Nancy Burns
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
Beth S. Wolff

EAST STROUDSBURG OFFICE
Denise M. Cebular
Mary Citro
Attorney Kirby Upright
Jeffrey Weichel

GREEN RIDGE OFFICE
Carl M. Baruffaldi
Joseph N. Connor
Everett Jones
Attorney Patrick J. Mellody
Caroline Mickelson
George Noone
Howard J. Snowdon

MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
Attorney Brian Golden
Robert C. Hay
David Lansdowne
Jeffrey Solimine

NORTH POCONO OFFICE
Jacqueline A. Carling
Anthony J. Descipio
George F. Edwards
James A. Forti
Attorney David Z. Smith
Deborah A. Wright

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

Penseco Financial Services Corporation           40           1999 Annual Report