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

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

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

LENDING

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

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

BRANCH LOCATIONS  (with ATMs)

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

East Scranton
Prescott Avenue & Ash Street
Scranton, PA
Beth S. Wolff, Manager
(570) 342-9101

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

Gouldsboro
Main & Second Streets
Gouldsboro, PA
Lori A. Dzwieleski, Manager
(570) 842-6473

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

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

Mount Pocono
Route 611 & Route 940
Mount Pocono, PA
Karyn Gaus Vashlishan, Manager
(570) 839-8732

North Pocono
Main & Academy Streets
Moscow, PA
Deborah A. Wright, Manager
(570) 842-7626

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

OTHER ATM LOCATIONS

Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets

Scranton, PA
Dino & Francesco's Restaurant
Birney Plaza

Moosic, PA
Drive-Up ATM

Meadow Avenue & Hemlock Street
Scranton, PA

Hilton Hotel & Conference Center
Adams Avenue
Scranton, PA

Metropolitan Life Insurance Company
Morgan Highway

Clarks Summit, PA
One Stop Quick Mart, Inc.

Milford Road
East Stroudsburg, PA

Red Barn Village
Newton Ransom Boulevard
Newton, PA

Skytop Lodge
One Skytop
Skytop, PA

                              www.pennsecurity.com

<PAGE>

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

In thousands, except per share data

                                2003         2002         2001
--------------------------------------------------------------
Earnings per share         $    2.78    $    3.14    $    2.62
Dividends per share        $    1.35    $    1.35    $    1.25
Total Capital              $  60,807    $  58,975    $  54,648
Total Deposits             $ 407,944    $ 414,664    $ 406,531
Total Assets               $ 584,590    $ 496,956    $ 482,551

                                    Contents
                                    --------

Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................3
Promotions and Appointments....................................................4
Community Events...............................................................5

                                   Form 10-K

Part I,   Item 1  Business.....................................................8
          Item 2  Properties...................................................9
          Item 3  Legal Proceedings............................................9
          Item 4  Submission of Matters to a Vote of Security Holders..........9
Part II,  Item 5  Market for Registrant's Common Equity and Related
                    Stockholder Matters.......................................10
          Item 6  Selected Financial Data.....................................11
          Item 7  Management Discussion and Analysis of Financial
                    Condition and Results of Operations.......................12
          Item 7A Quantitative and Qualitative Disclosures About Market Risk..21
          Item 8  Financial Statements and Supplementary Data.................23
                  Consolidated Balance Sheets.................................23
                  Consolidated Statements of Income...........................24
                  Consolidated Statements of Stockholders' Equity.............25
                  Consolidated Statements of Cash Flows.......................26
                  General Notes to Financial Statements.......................27
                  Independent Auditor's Report................................37
          Item 9  Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.......................38
          Item 9A Controls and Procedures.....................................38
Part III, Item 10 Directors and Executive Officers of the Registrant..........38
          Item 11 Executive Compensation......................................38
          Item 12 Security Ownership of Certain Beneficial Owners
                    and Management............................................39
          Item 13 Certain Relationships and Related Transactions..............39
          Item 14 Principal Accounting Fees and Services......................39
Part IV,  Item 15 Exhibits, Financial Statement Schedules and
                    Reports on Form 8-K.......................................39
Signatures....................................................................40
Certifications................................................................41
Index to Exhibits.............................................................43
Company Officers..............................................................44
Company Board Members..........................................Inside Back Cover

                  Penseco Financial Services Corporation / 2003 Annual Report  1

<PAGE>

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

Dear Shareholder

     For only the 5th time since I became  President 28 years ago, I must report
that earnings for the year declined from the previous  year.  Earnings per share
decreased from $3.14 per share in 2002 to $2.78 per share in 2003. Dividends per
share remained at $1.35 per share in 2003 as in 2002.  Total Assets increased to
$585 million,  as of the end of 2003 from $497 million at the end of 2002. Total
Deposits  decreased  from $415 million in 2002 to $408 million in 2003.  Capital
increased to $60.8  million at the end of 2003 from $59.0  million at the end of
2002.  The primary  reason for the decline in earnings  was the  continuing  low
levels of the interest rate structure for an extended  period of time,  reaching
45 year lows.  This has led to an  avalanche  of  refinancing  of loans and home
mortgages,  largely at much lower  fixed,  long-term  rates,  which the Bank was
reluctant to keep in its  portfolio.  We  therefore  sold many of these into the
secondary  market  generating  gains  on the  sale,  but also  reducing  our net
interest income.  With refinancing slowing down, rates have now come up over 100
basis  points  from their 45 year lows and fee income from the gains on sales of
mortgages has  decreased.  Net interest  income is  increasing  and we are again
portfolioing some longer term  obligations,  however net interest income has not
increased  fast  enough to fill the gap.  We  expect  the  economy  and our loan
portfolio  to  continue  to grow  rapidly  over the  next  several  years,  thus
improving  significantly  our net interest income. To that end, in August of the
year we introduced a privately  insured (TERI) student loan which can provide up
to 100% of the cost of college and graduate or professional school, thus filling
a gap left by government guaranteed student loans.

     The  Sarbanes-Oxley  Act, enacted in July of 2002,  continues to impact our
organization.  We are now  subject to the  accelerated  filing  deadlines  which
reduce the number of days after the end of the fiscal year,  in which we have to
issue our Annual Report,  from 90 to 75, days commencing with this annual report
and from 75 to 60 days next year. Similarly,  the quarterly reports this current
year will have to be filed within 40 days of the end of the quarter from 45 days
before.  Next year, we will lose another 5 days and quarterly  reports will need
to be filed within 35 days of the end of the quarter.

     Section 404 of the Act requires that, commencing with the annual report for
year 2004 which must be filed with the Securities  Exchange  Commission by March
1, 2005 and for each year  thereafter,  the  report  must  include  an  internal
control report that contains management's assertions regarding the effectiveness
of the Company's  internal  control  structure  and  procedures  over  financial
reporting.  The Company's  audit report must also provide an  attestation to and
report  on  management's  assessment  of the  Company's  internal  control  over
financial  reporting.  This provision  will require  management to document each
type  of  transaction  that  occurs  in the  Bank,  the  risks  involved  in the
transaction,   the  internal  controls   established  to  mitigate  such  risks,
information  and  communication  of the results and finally a monitoring  of the
controls.  Affecting all of this is the control environment within the Bank. All
of this must be  accomplished  by  December  31,  2004 and will take an enormous
amount of management's  time this year. All SEC reporting  corporations  will go
through the same pain this year or next and ongoing into the future,  because of
the transgressions of a few  knowledgeable,  smart but dishonest CEO's and CFO's
of major corporations.

     During the year, the following  appointments and promotions were made. Mark
M.  Bennett  was named  Assistant  Vice-President,  Chad J.  Hazelton  was named
Financial  Analyst,  Kristen R. Noll was named  Trust  Administrator,  Thomas J.
Malinchak  was named  Retail  Banking  Officer,  David R. Weiland was named Cost
Accounting  Officer,  Ellen M. Evans was named Audit Officer and Robert E. Diehl
was named  Collections  Officer.  We are  fortunate to have such a fine group of
people assuming greater responsibilities in the Company.

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

Sincerely yours,

Otto P. Robinson, Jr.
President

2  Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

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

This page of the 2003 Annual  Report to  Shareholders  contains one  picture.  A
description of the picture follows:

Seated left to right:

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

Standing left to right:

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

                  Penseco Financial Services Corporation / 2003 Annual Report  3

<PAGE>

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

This page of the 2003 Annual Report to Shareholders  contains seven pictures.  A
description of each picture follows, starting at the top, from left to right:

Mark M. Bennett
Assistant Vice-President

Chad J. Hazelton
Financial Analyst

Kristen R. Noll
Trust Administrator

Thomas J. Malinchak
Retail Banking Officer

David R. Weiland
Cost Accounting Officer

Ellen M. Evans
Audit Officer

Robert E. Diehl
Collections Officer

4  Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

                                Community Events
                                ----------------

This page of the 2003 Annual Report to Shareholders contains three pictures.


Penn Security Bank & Trust Company  welcomes  prospective  customers to our Open
House Seminar held at the South Side Branch.

Andrew A. Kettel, Jr. speaking with prospective  customers at Penn Security Bank
& Trust Company's Open House Seminar, held at the South Side Branch.

J. Patrick Dietz advising  customers about community  mortgage  financing at the
Penn Security Bank & Trust Company's Open House Seminar.

                  Penseco Financial Services Corporation / 2003 Annual Report  5

<PAGE>

                                Community Events
                                ----------------

This page of the 2003 Annual Report to Shareholders contains three pictures.


Art  displayed in the lobby of the Central  City Branch,  created by students at
Scranton High School.

Penn Security Bank & Trust Company's display at the 2003 Lackawanna Home Builder
Showcase.

A woman  stopping to look at Penn  Security's  display at the 4th Annual  Senior
Citizen's Fair.

6  Penseco Financial Services Corporation / 2003 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, 2003

                        Commission File Number 000-23777

                     PENSECO FINANCIAL SERVICES CORPORATION


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

                          Securities Registered Under
                            Section 12(g) of the Act

                    Common Stock, Par Value $ .01 per share

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

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

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

THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY  NON-AFFILIATES
OF THE REGISTRANT ON JUNE 30, 2003,  BASED ON THE CLOSING PRICE OF SUCH STOCK ON
THAT  DATE,  EQUALS  APPROXIMATELY  $85,920,000.  THE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING AS OF JUNE 30, 2003 EQUALS 2,148,000.

                      Documents Incorporated by Reference

Portions of the  Corporation's  definitive proxy statement  relating to the 2004
Annual Meeting of Stockholders are incorporated by reference in Part III.

                  Penseco Financial Services Corporation / 2003 Annual Report  7

<PAGE>

                     PENSECO FINANCIAL SERVICES CORPORATION

                                     PART I

ITEM 1  Business

GENERAL

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

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

     Through 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  borrowings  and general  operating  expenses.  The Bank provides a
variety of commercial and retail banking  services to business and  professional
customers,  as well as retail  customers,  on a personalized  basis.  The Bank's
primary lending  products are real estate,  commercial and consumer  loans.  The
Bank also offers ATM access,  credit cards,  active investment  accounts,  trust
department services and other various lending,  depository and related financial
services.  The Bank's  primary  deposit  products are savings and demand deposit
accounts and certificates of deposit.

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

     The Company is not dependent  upon a single  customer,  or a few customers,
the loss of one or more of which  would have a material  adverse  effect on 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 areas such as convenience of location,  types
of services, service costs and banking hours.

EMPLOYEES

As  of  February  13,  2004,  the  Company  employed  197  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.

8  Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

SUPERVISION AND REGULATION

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

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

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

FORWARD LOOKING INFORMATION

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

ITEM 2  Properties

There  are  nine  offices   positioned   throughout  the  greater   Northeastern
Pennsylvania  region.  They are located in the South  Scranton,  East  Scranton,
Green Ridge, and Central City sections of Scranton,  the Borough of Moscow,  the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners.  Through these offices, the
Company  provides  a full  range of  banking  and trust  services  primarily  to
Lackawanna, Wayne, Monroe and the surrounding counties. All offices are owned by
the Bank or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc.,
with the exception of the Mount Pocono Office, which is owned by the Bank but is
located on land  occupied  under a long-term  lease.  During  2003,  the Company
purchased  property  in the  Borough of Dalton,  Lackawanna  County,  to use for
future expansion.

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

ITEM 3  Legal Proceedings

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

ITEM 4  Submission of Matters to a Vote of Security Holders

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

                  Penseco Financial Services Corporation / 2003 Annual Report  9

<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:

Ferris, Baker, Watts, Inc.
F.J. Morrissey & Company Boenning & Scattergood, Inc.
Hill Thompson Magid, LP
Monroe Securities, Inc.
E.E. Powell & Company
Ryan, Beck & Company, Inc.
Schwab Capital Markets, LP

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

                               Dividends Paid
2002              High     Low   Per Share
---------------------------------------------
First Quarter     $ 30    $ 27   $  .30
Second Quarter      34      29      .30
Third Quarter       33      31      .30
Fourth Quarter      35      31      .45
                                 ------
                                 $ 1.35
                                 ======


DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,900                     2003
             2,899                     2002
             2,685                     2001
             2,470                     2000
             2,363                     1999


As of February 13, 2004 there were approximately 959 stockholders of the Company
based on the number of holders of record.

Reference should be made to the information about the Company's  dividend policy
and regulatory guidelines on pages 20 and 35.

TRANSFER AGENT

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

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


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



                             First     Second    Third     Fourth
2002                        Quarter   Quarter   Quarter   Quarter
-----------------------------------------------------------------
Net Interest Income         $ 5,173   $ 5,100   $ 4,927   $ 4,688
Provision for Loan Losses       179       240       152       242
Other Income                  2,684     1,978     3,292     3,078
Other Expenses                5,413     4,812     5,596     5,277
Net Income                    1,689     1,567     1,839     1,658
Earnings Per Share          $   .79   $   .73   $   .85   $   .77

10 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

ITEM 6  Selected Financial Data

(in thousands, except per share data)

RESULTS OF OPERATIONS:

<TABLE>
<CAPTION>

                                       2003         2002         2001         2000         1999
-----------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>          <C>
Interest Income                 $    26,014  $    27,899  $    31,860  $    31,043  $    28,320
Interest Expense                      8,228        8,011       12,524       13,698       11,213
-----------------------------------------------------------------------------------------------
Net Interest Income                  17,786       19,888       19,336       17,345       17,107
Provision for Loan Losses               476          813          954          233           89
-----------------------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                        17,310       19,075       18,382       17,112       17,018
Other Income                         10,743       11,032        9,186        8,233        7,746
Other Expenses                       20,454       21,098       20,077       19,306       18,312
Income Taxes                          1,628        2,256        1,869        1,296        1,781
-----------------------------------------------------------------------------------------------
Net Income                      $     5,971  $     6,753  $     5,622  $     4,743  $     4,671
===============================================================================================

BALANCE SHEET DATA:
Assets                          $   584,590  $   496,956  $   482,551  $   467,230  $   428,614
Investment Securities           $   293,125  $   139,132  $   128,623  $   125,808  $   106,511
Net Loans                       $   236,882  $   285,509  $   320,208  $   304,641  $   278,577
Deposits                        $   407,944  $   414,664  $   406,531  $   387,439  $   367,332
Stockholders' Equity            $    60,807  $    58,975  $    54,648  $    50,067  $    45,743

PER SHARE DATA:
Earnings per Share              $      2.78  $      3.14  $      2.62  $      2.21  $      2.17
Dividends per Share             $      1.35  $      1.35  $      1.25  $      1.15  $      1.10
Book Value per Share            $     28.31  $     27.46  $     25.44  $     23.31  $     21.30
Common Shares Outstanding         2,148,000    2,148,000    2,148,000    2,148,000    2,148,000

FINANCIAL RATIOS:
Net Interest Margin                   3.24%        4.21%        4.30%        4.08%        4.22%
Return on Average Assets              1.05%        1.37%        1.18%        1.06%        1.08%
Return on Average Equity              9.87%       11.79%       10.57%        9.96%       10.12%
Average Equity to Average Assets     10.59%       11.58%       11.19%       10.60%       10.70%
Dividend Payout Ratio                48.56%       42.99%       47.71%       52.04%       50.69%
</TABLE>

                  Penseco Financial Services Corporation / 2003 Annual Report 11

<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 2003  totalled  $5,971,  a decrease  of 11.6% from the $6,753
earned in 2002,  which was an increase of 20.1% from the $5,622  earned in 2001.
Net earnings per share were $2.78 in 2003, compared with $3.14 in 2002 and $2.62
in 2001. Net earnings for 2003 decreased from 2002 mainly due to the refinancing
of the  Company's  high-yield  residential  mortgage loan  portfolio  into lower
fixed-rate  obligations,  which  then were  sold in the  secondary  market.  Net
earnings  for 2002  increased  from 2001  results  due to an increase in the net
interest income, fee income, mainly from the sale of non-portfolio mortgages and
the sale of U.S. Agency  securities,  offset by an increase in operating  costs,
primarily salaries and employee benefits and applicable income tax expense.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  5,971                     2003
             6,753                     2002
             5,622                     2001
             4,743                     2000
             4,671                     1999


The  Company's  return on average  assets was 1.05% in 2003 compared to 1.37% in
2002 and 1.18% in 2001. Return on average equity was 9.87%, 11.79% and 10.57% in
2003, 2002 and 2001, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
             1.05%                     2003
             1.37%                     2002
             1.18%                     2001
             1.06%                     2000
             1.08%                     1999


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
             9.87%                     2003
            11.79%                     2002
            10.57%                     2001
             9.96%                     2000
            10.12%                     1999


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

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

     The Company also anticipates  purchasing  long-term municipal securities at
higher tax equivalent yields than the Company is presently  earning,  to improve
net interest income.

     Net interest income was $19.9 million in 2002,  compared with $19.3 million
in 2001,  an  increase of 3.1%.  The  increase  in net  interest  income in 2002
resulted  from an increase in  interest-earning  assets.  Also,  the Company had
increases in its deposit  transaction  accounts,  which have the lowest carrying
costs.

     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, 2003 was 3.2% compared with
4.2% for the year ended  December 31, 2002, and 4.3% for the year ended December
31, 2001.

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

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

     Interest  income in 2002 totalled $27.9 million,  compared to $31.9 million
in 2001, a decrease of 12.5%. The yield on average  interest-earning  assets was
5.9% in  2002,  compared  to  7.1%  in  2001.  Average  interest-earning  assets
increased in 2002 to $472.8 million from $450.0 million in 2001.  Average loans,
which are typically the Company's  highest  yielding  earning assets,  decreased
$9.3 million in 2002, while investment  securities increased on average by $13.7
million.  Average  loans  represented  67.0%  of 2002  average  interest-earning
assets, compared to 72.4% in 2001.

     Interest  expense also decreased in 2002 to $8.0 million from $12.5 million
in 2001, a decrease of $4.5 million or 36.0%.  This  decrease  resulted from the
Federal  Reserve  cutting  short  term  interest  rates in late  2001 due to the
economy  showing  anemic  growth.  The  average  rate  paid on  interest-bearing
liabilities  during 2002 was 2.2%,  compared  to 3.5%,  a decrease of 37.1% from
2001.

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

 NET INTEREST INCOME (in millions)       YEAR
---------------------------------------------
       $ 17,786                          2003
         19,888                          2002
         19,336                          2001
         17,345                          2000
         17,107                          1999


                  Penseco Financial Services Corporation / 2003 Annual Report 13

<PAGE>

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

The table below presents  average weekly  balances,  interest  income on a fully
taxable  equivalent basis and interest expense,  as well as average rates earned
and paid on the Company's  major asset and  liability  items for the years 2003,
2002 and 2001.

<TABLE>
<CAPTION>

                                                    2003                            2002                            2001
------------------------------------------------------------------------------------------------------------------------------------
                                        Average   Revenue/   Yield/     Average   Revenue/   Yield/     Average   Revenue/   Yield/
                                        Balance   Expense     Rate      Balance   Expense    Rate       Balance   Expense     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
ASSETS
Investment securities:
  Available-for-sale:
    U.S. Treasury securities           $  30,127  $  1,250    4.15%    $  36,550  $  1,575    4.31%   $   40,596  $  2,262    5.57%
    U.S. Agency obligations               79,520     3,660    4.60        57,544     3,267    5.68        47,802     3,130    6.55
    States & political subdivisions       20,433       947    7.02         8,962       439    7.42         6,725       245    5.52
    Federal Home Loan Bank stock           4,911        97    1.98         1,960        69    3.52         1,881       122    6.49
    Other                                    435        11    2.53           391        10    2.56           211         6    2.84
  Held-to-maturity:
    U.S. Agency obligations               75,194     3,365    4.48         1,862        58    3.11         3,192       185    5.80
    States & political subdivisions       29,730     1,621    8.26        29,715     1,641    8.37        22,852     1,189    7.88
Loans, net of unearned income:
  Real estate mortgages                  194,135    11,246    5.79       245,016    16,412    6.70       250,000    19,148    7.66
  Commercial                              31,288     1,497    4.78        32,168     1,751    5.44        27,885     2,117    7.59
  Consumer and other                      36,997     1,890    5.11        39,405     2,390    6.07        47,961     3,418    7.13
Federal funds sold                        35,620       340     .95        12,995       189    1.45           181         6    3.31
Interest on balances with banks            9,781        90     .92         6,277        98    1.56           651        32    4.92
------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                  548,171  $ 26,014    4.75%      472,845  $ 27,899    5.90%      449,937  $ 31,860    7.08%
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                              8,760                 8,234                           8,310
Bank premises and equipment                          9,984                10,411                          11,218
Accrued interest receivable                          3,144                 3,432                           3,831
Other assets                                         4,482                 3,083                           5,063
Less: Allowance for loan losses                      3,411                 3,662                           3,185
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                           $ 571,130                       $ 494,343                      $  475,174
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
  Demand-Interest bearing              $  28,738  $    144     .50%    $  26,204  $    159     .61%   $   25,033  $    240     .96%
  Savings                                 76,983       472     .61        71,470       700     .98        64,513       965    1.50
  Money markets                           87,973       737     .84        91,561     1,329    1.45        86,154     2,616    3.04
  Time - Over $100                        32,525       844    2.59        37,741     1,398    3.70        32,998     1,779    5.39
  Time - Other                           105,858     2,873    2.71       116,659     4,139    3.55       114,943     5,784    5.03
Federal funds purchased                        -         -       -             -         -       -             3         -       -
Repurchase agreements                     22,266       183     .82        20,278       276    1.36        17,366       570    3.28
Short-term borrowings                        699        11    1.57           562        10    1.78        15,520       570    3.67
Long-term borrowings                      76,401     2,964    3.88             -         -       -             -         -       -
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                 431,443  $  8,228    1.91%      364,475  $  8,011    2.20%      356,530  $ 12,524    3.51%
------------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing             76,421                          69,482                          61,823
All other liabilities                      2,763                           3,124                           3,656
Stockholders' equity                      60,503                          57,262                          53,165
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                 $ 571,130                       $ 494,343                      $  475,174
====================================================================================================================================
Interest Spread                                               2.84%                           3.70%                           3.57%
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                               $ 17,786                        $ 19,888                        $ 19,336
====================================================================================================================================

FINANCIAL RATIOS
Net interest margin                                           3.24%                           4.21%                           4.30%
Return on average assets                                      1.05%                           1.37%                           1.18%
Return on average equity                                      9.87%                          11.79%                          10.57%
Average equity to average assets                             10.59%                          11.58%                          11.19%
Dividend payout ratio                                        48.56%                          42.99%                          47.71%
</TABLE>

14 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

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



<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2002 compared to 2001                 of Change   Volume        Rate       Volume
             ----------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>          <C>
EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities          $   (687)  $   (225)   $   (512)    $    50
                 U.S. Agency obligations                137        638        (416)        (85)
                 States & political subdivisions        194         81          85          28
                 Equity securities                      (49)        10         (57)         (2)
               Held-to-maturity:
                 U.S. Agency obligations               (127)       (77)        (86)         36
                 States & political subdivisions        452        357          69          26
             Loans, net of unearned income:
               Real estate mortgages                 (2,736)      (382)     (2,400)         46
               Commercial                              (366)       325        (599)        (92)
               Consumer and other                    (1,028)      (610)       (508)         90
             Federal funds sold                         183        424          (3)       (238)
             Interest bearing balances with banks        66        277         (22)       (189)
             ----------------------------------------------------------------------------------
               Total Interest Income                 (3,961)       818      (4,449)       (330)
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                (81)        11         (88)         (4)
LIABILITIES    Savings                                 (265)       104        (335)        (34)
               Money markets                         (1,287)       163      (1,353)        (97)
               Time - Over $100                        (381)       256        (558)        (79)
               Time - Other                          (1,645)        86      (1,701)        (30)
             Federal funds purchased                      -          -           -           -
             Repurchase agreements                     (294)        96        (332)        (58)
             Short-term borrowings                     (560)      (549)       (293)        282
             ----------------------------------------------------------------------------------
               Total Interest Expense                (4,513)       167      (4,660)        (20)
             ----------------------------------------------------------------------------------
               Net Interest Income                 $    552   $    651    $    211     $  (310)
             ==================================================================================
</TABLE>


                  Penseco Financial Services Corporation / 2003 Annual Report 15

<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,           2003       2002       2001
--------------------------------------------------------------
Trust department income        $  1,311   $  1,266   $  1,233
Service charges on
  deposit accounts                1,133      1,123      1,126
Merchant transaction income       5,005      5,519      5,331
Other fee income                  1,630      1,562      1,291
Other operating income            1,323        553        231
Realized gains (losses) on
  securities, net                   341      1,009        (26)
--------------------------------------------------------------
  Total Other Income           $ 10,743   $ 11,032   $  9,186
==============================================================

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

     Total other  income  increased  $1,846 or 20.1% during 2002 to $11,032 from
$9,186 for 2001. Components of this increase include $1,009 from the gain on the
sale of U.S. Agency securities,  merchant  transaction income of $188 along with
an increase in fee income of $158 due to our  brokerage  division  and a gain on
the sale of low-yield, fixed-rate non-portfolio mortgage loans of $444.

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,           2003       2002       2001
--------------------------------------------------------------
Salaries and employee
  benefits                     $  9,010   $  9,048   $  8,180
Occupancy expenses, net           1,388      1,384      1,416
Furniture and equipment
  expenses                        1,175      1,208      1,245
Merchant transaction
  expenses                        4,158      4,731      4,636
Other operating expenses          4,723      4,727      4,600
--------------------------------------------------------------
  Total Other Expenses         $ 20,454   $ 21,098   $ 20,077
==============================================================

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

     Other  expenses  increased  $1,021 or 5.1% for 2002 to $21,098 from $20,077
for 2001.  Salaries and employee benefits  increased $868 or 10.6% to $9,048 for
2002 from $8,180 for 2001  partly due to staff  additions,  replacements,  merit
increases and pension costs.  Merchant  transaction  expenses increased $95, the
result of additional  volume.  Also, other operating  expenses increased $127 or
2.8%, mainly due to increased  expenses in advertising and other centennial year
expenses.

INCOME TAXES

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

     Federal  income  tax  expense  increased  $387 or 20.7% to  $2,256  in 2002
compared to $1,869 in 2001, due to increased operating income.

     The Company's  effective income tax rate for 2003, 2002 and 2001 was 21.4%,
25.0% and 25.0%, respectively.

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

FINANCIAL CONDITION

Total assets  increased  $87.6 million or 17.6% during 2003 to $584.6 million at
December 31, 2003  compared to $497.0  million at December 31, 2002 For the year
ended December 31, 2002 total assets  increased  $14.4 million to $497.0 million
or a 3.0% increase over $482.6 million at December 31, 2001.


ASSETS (in millions)             YEAR
-------------------------------------
       $ 584,590                 2003
         496,956                 2002
         482,551                 2001
         467,230                 2000
         428,614                 1999


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,                           2003        2002        2001
--------------------------------------------------------------------
U.S.Treasury securities           $  15,387   $  36,456   $  36,069
U.S. Agency obligations             221,156      52,026      60,520
States & political subdivisions      50,228      49,294      29,741
Equity securities                     6,354       1,356       2,293
-------------------------------------------------------------------
  Total Investment Securities     $ 293,125   $ 139,132   $ 128,623
===================================================================

16 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

LOAN PORTFOLIO

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

<TABLE>
<CAPTION>

December 31,                           2003        2002        2001        2000        1999
-------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>          <C>
Real estate - construction
  and land development            $   3,078   $   5,031   $   9,124   $   9,321   $   3,241
Real estate mortgages               172,964     217,883     246,486     234,212     216,574
Commercial                           30,056      30,077      30,001      21,566      18,995
Credit card and related plans         2,403       2,320       2,377       2,267       2,203
Installment                          25,855      27,306      30,142      30,290      28,693
Obligations of states &
  political subdivisions              6,026       6,239       5,678      10,085      11,821
-------------------------------------------------------------------------------------------
  Loans, net of unearned income     240,382     288,856     323,808     307,741     281,527
Less: Allowance for loan losses       3,500       3,347       3,600       3,100       2,950
-------------------------------------------------------------------------------------------
  Loans, net                      $ 236,882   $ 285,509   $ 320,208   $ 304,641   $ 278,577
===========================================================================================
</TABLE>

LOANS

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

     Total net loans  decreased  $34.7 million to $285.5 million at December 31,
2002 from $320.2 million at December 31, 2001, a decrease of 10.8%. The decrease
is due to  management's  reluctance to carry  low-yield,  fixed-rate  mortgages,
while concentrating on increasing variable rate loans.


NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 236,882                       2003
         285,509                       2002
         320,208                       2001
         304,641                       2000
         278,577                       1999


LOAN QUALITY

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

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

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

                  Penseco Financial Services Corporation / 2003 Annual Report 17

<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,                                     2003      2002      2001      2000      1999
---------------------------------------------------------------------------------------------
<S>                                           <C>       <C>       <C>       <C>       <C>
Non-accrual loans                             $ 1,533   $ 2,245   $ 1,917   $ 1,210   $   836
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        169       394       304       313       476
  Credit card and home equity loans                 3         -        22        23         -
---------------------------------------------------------------------------------------------
  Total non-performing loans                    1,705     2,639     2,243     1,546     1,312
Other real estate owned                           121        59       143       201        33
---------------------------------------------------------------------------------------------
  Total non-performing assets                 $ 1,826   $ 2,698   $ 2,386   $ 1,747   $ 1,345
=============================================================================================
</TABLE>

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

     Loans on which the accrual of  interest  has been  discontinued  or reduced
amounted  to $1,533,  $2,245 and $1,917 at  December  31,  2003,  2002 and 2001,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $198,  $171 and $152 for 2003, 2002 and 2001,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $29,
$77 and $86 for 2003, 2002 and 2001,  respectively.  There are no commitments to
lend additional funds to borrowers whose loans are on non-accrual status.

     The  management  process for  evaluating  the adequacy of the allowance for
loan losses  includes  reviewing each month's loan committee  reports which list
all  loans  that  do  not  meet  certain  internally  developed  criteria  as to
collateral adequacy, payment performance, economic conditions and overall credit
risk.  These  reports also address the current  status and actions in process on
each listed loan. From this  information,  adjustments are made to the allowance
for loan losses.  Such adjustments include both specific loss allocation amounts
and general  provisions  by loan category  based on present and past  collection
experience,  nature and volume of the loan portfolio, overall portfolio quality,
and current economic  conditions that may affect the borrower's  ability to pay.
As of December 31, 2003,  there are no significant  loans as to which management
has serious doubt about their collectibility.

     At December  31,  2003,  2002 and 2001,  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,                   2003      2002      2001      2000      1999
-----------------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>
Balance at beginning of year            $ 3,347   $ 3,600   $ 3,100   $ 2,950   $ 2,830
-----------------------------------------------------------------------------------------
Charge-offs:
  Real estate mortgages                      11        91        38        37        82
  Commercial and all others                 289       944       389        51        13
  Credit card and related plans              51        44        37        27        65
  Installment loans                           4        22        19        24        26
-----------------------------------------------------------------------------------------
Total charge-offs                           355     1,101       483       139       186
-----------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                      24        31        20        30         -
  Commercial and all others                   6         -         -         -       195
  Credit card and related plans               2         1         1         9        10
  Installment loans                           -         3         8        17        12
-----------------------------------------------------------------------------------------
Total recoveries                             32        35        29        56       217
-----------------------------------------------------------------------------------------
Net charge-offs (recoveries)                323     1,066       454        83       (31)
-----------------------------------------------------------------------------------------
Provision charged to operations             476       813       954       233        89
-----------------------------------------------------------------------------------------
  Balance at End of Year                $ 3,500   $ 3,347   $ 3,600   $ 3,100   $ 2,950
=========================================================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding              0.12%     0.34%     0.14%     0.03%     (0.01)%
=========================================================================================
</TABLE>

18 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

The allowance for loan losses is allocated as follows:


<TABLE>
<CAPTION>

December 31,                    2003             2002             2001             2000             1999
---------------------------------------------------------------------------------------------------------------
                              Amount     %1    Amount     %1    Amount     %1    Amount     %1    Amount     %1
---------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Real estate mortgages        $ 1,100   73%    $ 1,600   77%    $ 1,700   79%    $ 1,500   79%    $ 1,500   78%
Commercial
  and all others               1,970   15       1,222   13       1,375   11       1,100   10         950   10
Credit card and
  related plans                  180    1         175    1         175    1         150    1         150    1
Personal installment loans       250   11         350    9         350    9         350   10         350   11
---------------------------------------------------------------------------------------------------------------
  Total                      $ 3,500  100%    $ 3,347  100%    $ 3,600  100%    $ 3,100  100%    $ 2,950  100%
===============================================================================================================
</TABLE>

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

DEPOSITS

The primary  source of funds to support the Company's  operations is its deposit
base.  Company deposits decreased $6.8 million to $407.9 million at December 31,
2003 from  $414.7  million at  December  31,  2002,  a decrease of 1.6% due to a
decrease in time  deposits.  Company  deposits  increased $8.2 million to $414.7
million at December  31,  2002 from $406.5  million at  December  31,  2001,  an
increase of 2.0% due to increases in DDA and savings deposits.

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

  Three months or less                  $  9,143
  Over three months through six months     2,676
  Over six months through twelve months    7,824
  Over twelve months                      10,678
                                        --------
  Total                                 $ 30,321
                                        ========



DEPOSITS (in millions)            YEAR
--------------------------------------
       $ 407,944                  2003
         414,664                  2002
         406,531                  2001
         387,439                  2000
         367,332                  1999


ASSET/LIABILITY MANAGEMENT

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

LIQUIDITY

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

                  Penseco Financial Services Corporation / 2003 Annual Report 19

<PAGE>

LIQUIDITY (continued)

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

     The Company offers collateralized  repurchase  agreements,  that have a one
day maturity,  as an alternative  deposit option for its customers.  The Company
also has long-term debt  outstanding  to the FHLB,  which was used to purchase a
Freddie Mac pool of residential mortgages,  as described earlier in this report.
The Company continues to have $95,701 of available  borrowing  capacity with the
FHLB.

COMMITMENTS AND CONTINGENT LIABILITIES

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

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

     Financial  instruments  whose  contract  amounts  represent  credit risk at
December 31, 2003 and 2002 are as follows:

                                    2003        2002
----------------------------------------------------
Commitments to extend credit:
  Fixed rate                    $ 19,147    $ 12,273
  Variable rate                 $ 52,188    $ 66,257
Standby letters of credit       $ 15,363    $ 10,586

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

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

RELATED PARTIES

The Company does not have any material transactions involving related persons or
entities,  other than traditional  banking  transactions,  which are made on the
same  terms  and  conditions  as those  prevailing  at the  time for  comparable
transactions  with  unrelated  parties.  The Bank has issued a standby letter of
credit for the account of a related party in the amount of $6,353.

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 21.99% at December 31,
2003. 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
----------------------------------------------
        $ 60,807                          2003
          58,975                          2002
          54,648                          2001
          50,067                          2000
          45,743                          1999


20 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

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 third party up to a stipulated amount and with specified terms and conditions.

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

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

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

                  Penseco Financial Services Corporation / 2003 Annual Report 21

<PAGE>

MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2003

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

<TABLE>
<CAPTION>
                                                                                                     Non-Rate
                                          2004        2005      2006      2007      2008  Thereafter Sensitive     Total  Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>         <C>       <C>       <C>       <C>        <C>        <C>        <C>
ASSETS

Fixed interest rate securities:
  U.S. Treasury securities           $  10,030  $    5,357  $      -  $      -  $      -  $       -  $       -  $  15,387  $  15,387
       Yield                             3.00%       6.79%         -         -         -          -          -      4.32%
  U.S. Agency obligations               15,490      34,444    23,727     3,153     3,297     68,239          -    148,350    147,770
       Yield                             4.27%       4.47%     2.69%      4.48%    4.48%      4.48%          -      4.17%
  States & political subdivisions            -           -         -         -         -     50,228          -     50,228     52,947
       Yield                                 -           -         -         -         -      7.55%          -      7.55%
Variable interest rate securities:
  U.S. Agency obligations               20,559      21,034    21,195     4,972     5,046          -          -     72,806     72,814
       Yield                             3.50%       3.49%     3.46%     4.48%     4.48%          -          -      3.62%
  Federal Home Loan Bank stock               -           -         -         -         -      5,840          -      5,840      5,840
       Yield                                 -           -         -         -         -      1.40%          -      1.40%
  Other                                      -           -         -         -         -        514          -        514        514
       Yield                                 -           -         -         -         -      4.63%          -      4.63%
Fixed interest rate loans:
  Real estate mortgages                  4,194       3,597     3,875     3,592     3,518     31,087          -     49,863     50,225
       Yield                             6.91%       7.18%     6.79%     7.20%     7.20%      6.78%          -      6.88%
  Consumer and other                     1,579       1,423     1,279     1,014       850      1,051          -      7,196      7,337
       Yield                             6.76%       6.57%     6.24%     5.73%     5.35%      7.98%          -      6.50%
Variable interest rate loans:
  Real estate mortgages                 24,844      12,356    11,700    11,287    11,331     54,661          -    126,179    127,294
       Yield                             4.22%       4.33%     4.36%     4.35%     4.35%      4.59%          -      4.43%
  Commercial                            30,056           -         -         -         -          -          -     30,056     30,056
       Yield                             4.78%           -         -         -         -          -          -      4.78%
  Consumer and other                    11,247       3,925     3,509     3,051     3,141      2,215          -     27,088     27,187
       Yield                             4.77%       5.53%     4.71%     3.51%     3.51%      3.54%          -      4.48%
Less: Allowance for loan losses            697         354       339       315       314      1,481          -      3,500
Interest bearing deposits with banks     4,693           -         -         -         -          -          -      4,693      4,693
       Yield                              .80%           -         -         -         -          -          -       .80%
Federal funds sold                      23,600           -         -         -         -          -          -     23,600     23,600
       Yield                              .89%           -         -         -         -          -          -       .89%
Cash and due from banks                      -           -         -         -         -          -     10,062     10,062     10,062
Other assets                                 -           -         -         -         -          -     16,228     16,228
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                         $ 145,595  $   81,782  $ 64,946  $ 26,754  $ 26,869  $ 212,354  $  26,290  $ 584,590  $ 575,726
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing          $       -  $   30,515  $      -  $      -  $      -  $       -  $       -  $  30,515  $  30,515
       Yield                                 -        .25%         -         -         -          -          -       .25%
  Savings                                    -      80,689         -         -         -          -          -     80,689     80,689
       Yield                                 -        .49%         -         -         -          -          -       .49%
  Money markets                         89,103           -         -         -         -          -          -     89,103     89,103
       Yield                              .70%           -         -         -         -          -          -       .70%
  Time - Other                          10,063           -         -         -         -          -          -     10,063     10,063
       Yield                             2.92%           -         -         -         -          -          -      2.92%
Fixed interest rate deposits:
  Time - Over $100,000                  19,643       2,781     2,644     3,061     2,092        100          -     30,321     30,860
       Yield                             1.72%       2.40%     3.64%     4.77%     3.87%      5.00%          -      2.42%
  Time - Other                          48,015       8,068     7,206    14,443     6,970      2,825          -     87,527     88,384
       Yield                             1.66%       2.70%     3.19%     4.66%     3.60%      4.54%          -      2.62%
Demand - Non-interest bearing                -           -         -         -         -          -     79,726     79,726     79,726
Repurchase agreements                   19,454           -         -         -         -          -          -     19,454     19,454
       Yield                              .75%           -         -         -         -          -          -       .75%
Short-term borrowings                      823           -         -         -         -          -          -        823        823
       Yield                              .76%           -         -         -         -          -          -       .76%
Long-term borrowings                     6,648       9,139     9,464     9,801     9,181     49,290          -     93,523     93,549
       Yield                             3.52%       3.52%     3.53%     3.53%     3.53%      4.12%          -      3.84%
Other liabilities                            -           -         -         -         -          -      2,039      2,039
Stockholders' equity                         -           -         -         -         -          -     60,807     60,807
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity                 $ 193,749  $  131,192  $ 19,314  $ 27,305  $ 18,243  $  52,215  $ 142,572  $ 584,590  $ 523,166
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change      $ (48,154) $  (49,410) $ 45,632  $   (551) $  8,626  $ 160,139  $(116,282) $       -
====================================================================================================================================
</TABLE>

22 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>


ITEM 8  Financial Statements and Supplementary Data

                          Consolidated Balance Sheets

(in thousands, except per share data)

                 December 31,                                    2003       2002
                 ---------------------------------------------------------------
ASSETS           Cash and due from banks                    $  10,062  $  11,120
                 Interest bearing balances with banks           4,693     10,424
                 Federal funds sold                            23,600     33,075
                 ---------------------------------------------------------------
                   Cash and Cash Equivalents                   38,355     54,619

                 Investment securities:
                   Available-for-sale, at fair value          179,600    108,083
                   Held-to-maturity (fair value of $115,672
                     and $32,986, respectively)               113,525     31,049
                 ---------------------------------------------------------------
                   Total Investment Securities                293,125    139,132

                 Loans, net of unearned income                240,382    288,856
                   Less: Allowance for loan losses              3,500      3,347
                 ---------------------------------------------------------------
                 Loans, Net                                   236,882    285,509
                 Bank premises and equipment                    9,935      9,920
                 Other real estate owned                          121         59
                 Accrued interest receivable                    3,298      3,399
                 Other assets                                   2,874      4,318
                 ---------------------------------------------------------------
                   Total Assets                             $ 584,590  $ 496,956
                 ===============================================================
LIABILITIES      Deposits:
                   Non-interest bearing                     $  79,726  $  78,560
                   Interest bearing                           328,218    336,104
                   Total Deposits                             407,944    414,664
                 Other borrowed funds:
                   Repurchase agreements                       19,454     19,419
                   Short-term borrowings                          823        890
                   Long-term borrowings                        93,523          -
                 Accrued interest payable                       1,158      1,317
                 Other liabilities                                881      1,691
                 ---------------------------------------------------------------
                   Total Liabilities                          523,783    437,981
                 ---------------------------------------------------------------

STOCKHOLDERS'    Common stock, $.01 par value, 15,000,000
EQUITY             shares authorized, 2,148,000
                   shares issued and outstanding                   21         21
                 Surplus                                       10,819     10,819
                 Retained earnings                             48,131     45,060
                 Accumulated other comprehensive income         1,836      3,075
                 ---------------------------------------------------------------
                   Total Stockholders' Equity                  60,807     58,975
                 ---------------------------------------------------------------
                   Total Liabilities and
                   Stockholders' Equity                     $ 584,590  $ 496,956
                 ===============================================================

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

                  Penseco Financial Services Corporation / 2003 Annual Report 23

<PAGE>

                       Consolidated Statements of Income

(in thousands, except per share data)

<TABLE>
<CAPTION>

              Years Ended December 31,                      2003       2002       2001
              -------------------------------------------------------------------------
              <S>                                       <C>        <C>        <C>
INTEREST      Interest and fees on loans                $ 14,632   $ 20,553   $ 24,683
              Interest and dividends on investments:
                U.S. Treasury securities and U.S.
                  Agency obligations                       8,275      4,900      5,577
                States & political subdivisions            2,569      2,080      1,434
                Other securities                             108         79        128
              Interest on Federal funds sold                 340        189          6
              Interest on balances with banks                 90         98         32
              -------------------------------------------------------------------------
                Total Interest Income                     26,014     27,899     31,860
              -------------------------------------------------------------------------
INTEREST      Interest on time deposits
EXPENSE         of $100,000 or more                          844      1,398      1,779
              Interest on other deposits                   4,226      6,327      9,605
              Interest on other borrowed funds             3,158        286      1,140
                Total Interest Expense                     8,228      8,011     12,524
              -------------------------------------------------------------------------
                Net Interest Income                       17,786     19,888     19,336
              Provision for loan losses                      476        813        954
              -------------------------------------------------------------------------
                Net Interest Income After Provision
                  for Loan Losses                         17,310     19,075     18,382
              -------------------------------------------------------------------------
OTHER         Trust department income                      1,311      1,266      1,233
INCOME        Service charges on deposit accounts          1,133      1,123      1,126
              Merchant transaction income                  5,005      5,519      5,331
              Other fee income                             1,630      1,562      1,291
              Other operating income                       1,323        553        231
              Realized gains (losses) on securities, net     341      1,009        (26)
              -------------------------------------------------------------------------
                Total Other Income                        10,743     11,032      9,186
              -------------------------------------------------------------------------
OTHER         Salaries and employee benefits               9,010      9,048      8,180
EXPENSES      Occupancy expenses, net                      1,388      1,384      1,416
              Furniture and equipment expenses             1,175      1,208      1,245
              Merchant transaction expenses                4,158      4,731      4,636
              Other operating expenses                     4,723      4,727      4,600
              -------------------------------------------------------------------------
                Total Other Expenses                      20,454     21,098     20,077
              -------------------------------------------------------------------------
              Income before income taxes                   7,599      9,009      7,491
              Applicable income taxes                      1,628      2,256      1,869
              -------------------------------------------------------------------------
                Net Income                              $  5,971   $  6,753   $  5,622
              =========================================================================
                Earnings Per Share                      $   2.78   $   3.14   $   2.62
              =========================================================================
</TABLE>


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

24 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

                Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                                                 Other          Total
                                             Common               Retained   Comprehensive   Stockholders'
(in thousands except per share data)         Stock      Surplus   Earnings      Income          Equity
----------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>          <C>             <C>
Balance, December 31, 2000                  $ 21       $ 10,819   $ 38,269     $   958         $ 50,067

Comprehensive income:

  Net income, 2001                             -              -      5,622           -            5,622
  Unrealized gains on securities,
    net of reclassification adjustment
    and taxes                                  -              -          -       1,644            1,644
                                                                                                 -------
Comprehensive income                                                                              7,266

Cash dividends declared ($1.25 per share)      -              -     (2,685)          -           (2,685)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2001                    21         10,819     41,206       2,602           54,648

Comprehensive income:

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

Cash dividends declared ($1.35 per share)      -              -     (2,899)          -           (2,899)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002                    21         10,819     45,060       3,075           58,975

Comprehensive income:

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

Cash dividends declared ($1.35 per share)      -              -     (2,900)          -           (2,900)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2003                  $ 21       $ 10,819   $ 48,131     $ 1,836         $ 60,807
==========================================================================================================

</TABLE>

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

                  Penseco Financial Services Corporation / 2003 Annual Report 25

<PAGE>

                     Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

(in thousands)   Years Ended December 31,                                 2003          2002          2001
                 ------------------------------------------------------------------------------------------
                 <S>                                                 <C>           <C>           <C>
OPERATING        Net Income                                          $   5,971     $   6,753     $   5,622
ACTIVITIES       Adjustments to reconcile net income to net
                   cash provided by operating activities:
                     Depreciation                                        1,119         1,240         1,288
                     Provision for loan losses                             476           813           954
                     Deferred income tax (benefit) provision              (182)           95          (213)
                     Amortization of securities
                       (net of accretion)                                1,050           201            38
                     Net realized (gains) losses on securities            (341)       (1,009)           26
                     Loss (gain) on other real estate                       15             2           (14)
                     Loss on disposition of fixed assets                     -             7             -
                     Decrease in interest receivable                       101           200           391
                     Decrease (increase) in other assets                 1,441        (2,419)         (299)
                     Increase (decrease) in income taxes payable           252          (252)          208
                     Decrease in interest payable                         (159)         (260)         (691)
                     (Decrease) increase in other liabilities             (239)          (34)           78
                 ------------------------------------------------------------------------------------------
                     Net cash provided by
                       operating activities                              9,504         5,337         7,388
                 ------------------------------------------------------------------------------------------
INVESTING        Purchase of investment securities
ACTIVITIES         available-for-sale                                 (122,157)      (34,798)      (41,035)
                 Proceeds from sales and maturities of investment
                   securities available-for-sale                        48,715        24,797        52,568
                 Purchase of investment securities to be
                   held-to-maturity                                   (103,031)            -       (13,407)
                 Proceeds from repayments of investment
                   securities to be held-to-maturity                    19,894         1,017         1,487
                 Net loans repaid (originated)                          47,677        33,629       (16,786)
                 Proceeds from other real estate                           397           339           337
                 Proceeds from sale of fixed assets                          -             5             -
                 Investment in premises and equipment                   (1,134)         (389)         (364)
                 ------------------------------------------------------------------------------------------
                     Net cash (used) provided by
                       investing activities                           (109,639)       24,600       (17,200)
                 ------------------------------------------------------------------------------------------
FINANCING        Net increase in demand and savings deposits             6,862        18,906        14,784
ACTIVITIES       Net (payments) proceeds on time deposits              (13,582)      (10,773)        4,308
                 Increase in repurchase agreements                          35         1,279         3,054
                 Net (decrease) increase in short-term borrowings          (67)          873       (11,486)
                 Proceeds from long-term borrowings                    100,000             -             -
                 Payments on long-term borrowings                       (6,477)            -             -
                 Cash dividends paid                                    (2,900)       (2,899)       (2,685)
                 ------------------------------------------------------------------------------------------
                 Net cash provided by
                   financing activities                                 83,871         7,386         7,975
                 ------------------------------------------------------------------------------------------
                 Net (decrease) increase in cash
                   and cash equivalents                                (16,264)       37,323        (1,837)

                 Cash and cash equivalents at January 1                 54,619        17,296        19,133
                 ------------------------------------------------------------------------------------------
                 Cash and cash equivalents at December 31            $  38,355     $  54,619     $  17,296
                 ==========================================================================================
</TABLE>

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

26 Penseco Financial Services Corporation / 2003 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 financial holding company,
incorporated in 1997 under the laws of Pennsylvania. It is the parent company of
Penn Security Bank and Trust Company (Bank), a state chartered bank.

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

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

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

BASIS OF PRESENTATION

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

     The Statements are presented on the accrual basis of accounting.

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

EMERGING ACCOUNTING STANDARDS

In January 2003,  the Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  No.  46,   "Consolidation  of  Variable  Interest  Entities,  an
Interpretation of ARB No. 51". The Interpretation  provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be  consolidated  by  their  primary   beneficiaries  if  the  entities  do  not
effectively disperse risk among parties involved. The consolidation requirements
apply  immediately  to VIEs created after January 31, 2003 and are effective for
the first fiscal year or interim  period  beginning  after December 15, 2003 for
VIEs acquired before February 1, 2003.

     The Company  presently does not have any variable  interest  entities which
will be affected by the application of Interpretation No. 46.

     In  December  2003,  the FASB  issued  Statement  No. 132  (revised  2003),
"Employers'  Disclosure  about Pensions and Other  Postretirement  Benefits,  an
amendment of FASB  Statements  No. 87, 88 and 106".  The  Statement  retains all
required  disclosures  contained in the original  Statement No. 132 and requires
additional  disclosures about assets,  obligations,  cash flows and net periodic
benefit  costs of  defined  benefit  pension  plans  and other  defined  benefit
postretirement   benefit  plans.  The  disclosure   requirements  are  generally
effective for years ended after December 15, 2003 with the following exceptions:

     Disclosure  of  estimated  future  benefit  payments (as of the date of the
latest balance sheet) expected to be paid in each of the next five fiscal years,
and in the  aggregate  for the five fiscal years  thereafter,  is effective  for
fiscal years ending after June 15, 2004.

     Companies with foreign plans may defer certain disclosures (the accumulated
benefit obligation,  estimated  contributions,  the measurement date and certain
information  about plan assets)  associated  with those plans until fiscal years
ending after June 15, 2004.

     Employers  are  required  to report  various  elements of pension and other
benefit  costs in interim  financial  statements  for quarters  beginning  after
December 15, 2003.

     Management  does  not  anticipate  that  the  adoption  of  the  additional
disclosures  required by the  Statement  will have a  significant  effect on the
Company's earnings or financial position.

INVESTMENT SECURITIES

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

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

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

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

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

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

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

     Loans are  generally  placed on a  non-accrual  status  when  principal  or
interest is past due 90 days or when payment in full is not anticipated.

                  Penseco Financial Services Corporation / 2003 Annual Report 27

<PAGE>

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

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

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

PREMISES AND EQUIPMENT

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

LONG-LIVED ASSETS

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

LOAN SERVICING

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

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

ADVERTISING EXPENSES

Advertising costs are expensed as incurred.  Advertising  expenses for the years
ended  December  31,  2003,  2002 and  2001,  amounted  to $473,  $650 and $497,
respectively.

INCOME TAXES

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

PENSION EXPENSE

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

POSTRETIREMENT BENEFITS EXPENSE

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

CASH FLOWS

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

The Company paid  interest and income taxes during the years ended  December 31,
2003, 2002 and 2001 as follows:

                           2003       2002       2001
-----------------------------------------------------
Income taxes paid      $  1,698   $  2,636   $  1,909
Interest paid          $  8,387   $  8,271   $ 13,215

Non-cash  transactions  during the years ended December 31, 2003, 2002 and 2001,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $474, $257 and $265, respectively.

TRUST ASSETS AND INCOME

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

EARNINGS PER SHARE

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

RECLASSIFICATIONS

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2003
presentation.

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

2  CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                               2003        2002
-----------------------------------------------------------
Cash items in process of collection    $  5,452    $    127
Non-interest bearing balances             1,371       8,708
Cash on hand                              3,239       2,285
-----------------------------------------------------------
  Total                                $ 10,062    $ 11,120
===========================================================

     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.

28 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

3 INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 2003
and 2002 are as follows:

                              AVAILABLE-FOR-SALE

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

                              AVAILABLE-FOR-SALE

                                           Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2002                          Cost       Gains        Losses       Value
--------------------------------------------------------------------------
U.S. Treasury securities   $  35,098   $    1,358   $        -    $ 36,456
U.S. Agency securities        47,679        2,927            -      50,606
States & political
  subdivisions                19,431          361          127      19,665
--------------------------------------------------------------------------
  Total Debt Securities      102,208        4,646          127     106,727
Equity securities              1,215          141            -       1,356
--------------------------------------------------------------------------
  Total Available -
    for-Sale               $ 103,423   $    4,787   $      127    $108,083
==========================================================================

Equity securities at December 31, 2003 and 2002,  consisted primarily of Federal
Home Loan Bank stock, which is a required  investment in order to participate in
an available line of credit  program.  The stock is stated at par value as there
is no readily determinable fair value.

A summary of transactions involving  available-for-sale debt securities in 2003,
2002 and 2001 are as follows:

December 31,                    2003        2002        2001
------------------------------------------------------------
Proceeds from sales        $  15,640   $  13,832   $  28,594
Gross realized gains             341       1,009          53
Gross realized losses              -           -          79



                                Held-to-Maturity

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


                                Held-to-Maturity

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2002                          Cost       Gains        Losses       Value
--------------------------------------------------------------------------
Mortgage-backed
  securities               $   1,420   $        8   $       20   $   1,408
States & political
  subdivisions                29,629        1,949            -      31,578
--------------------------------------------------------------------------
  Total Held-to-Maturity   $  31,049   $    1,957   $       20   $  32,986
==========================================================================

Investment  securities  with  amortized  costs and fair  values of  $81,461  and
$85,653 at December 31, 2003 and $88,034 and $92,907 at December 31, 2002,  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, 2003
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      $  10,010    $  10,030    $       -    $       -
  U.S. Agency
    securities                     12,570       12,731            -            -
After one year through
  five years:
  U.S. Treasury
    securities                      4,998        5,357            -            -
  U.S. Agency
    securities                     50,998       52,272            -            -
After ten years:
  States & political
    subdivisions                   20,158       20,841       29,387       32,106
--------------------------------------------------------------------------------
    Subtotal                       98,734      101,231       29,387       32,106
Mortgage-backed securities         71,975       72,015       84,138       83,566
--------------------------------------------------------------------------------
    Total Debt Securities       $ 170,709    $ 173,246    $ 113,525    $ 115,672
================================================================================


The  gross  fair  value and  unrealized  losses  of the  Company's  investments,
aggregated by investment category and length of time that individual  securities
have been in a continuous  unrealized loss position, at December 31, 2003 are as
follows:

                                   Fair      Unrealized
Mortgaged-backed securities        Value       Losses
-------------------------------------------------------
Less than twelve months         $ 130,285    $     687
Twelve months or more                   -            -
-------------------------------------------------------
Totals                          $ 130,285    $     687
=======================================================

The above table includes three (3) securities  that have  unrealized  losses for
less than twelve months.  The unrealized  losses in each case are related solely
to interest rate fluctuations.

                  Penseco Financial Services Corporation / 2003 Annual Report 29

<PAGE>

4  LOANS

Major classifications of loans are as follows:

December 31,                                      2003        2002
------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development          $   3,078    $  5,031
  Secured by farmland                                -           -
  Secured by 1-4 family residential
    properties:
    Revolving, open-end loans                   18,945      15,818
    Secured by first liens                      93,380     135,602
    Secured by junior liens                     15,588      20,921
  Secured by multi-family properties               165         635
  Secured by non-farm, non-residential
    properties                                  44,886      44,907
Commercial and industrial loans
  to U.S. addressees                            30,056      30,077
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                  2,403       2,320
  Other (installment and
    student loans, etc.)                        25,192      26,942
Obligations of states &
  political subdivisions                         6,026       6,239
All other loans                                    663         364
------------------------------------------------------------------
  Gross Loans                                  240,382     288,856
Less: Unearned income on loans                       -           -
------------------------------------------------------------------
  Loans, Net of Unearned Income              $ 240,382    $288,856
==================================================================


Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,533, $2,245 and $1,917 at December 31, 2003, 2002 and 2001,  respectively.
If interest on those loans had been  accrued,  such income would have been $198,
$171 and $152 for 2003,  2002 and 2001,  respectively.  Interest income on those
loans,  which is recorded only when  received,  amounted to $29, $77 and $86 for
2003, 2002 and 2001, respectively. Also, at December 31, 2003 and 2002, the Bank
had loans totalling $172 and $394, 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,                   2003       2002       2001
---------------------------------------------------------------------
Balance at beginning of year            $ 3,347    $ 3,600    $ 3,100
Provision charged to operations             476        813        954
Recoveries credited to allowance             32         35         29
---------------------------------------------------------------------
                                          3,855      4,448      4,083
Losses charged to allowance                (355)    (1,101)      (483)
---------------------------------------------------------------------
  Balance at End of Year                $ 3,500    $ 3,347    $ 3,600
=====================================================================


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
------------------------        --------------       -------------
        2003                        $  476              $   323
        2002                        $  813              $ 1,066
        2001                        $  954              $   454

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $948,  $948  and  $948 at  December  31,  2003,  2002  and  2001,
respectively.

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

6  LOAN SERVICING

The Company  services  $73,663 in  mortgage  loans for Freddie Mac which are not
included in the accompanying Consolidated Balance Sheets.

     Custodial escrow balances  maintained in connection with the foregoing loan
servicing,  and  included in  deposits,  were  approximately  $709 and $299,  at
December 31, 2003 and 2002,  respectively.  The balance of the servicing  rights
was  $647  and  $227  at  December  31,  2003  and  2002,  respectively,  net of
amortization.

     The Company recorded $569 and $236 in new mortgage servicing rights in 2003
and 2002, respectively. Amortization expense of $149 and $9 was recorded for the
years ended December 31, 2003 and 2002, respectively.

     There was no  allowance  for  impairment  recorded at December  31, 2003 or
2002.

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

7  BANK PREMISES AND EQUIPMENT

December 31,                           2003         2002
--------------------------------------------------------
Land                               $  3,122     $  2,919
Buildings and improvements           14,531       14,519
Furniture and equipment              12,458       11,539
--------------------------------------------------------
                                     30,111       28,977
Less: Accumulated depreciation       20,176       19,057
--------------------------------------------------------
  Net Bank Premises
    and Equipment                  $  9,935     $  9,920
========================================================

Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation expense amounted to $1,119 in
2003, $1,240 in 2002 and $1,288 in 2001.

     Occupancy  expenses were reduced by rental income received in the amount of
$64,  $63  and  $61 in the  years  ended  December  31,  2003,  2002  and  2001,
respectively.

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

8  OTHER REAL ESTATE OWNED

Real estate  acquired  through  foreclosure  is recorded at the lower of cost or
market  at the time of  acquisition.  Any  subsequent  write-downs  are  charged
against operating expenses.  The other real estate owned as of December 31, 2003
and 2002 was $121 and $59,  respectively,  supported by  appraisals  of the real
estate involved.

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

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

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

                                    Equity in
                                    underlying                   Bank's
           Percent         Total    net assets    Amount    proportionate
          of voting     investment  at balance      of      part of loss
Year     stock owned     and loan   sheet date   dividends  for the period
--------------------------------------------------------------------------

2003         100%        $ 3,450     $ 3,435       None        $     -
2002         100%        $ 3,550     $ 3,535       None        $     -
2001         100%        $ 3,650     $ 3,635       None        $     -


30 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

10 DEPOSITS

December 31,                            2003         2002
---------------------------------------------------------
Demand - Non-interest
  bearing                          $  79,726    $  78,560
Demand - Interest bearing             30,515       31,363
Savings                               80,689       73,786
Money markets                         89,103       89,462
Time - Over $100,000                  30,321       33,686
Time - Other                          97,590      107,807
---------------------------------------------------------
  Total                            $ 407,944    $ 414,664
=========================================================

Scheduled maturities of time deposits are as follows:

        2004                 $  77,721
        2005                    10,849
        2006                     9,850
        2007                    17,504
        2008                     9,062
        2009 and thereafter      2,925
--------------------------------------
            Total            $ 127,911
=======================================

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

11 OTHER BORROWED FUNDS

At December 31, 2003 and 2002, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase agreements.

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

     Investment  securities  with amortized costs and fair values of $28,025 and
$29,289 at December 31, 2003 and $27,133 and $29,008 at December 31, 2002,  were
pledged to secure repurchase agreements.

Years Ended December 31,                    2003        2002
------------------------------------------------------------
Amount outstanding at year end          $ 20,277    $ 20,309
Average interest rate at year end           .75%       1.57%
Maximum amount outstanding at
  any month end                         $ 19,948    $ 24,649
Average amount outstanding              $ 22,176    $ 20,792
Weighted average interest rate
  during the year:
    Federal funds purchased                2.12%        .53%
    Repurchase agreements                   .88%       1.00%
    Demand notes to U.S. Treasury           .90%       1.00%

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 $10,298 and $10,226 at December  31, 2003 and $10,010 and $10,150
at December 31, 2002 and with  interest  rates of 2.00% and .75% at December 31,
2003 and December 31, 2002, 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,
2003 and 2002, respectively.

     The Company has the availability of a $5,000  overnight  Federal funds line
of credit  with  Wachovia  Bank,  N.A.  There was no balance  outstanding  as of
December 31, 2003 and 2002, respectively.

     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$95,701 with the Federal Home Loan Bank of Pittsburgh (FHLB).

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

12 LONG-TERM DEBT

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

     A summary of long-term debt,  including  amortizing  principal and interest
payments, at December 31, 2003 is as follows:

Monthly        Fixed   Maturity
Installment     Rate       Date          Balance
------------------------------------------------
$ 161          2.73%   03/13/08         $  7,727
  253          3.22%   03/13/10           17,163
  430          3.74%   03/13/13           40,302
  186          4.69%   03/13/23           28,331
------------------------------------------------
Total                                   $ 93,523
================================================

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

Aggregate maturities of long-term debt at December 31, 2003 are as follows: 2004
$6,648,  2005 $9,139,  2006  $9,464,  2007  $9,801,  2008 $9,181 and  thereafter
$49,290 for a total of $93,523.

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

13 EMPLOYEE BENEFIT PLANS

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

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

     At  December  31, 2003 and 2002,  the ESOP held  89,204 and 88,962  shares,
respectively  of the  Company's  stock,  all of which were acquired as described
above and allocated to specific participant  accounts.  These shares are treated
the same for dividend  purposes and earnings per share  calculations  as are any
other  outstanding  shares of the Company's stock.  The Company  contributed $0,
$140 and $140 to the plan during the years ended  December  31,  2003,  2002 and
2001, respectively.

     Under the  Retirement  Profit  Sharing Plan,  amounts voted by the Board of
Directors  are paid into a fund and each  employee is  credited  with a share in
proportion to their annual compensation.  Upon retirement, death or termination,
each  employee is paid the total amount of their credits in the fund in one of a
number of optional  ways in  accordance  with the plan  provisions.  The Company
contributed $70, $0 and $0 to the plan during the years ended December 31, 2003,
2002 and 2001, respectively.

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

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

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

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

                  Penseco Financial Services Corporation / 2003 Annual Report 31

<PAGE>

13 EMPLOYEE BENEFIT PLANS (continued)


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

                                    Pension Benefits        Other Benefits
                                   ------------------      ----------------
December 31,                          2003       2002         2003     2002
---------------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation,
      beginning                   $  9,855   $  9,059       $  250   $  186
    Service cost                       385        370            6        5
    Interest cost                      635        588           15       15
    Change in assumptions              237          -            7        -
    Amendments                           -        111            -        -
    Actuarial gain (loss)               88         26            -       51
    Benefits paid                     (316)      (299)          (9)      (7)
---------------------------------------------------------------------------
  Benefit obligation,
    ending                          10,884      9,855          269      250
---------------------------------------------------------------------------
Change in plan assets:
    Fair value of plan
      assets, beginning              7,804      8,100            -        -
    Actual return on plan
      assets                           897       (219)           -        -
    Employer contribution              328        222            -        -
    Benefits paid                     (316)      (299)           -        -
---------------------------------------------------------------------------
  Fair value of plan
    assets, ending                   8,713      7,804            -        -
---------------------------------------------------------------------------
Funded status                       (2,171)    (2,051)        (269)    (250)
Unrecognized net transition
    asset                                -          -            -        -
Unrecognized net actuarial
    loss (gain)                      2,723      2,845          (27)     (34)
Unrecognized prior service
    cost                                55         56           57       64
---------------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                          $    607   $    850       $ (239)  $ (220)
===========================================================================

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


                                               Pension Benefits
                                              ------------------
Years Ended December 31,                  2003       2002       2001
---------------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                        $  385     $  370     $  310
    Interest cost                          635        588        540
    Expected return on plan assets        (624)      (726)      (732)
    Amortization of transition asset         -          -        (66)
    Amortization of prior service cost       -       (104)         -
    Amortization of unrecognized
      net loss                             175         82          -
---------------------------------------------------------------------
      Net periodic pension cost         $  571     $  210     $   52
=====================================================================

                                                Other Benefits
                                              ------------------
Years Ended December 31,                  2003       2002       2001
---------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                        $    6     $    5     $    5
    Interest cost                           15         15         11
    Amortization of prior service cost       8          7          8
    Amortization of unrecognized
      net gain                              (1)        (1)        (7)
---------------------------------------------------------------------
      Net periodic other benefit cost   $   28     $   26     $   17
=====================================================================

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 $153, $153 and $0,  respectively at December 31, 2003
and $98, $98 and $0, respectively at December 31, 2002.

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

                                Pension Benefits        Other Benefits
                                ----------------        --------------
December 31,                  2003        2002            2003     2002
-----------------------------------------------------------------------
Discount rate                 6.25%   6.25% - 6.50%       6.25%   6.25%
Rate of compensation
  increase                    4.25%       4.50%           4.50%   4.50%


                                Pension Benefits        Other Benefits
                                ----------------        --------------
Years Ended December 31,      2003        2002            2003     2002
-----------------------------------------------------------------------
Discount rate                 6.25%   6.25% - 6.50%       6.25%   6.25%
Expected return on
  plan assets                 8.00%       9.00%              -       -
Rate of compensation
  increase                    4.25%       4.50%           4.50%   4.50%


The  expected  long-term  return on plan  assets was  determined  using  average
historical  returns of the Company's  plan assets.  The rate was reduced  during
2003 due to the reduction in returns for the prior year.

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

                                     Plan Assets at December 31,
                                     ---------------------------
                                         2003       2002
---------------------------------------------------------
Asset Category
--------------
Equity securities                        52.4%      42.1%
Corporate bonds                          33.3%      36.8%
U.S. Government securities               13.1%      16.4%
Foreign equity securities                   -        2.7%
Cash and cash equivalents                 1.2%       2.0%
---------------------------------------------------------
                                        100.0%     100.0%
---------------------------------------------------------

The Company investment policies and strategies include:

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

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

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

     There is no Company  stock  included in equity  securities  at December 31,
2003 or 2002.

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

The Company  expects to  contribute  $318,519 to its pension plan and $11,576 to
its other postretirement plan in 2004.

32 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

14 INCOME TAXES

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

Years Ended December 31,           2003         2002         2001
------------------------------------------------------------------
Currently payable               $ 1,810      $ 2,161      $ 2,082
Deferred (benefit) provision       (182)          95         (213)
------------------------------------------------------------------
  Total                         $ 1,628      $ 2,256      $ 1,869
==================================================================

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,           2003         2002         2001
------------------------------------------------------------------
Tax at statutory rate           $ 2,584      $ 3,063      $ 2,547
Reduction for non-taxable
  interest                         (978)        (828)        (746)
Other additions                      22           21           68
------------------------------------------------------------------
  Applicable Income Taxes       $ 1,628      $ 2,256      $ 1,869
==================================================================

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

Years Ended December 31,           2003         2002         2001
------------------------------------------------------------------
Accretion of discount on bonds  $  (121)     $    53      $    53
Accelerated depreciation             67          (36)         (96)
Supplemental benefit plan           (16)           4           (9)
Allowance for loan losses           (53)          86         (180)
Prepaid pension cost                (59)         (12)          19
------------------------------------------------------------------
  Total                         $  (182)     $    95      $  (213)
==================================================================

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

December 31,                              2003         2002
------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses            $   868      $   815
  Accumulated depreciation                 339          406
  Accrued supplemental benefit plan         47           31
------------------------------------------------------------
    Total Deferred Tax Assets            1,254        1,252
============================================================
Deferred tax liabilities:
  Unrealized securities gains              946        1,584
  Prepaid pension costs                    284          343
  Accumulated accretion                     27          148
------------------------------------------------------------
    Total Deferred Tax Liabilities       1,257        2,075
------------------------------------------------------------
    Net Deferred Tax Liabilities       $    (3)     $  (823)
============================================================

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

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

15 ACCUMULATED OTHER COMPREHENSIVE INCOME


Accumulated other comprehensive income of $1,836,  $3,075 and $2,602 at December
31, 2003, 2002 and 2001,  respectively consisted entirely of unrealized gains or
losses on available-for-sale securities, net of tax.

     A reconciliation of other comprehensive income for the years ended December
31, 2003 and 2002 is as follows:

                                                        Tax
                                         Before-Tax   (Expense)    Net-of-Tax
2002                                       Amount      Benefit       Amount
------------------------------------------------------------------------------
Unrealized losses on
  available-for-sale securities:
    Unrealized losses arising during
      the year                            $(1,536)    $    522       $(1,014)
    Less:  Reclassification adjustment
      for gains realized in income            341         (116)          225
------------------------------------------------------------------------------
    Net unrealized losses                 $(1,877)    $    638       $(1,239)
==============================================================================


                                                        Tax
                                         Before-Tax   (Expense)    Net-of-Tax
2002                                       Amount      Benefit       Amount
------------------------------------------------------------------------------
Unrealized gains on
  available-for-sale securities:
    Unrealized gains arising during
      the year                            $ 1,726     $   (587)      $ 1,139
    Less:  Reclassification adjustment
      for gains realized in income          1,009         (343)          666
------------------------------------------------------------------------------
    Net unrealized gains                  $   717     $   (244)      $   473
==============================================================================

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

16 COMMITMENTS AND CONTINGENT LIABILITIES

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

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

     Financial  instruments  whose  contract  amounts  represent  credit risk at
December 31, 2003 and 2002 are as follows:

                                        2003        2002
--------------------------------------------------------
Commitments to extend credit:
  Fixed rate                        $ 19,147    $ 12,273
  Variable rate                     $ 52,188    $ 66,257

Standby letters of credit           $ 15,363    $ 10,586


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

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

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

                  Penseco Financial Services Corporation / 2003 Annual Report 33

<PAGE>

17 FAIR VALUE DISCLOSURE

GENERAL

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

VALUATION METHODS AND ASSUMPTIONS

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

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

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

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

<TABLE>
<CAPTION>

                                             December 31, 2003          December 31, 2002
--------------------------------------------------------------------------------------------
                                           Carrying       Fair        Carrying      Fair
                                            Amount        Value        Amount       Value
--------------------------------------------------------------------------------------------
<S>                                       <C>           <C>          <C>          <C>
Financial Assets:
  Cash and due from banks                 $  10,062     $  10,062    $  11,120    $  11,120
  Interest bearing balances with banks        4,693         4,693       10,424       10,424
  Federal funds sold                         23,600        23,600       33,075       33,075
--------------------------------------------------------------------------------------------
        Cash and cash equivalents            38,355        38,355       54,619       54,619
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities               15,387        15,387       36,456       36,456
      U.S. Agency obligations               137,018       137,018       50,606       50,606
      States & political subdivisions        20,841        20,841       19,665       19,665
      Federal Home Loan Bank stock            5,840         5,840          946          946
      Other securities                          514           514          410          410
    Held-to-maturity:
      U.S. Agency obligations                84,138        83,566        1,420        1,408
      States & political subdivisions        29,387        32,106       29,629       31,578
--------------------------------------------------------------------------------------------
        Total investment securities         293,125       295,272      139,132      141,069
  Loans, net of unearned income:
    Real estate mortgages                   176,042       177,519      222,914      225,138
    Commercial                               30,056        30,056       30,077       30,077
    Consumer and other                       34,284        34,524       35,865       36,107
    Less:  Allowance for loan losses          3,500                      3,347
--------------------------------------------------------------------------------------------
        Loans, net                          236,882       242,099      285,509      291,322
--------------------------------------------------------------------------------------------
        Total Financial Assets              568,362     $ 575,726      479,260    $ 487,010
Other assets                                 16,228                     17,696
--------------------------------------------------------------------------------------------
        Total Assets                      $ 584,590                  $ 496,956
============================================================================================

Financial Liabilities:
  Demand - Non-interest bearing           $  79,726     $  79,726    $  78,560    $  78,560
  Demand - Interest bearing                  30,515        30,515       31,363       31,363
  Savings                                    80,689        80,689       73,786       73,786
  Money markets                              89,103        89,103       89,462       89,462
  Time                                      127,911       129,307      141,493      144,981
--------------------------------------------------------------------------------------------
        Total Deposits                      407,944       409,340      414,664      418,152
  Repurchase agreements                      19,454        19,454       19,419       19,419
  Short-term borrowings                         823           823          890          890
  Long-term borrowings                       93,523        93,549            -            -
--------------------------------------------------------------------------------------------
        Total Financial Liabilities         521,744     $ 523,166      434,973    $ 438,461
Other Liabilities                             2,039                      3,008
Stockholders' Equity                         60,807                     58,975
--------------------------------------------------------------------------------------------
        Total Liabilities and
        Stockholders' Equity              $ 584,590                  $ 496,956
============================================================================================

Standby Letters of Credit                 $    (153)    $    (153)   $    (106)   $    (106)
</TABLE>

34 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

18 OPERATING LEASES

The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several  locations  which are being used as remote  banking
facilities.  Rental  expense was $86 in 2003,  $80 in 2002 and $81 in 2001.  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, 2003
are as follows:

                            Mount   Meadow    ATM
                           Pocono   Avenue   Sites    Total
-----------------------------------------------------------
2004                       $   48   $   19   $  17    $  84
2005                           48       20      12       80
2006                           48       13       -       61
2007                           48        -       -       48
2008                           48        -       -       48
2009 to 2012                  119        -       -      119
-----------------------------------------------------------
  Total minimum
    payments required      $  359   $   52   $  29    $ 440
===========================================================

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

19 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

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

Years Ended December 31,       2003         2002
-------------------------------------------------
Beginning Balance           $ 4,483      $ 6,664
Additions                     2,065         748
Collections                  (1,283)      (2,929)
-------------------------------------------------
  Ending Balance            $ 5,265      $ 4,483
=================================================

In  addition  to the loan  amounts  shown  above,  the Bank has issued a standby
letter of credit for the account of a related party in the amount of $6,353.

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

20 REGULATORY MATTERS

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the Capital  Adequacy table on the following  page) of Tier I and Total
Capital  to  risk-weighted  assets  and of  Tier I  Capital  to  average  assets
(Leverage  ratio).  The table also presents the Company's actual capital amounts
and ratios.  The Bank's  actual  capital  amounts  and ratios are  substantially
identical to the Company's.  Management believes,  as of December 31, 2003, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject.

     As of December  31,  2003,  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,
2003, 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 / 2003 Annual Report 35

<PAGE>

20 REGULATORY MATTERS (continued)

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

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

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


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

December 31, 2002              Amount   Ratio        Amount    Ratio          Amount    Ratio
----------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>         <C>         <C>         <C>
Total Capital
  (to Risk Weighted Assets)   $ 59,020  17.99%    > $ 26,250  > 8.0%      > $ 32,813  > 10.0%
                                                  -           -           -           -
Tier I Capital
  (to Risk Weighted Assets)   $ 55,673  16.97%    > $ 13,125  > 4.0%      > $ 19,688  >  6.0%
                                                  -           -           -           -
Tier I Capital
  (to Average Assets)         $ 55,673  11.26%    >        *  >   *       > $ 24,717  >  5.0%
                                                  -           -           -           -
</TABLE>

* 3.0%  ($14,830),  4.0%  ($19,774)  or 5.0%  ($24,717)  depending on the bank's
CAMELS Rating and other regulatory risk factors.

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

21 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:

BALANCE SHEETS

December 31,                                        2003          2002
----------------------------------------------------------------------
Cash                                            $      7      $      7
Investment in bank subsidiary                     60,389        58,626
Equity Investments                                   494           390
----------------------------------------------------------------------
Total Assets                                    $ 60,890      $ 59,023
======================================================================
Total Liabilities                               $     83      $     48
Total Stockholders' Equity                        60,807        58,975
======================================================================
Total Liabilities and Stockholders' Equity      $ 60,890      $ 59,023
======================================================================


STATEMENTS OF INCOME

Years Ended December 31,                2003        2002       2001
-------------------------------------------------------------------
Dividends from bank subsidiary      $  2,900    $  2,899    $ 2,892
Dividends on investment securities        10           9          5
-------------------------------------------------------------------
  Total Income                         2,910       2,908      2,897
Other non-interest expense                10           8          7
-------------------------------------------------------------------
Net income before undistributed
  earnings of bank subsidiary          2,900       2,900      2,890
Undistributed earnings of bank
  subsidiary                           3,071       3,853      2,732
-------------------------------------------------------------------
Net Income                          $  5,971    $  6,753    $ 5,622
===================================================================

STATEMENTS OF CASH FLOWS

Years Ended December 31,                      2003        2002        2001
--------------------------------------------------------------------------
Operating Activities:
Net Income                                $  5,971    $  6,753    $ 5,622
Adjustments to reconcile net income
  to net cash provided by
    operating activities:
      Equity in undistributed net
        income of bank subsidiary           (3,071)     (3,853)    (2,732)
--------------------------------------------------------------------------
      Net cash provided by
        operating activities                 2,900       2,900      2,890
--------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment                    -           -       (199)
--------------------------------------------------------------------------
      Net cash used by
        investing activities                     -           -       (199)
--------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                         (2,900)     (2,899)    (2,685)
--------------------------------------------------------------------------
      Net cash used by
        financing activities                (2,900)     (2,899)    (2,685)
--------------------------------------------------------------------------
      Net increase in cash and
        cash equivalents                         -           1          6
Cash and cash equivalents at January 1           7           6          -
--------------------------------------------------------------------------
Cash and cash equivalents at December 31  $      7    $      7    $     6
==========================================================================

36 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>



McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants

                                                               January 30, 2004





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

             Report of Independent Registeres Public Accounting Firm
             -------------------------------------------------------

     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,  2003 and 2002,  and the  related
consolidated statements of income,  stockholders' equity and cash flows for each
of the three  years in the period  ended  December  31,  2003.  These  financial
statements  are  the  responsibility  of  the  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  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the 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, 2003 and 2002,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  2003,  in  conformity
with accounting principles generally accepted in the United States of America.


                                         /s/ McGrail, Merkel, Quinn & Associates


                  37 Penseco Financial Services Corporation / 2002 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 2003.

ITEM 9A Controls and Procedures

Based on the Company's  principal  executive  officer,  Otto P.  Robinson,  Jr.,
President  and the  Company's  principal  financial  officer,  Patrick  Scanlon,
Controller,  evaluations of the Company's  Disclosure Controls and Procedures as
of February 19, 2004 (evaluation  date),  they have concluded that the Company's
disclosure controls are effective,  reasonably ensure that material  information
relating to the Company and its consolidated  subsidiaries is made known to them
by others within those  entities,  particularly  during the period in which this
report is being  prepared,  and identify  significant  deficiencies  or material
weaknesses  in internal  controls  which could  adversely  affect the  Company's
ability to record, process, summarize and report financial data.

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

     Based  on  information  available  to  them,  they  are  not  aware  of any
significant  changes  made in internal  controls or in other  factors that could
significantly  affect those controls subsequent to February 19, 2004 (evaluation
date) and prior to the date of their certifications.

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

                                    PART III
                                    --------

ITEM 10 Directors and Executive Officers of the Registrant

                                 CODE OF ETHICS
                                 --------------

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

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

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

                        AUDIT COMMITTEE FINANCIAL EXPERT
                        --------------------------------

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

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

     Other  information  required  by this Item as to  Directors  of the Company
contained under the headings  "Election of Directors",  and "Board and Committee
Meetings" within the definitive proxy statement relating to the Company's Annual
Meeting of  Shareholders,  to be held May 4,  2004,  is  incorporated  herein by
reference thereto.

ITEM 11 Executive Compensation

The  information   contained  under  the  headings   "Executive   Compensation",
"Directors   Compensation",   "Compensation   Committee   Report  on   Executive
Compensation" and "Compensation  Committee Interlocks and Insider Participation"
in the definitive  proxy statement  relating to the Company's  Annual Meeting of
stockholders,  to be held May 4,  2004,  is  incorporated  herein  by  reference
thereto.

38 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

ITEM 12 Security Ownership of Certain Beneficial Owners and Management

The  information  contained  under the heading  "Voting  Securities  & Principal
Holders  Thereof" in the definitive  proxy  statement  relating to the Company's
Annual Meeting of stockholders,  to be held May 4, 2004, is incorporated  herein
by reference thereto.

ITEM 13 Certain Relationships and Related Transactions

The  information  contained under the heading  "Transactions  with Directors and
Principal  Officers" in the definitive  proxy  relating to the company's  annual
meeting  of  stockholders,  to be held May 4,  2004 is  incorporated  herein  by
reference thereto.

ITEM 14 Principal Accounting Fees and Services

The information contained under the heading "Our Relationship with Our Auditors"
in  the  definitive   proxy   relating  to  the  Company's   Annual  Meeting  of
Stockholders,  to be  held  May 4,  2004 is  incorporated  herein  by  reference
thereto.

                                    PART IV
                                    -------

ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

          Balance Sheets
          Consolidated Statements of Income
          Consolidated Statements of Stockholders' Equity
          Consolidated Statements of Cash Flows
          General Notes to Financial Statements
          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.)

(b)       No current report on  Form 8-K was filed for the fourth quarter of the
          fiscal year ended December 31, 2003.

(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 / 2003 Annual Report 39

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on February 24, 2004.


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 February 24, 2004.


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


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


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


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


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


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

40 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

                                 CERTIFICATIONS

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

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

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

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

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

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

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

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

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

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

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

Date:  February 19, 2004


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



I, Patrick Scanlon, certify that:

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

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

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

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

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

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

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

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

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

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

Date:  February 19, 2004


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


                  Penseco Financial Services Corporation / 2003 Annual Report 41

<PAGE>

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


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

     (1) The  Annual  Report  on Form  10-K of the  Company  for the year  ended
     December 31, 2003 (the "Form 10-K") fully complies with the requirements of
     Section 13(a) or 15(d) of the Securities  Exchange Act of 1934 (the "Act");
     and

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

                             /s/ OTTO P. ROBINSON JR
                             -----------------------
                             Otto P. Robinson, Jr.
                             President
                             February 19, 2004

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

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

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

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

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


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

     (1) The  Annual  Report  on Form  10-K of the  Company  for the year  ended
     December 31, 2003 (the "Form 10-K") fully complies with the requirements of
     Section 13(a) or 15(d) of the Securities  Exchange Act of 1934 (the "Act");
     and

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

                             /s/ PATRICK SCANLON
                             -----------------------
                             Patrick Scanlon
                             Controller
                             February 19, 2004

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

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

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

42 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

                              INDEX TO EXHIBITS
<TABLE>
<CAPTION>

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

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

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

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

   9              Voting trust agreement                               None

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

  11              Statement re:  Computation of per share earnings     None

  12              Statements re:  Computation of ratios                None

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

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

  16              Letter re:  Change in certifying accountant          None

  18              Letter re:  Change in accounting principles          None

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

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

  23              Consents of experts and counsel                      None

  24              Power of attorney                                    None

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

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

  99              Additional Exhibits                                  None

</TABLE>

                  Penseco Financial Services Corporation / 2003 Annual Report 43

<PAGE>

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

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

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

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

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

Andrew A. Kettel, Jr.
Senior Vice-President

Christe A. Casciano
Vice-President, Director of Marketing

Audrey F. Markowski
Vice-President

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

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

Lynn Peters Thiel
Vice-President and Compliance Officer

James Tobin
Vice-President, Charge Card Manager

John H. Warnken
Vice-President, Operations

Robert P. Heim
Director of Internal Audit

Patrick Scanlon
Controller

P. Frank Kozik
Secretary


ASSISTANT VICE-PRESIDENTS

John R. Anderson III
Carl M. Baruffaldi
Mark M. Bennett
  and Assistant Secretary
Denise M. Cebular
Carol Curtis McMullen
  Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
  and Assistant Treasurer
J. Patrick Dietz
Karyn Gaus Vashlishan
Lisa A. Kearney
Eleanor Kruk
Caroline Mickelson
Louis J. Rizzo
Aleta Sebastianelli
  and Assistant Secretary
Jeffrey Solimine
Jennifer S. Wohlgemuth
Linda Wolf
  and Training Officer
Beth S. Wolff
Deborah A. Wright
Mark J. Zakoski

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

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT BRANCH OPERATIONS OFFICERS
Carolyn E. Brown
Robin L. Jenkins

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT CONTROLLER
Susan M. Bray
  and Assistant Treasurer

ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

ASSISTANT TRUST OFFICER
Dominick P. Gianuzzi

AUDIT OFFICER
Ellen M. Evans

BRANCH OPERATIONS OFFICERS
Patricia A. Bruno
Stephen A. Hoffman

BUSINESS DEVELOPMENT OFFICER
Mary Carol Cicco

COLLECTIONS OFFICER
Robert E. Diehl

COMPUTER OPERATIONS OFFICER
Charles Penn

COST ACCOUNTING OFFICER
David R. Weiland

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF SYSTEMS / NETWORKING
Robert J. Saslo

FINANCIAL ANALYST
Chad J. Hazelton

LOAN ADMINISTRATION OFFICERs
Susan D. Blascak
Carol J. Ives

LOAN OFFICER
Denise Belton

MERCHANT OFFICER
Jill Ross

OPERATIONS OFFICER
Patricia Pliske

RETAIL BANKING OFFICER
Thomas J. Malinchak

TAX OFFICER
Robert W. McDonald

TRUST ADMINISTRATOR
Kristen R. Noll

TRUST OPERATIONS OFFICER
Carol Trezzi

TRUST INVESTMENT OFFICER
Katherine M. Oven

44 Penseco Financial Services Corporation / 2003 Annual Report

<PAGE>

                              (INSIDE BACK COVER)

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

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

Edwin J. Butler
Retired Bank Officer

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

Russell C. Hazelton
Retired Captain, Trans World Airlines

D. William Hume
Retired Bank Officer

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

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

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

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

Emily S. Perry
Retired Insurance Account Executive & Community Volunteer

Sandra C. Phillips
Penn State Master Gardener & Community Volunteer

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

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

PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

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

EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Beth S. Wolff

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

GREEN RIDGE OFFICE
Joseph N. Connor
Everett Jones
George Noone
Howard J. Snowdon
Jeffrey Solimine

MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
Robert C. Hay
David Lansdowne
Karyn Gaus Vashlishan

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


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