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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

                                   ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

                        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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No|X|

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No|X|

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 (ss. 229.405 of this chapter) 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting company. See the
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  |_|                         Accelerated filer  |X|

Non-accelerated filer |_| (Do not check if a smaller reporting company)

Small reporting company |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No|X|

The aggregate market value of the Company's voting stock held by non-affiliates
of the registrant on June 30, 2008, based on the closing price of such stock on
that date, equals approximately $72,139,468.

The number of shares of common stock outstanding as of February 26, 2009 equals
2,148,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporation's definitive proxy statement relating to the 2009
Annual Meeting of Stockholders, to be held on May 5, 2009, are incorporated by
reference in Part III.

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                  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, regulation and examination by
the Federal Deposit Insurance Corporation and the Pennsylvania Department of
Banking.

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

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

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

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

An Agreement and Plan of Merger (The Agreement) by and between Penseco Financial
Services Corporation, Penn Security Bank and Trust Company and Old Forge Bank,
dated December 5, 2008, provides for, among other things, Penseco to acquire Old
Forge Bank through a two-step merger transaction. Old Forge Bank will be merged
with and into Penn Security Bank and Trust Company. Following the merger, Penn
Security Bank and Trust Company will continue to operate as a banking subsidiary
of Penseco Financial Services Corporation.

Shareholders of Old Forge Bank will be entitled to receive the merger
consideration in either cash or shares of Penseco common stock, or any
combination thereof, subject to certain limitations and allocation procedures
set forth in the Agreement. The per share amount will be calculated from the
cash consideration and the value of the stock consideration based on the Penseco
closing price, as such term is defined in the Agreement. The per share amount
will be approximately $103.76, provided that the Penseco closing price per share
is between $35.99 and $39.77.

Penseco and Old Forge Bank have agreed to use reasonable best efforts to obtain
all regulatory approvals required to complete the transactions contemplated by
the merger agreement. These approvals include approval from the Federal Deposit
Insurance Corporation, under the Federal Bank Merger Act, and the Pennsylvania
Department of Banking under the Pennsylvania Banking Code of 1965, as well as
various other regulatory authorities. The transaction is also subject to the
non-objection of the Federal Reserve Bank of Philadelphia, because the merger
involves an acquisition by a bank holding company. Old Forge Bank and Penseco
have completed the filing of applications and notifications to obtain the
required regulatory approvals. The Company hopes to consummate the acquisition
of Old Forge Bank on or before April 1, 2009.

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FORWARD LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements that are
based on assumptions and may describe future plans, strategies and expectations
of Penseco Financial Services Corporation. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. Penseco Financial
Services Corporation's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of Penseco Financial Services Corporation and
its subsidiary include, but are not limited to, changes in interest rates,
national and regional economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the U.S. government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in Penseco Financial Services
Corporation's market area, changes in real estate market values in Penseco
Financial Services Corporation's market area, changes in relevant accounting
principles and guidelines and inability of third party service providers to
perform. Additional factors that may affect our results are discussed in Item 1
A to this Annual Report on Form 10-K titled "Risk Factors" below.

These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, Penseco Financial Services Corporation
does not undertake, and specifically disclaims any obligation, to release
publicly the result of any revisions that may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.

Unless the context indicates otherwise, all references in this Annual Report to
"Company," "we," "us" and "our" refer to Penseco Financial Services Corporation
and its subsidiary.

ITEM 1A   RISK FACTORS

RISKS RELATED TO OUR BUSINESS

CREDIT RISK

CHANGES IN THE CREDIT QUALITY OF OUR LOAN PORTFOLIO MAY IMPACT THE LEVEL OF OUR
ALLOWANCE FOR LOAN LOSSES.

We make various judgments about the collectibility of our loans, including the
creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for our loans. In determining the amount of the
allowance for loan losses, we review our loans and our loan loss and delinquency
experience, and we evaluate economic conditions. If our judgments are incorrect,
our allowance for loan losses may not be sufficient to cover future losses,
which will result in additions to our allowance through increased provisions
for loan losses. In addition, bank regulators periodically review our allowance
for loan losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs. Increased provisions for loan losses would
increase our expenses and reduce our profits.

Nonetheless, to the best of management's knowledge, there are also no particular
risk elements in the local economy that put a group or category of loans at
increased risk. The Company does not engage in any sub-prime or Alt-A credit
lending. Therefore, the Company is not subject to any credit risks associated
with such loans.

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

MARKET RISK

CHANGES IN INTEREST RATES COULD AFFECT OUR INVESTMENT VALUES AND NET INTEREST
INCOME WHICH COULD HURT OUR PROFITS.

At December 31, 2008, the Company owned approximately $95.0 million of
marketable securities available for sale. These securities are carried at fair
value on the consolidated balance sheets. Unrealized gains or losses on these
securities, that is, the difference between the fair value and the amortized
cost of these securities, is reflected in stockholders' equity, net of deferred
taxes. As of December 31, 2008, the Company's available for sale marketable
securities portfolio had a net unrealized gain, net of taxes, of $225 thousand.
The fair value of the Company's available for sale marketable securities is
subject to interest rate change, which would not affect recorded earnings, but
would increase or decrease comprehensive income and stockholders' equity.

                                                                              3

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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. 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.

The Company continually monitors the relationship of its interest rate sensitive
assets and liabilities through its Asset/Liability Committee.

STRONG COMPETITION WITHIN OUR MARKET COULD HURT OUR PROFITS AND INHIBIT GROWTH.

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

The principal competitive factors among the Company's competitors can be grouped
into two categories: pricing and services. In the Company'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. Our profitability depends on our
continued ability to compete successfully in our market area.

COMPLIANCE RISK

WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY AFFECTED BY
CHANGES IN LAWS AND REGULATIONS.

The Company is registered as a financial 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 ("FRB"). The
Company is required to file annual and 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 FRB, directly or through
subsidiaries or by acquiring companies already established in such activities
subject to the FRB regulations relating to those activities.

Our banking subsidiary, Penn Security Bank and Trust Company, 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.

Any change in such regulation and oversight, whether in the form of regulatory
policy, regulations, legislation or supervisory actions, may have a material
impact on our operations.

OPERATIONAL RISK

THE COMPANY NEEDS TO CONTINUALLY ATTRACT AND RETAIN QUALIFIED PERSONNEL FOR ITS
OPERATIONS.

High quality customer service, as well as efficient and profitable operations,
are dependent on the Company's ability to attract and retain qualified
individuals for key positions within the organization. The Company has
successfully recruited several individuals for management positions in recent
years. As of December 31, 2008, the Company employed 172 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.

A CONTINUATION OF RECENT TURMOIL IN THE FINANCIAL MARKETS COULD HAVE AN ADVERSE
EFFECT ON THE FINANCIAL POSITION OR RESULTS OF OPERATIONS.

In recent periods, United States and global markets, as well as general economic
conditions, have been disrupted and volatile. Concerns regarding the financial
strength of financial institutions have led to distress in credit markets and
issues relating to liquidity among financial institutions. Some financial
institutions around the world have failed; others have been forced to seek

                                                                              4

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acquisition partners. The United States and other governments have taken steps
to try to stabilize the financial system, including investing in financial
institutions. The Company has not applied for and is not participating in any
government sponsored Capital Purchase Programs. Our businesses, financial
conditions and results of operations could be adversely affected by (1)
continued disruption and volatility in financial markets, (2) continued capital
and liquidity concerns regarding financial institutions generally and our
counterparties specifically, including the Federal Home Loan Bank, (3)
limitations resulting from governmental action in an effort to stabilize or
provide additional regulation of the financial system, or (4) recessionary
conditions that are deeper or last longer than currently anticipated. Further,
there can be no assurance that action by federal and state legislatures, and
governmental agencies and regulators, including the enacted legislation
authorizing the U.S. government to invest in financial institutions, or changes
in tax policy, will help stabilize the U.S. financial system and any such
action, including changes to existing legislation or policy, could have an
adverse effect on the financial conditions or results of operations of the
Company.

OUR OPERATIONS COULD BE AFFECTED IF WE DO NOT HAVE ACCESS TO MODERN AND RELIABLE
TECHNOLOGY.

The Company operates in a highly-automated environment, wherein almost all
transactions are processed by computer software to produce results. To remain
competitive, the Company must continually evaluate the adequacy of its data
processing capabilities and make revisions as needed.

The Company regularly tests its ability to restore data capabilities in the
event of a natural disaster, sustained power failure or other inability to
utilize its primary systems.

LIQUIDITY RISK

INCREASED NEEDS FOR DISBURSEMENT OF FUNDS ON LOANS AND DEPOSITS CAN AFFECT OUR
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.

OUR FUTURE PENSION PLAN COSTS AND CONTRIBUTIONS COULD BE UNFAVORABLY IMPACTED BY
THE FACTORS THAT ARE USED IN THE ACTUARIAL CALCULATIONS.

Our costs for the non-contributory defined benefit pension plans are dependent
upon a number of factors, such as the rates of return on plan assets, discount
rates, the level of interest rates used to measure the required minimum funding
levels of the plans, future government regulation and our required or voluntary
contributions made to the plans. Without sustained growth in the pension
investments over time to increase the value of our plan assets and depending
upon the other factors impacting our costs as listed above, we could be required
to fund our plans with higher amounts of cash than are anticipated by our
actuaries. Such increased funding obligations could have a material impact on
our liquidity by reducing our cash flows.

ITEM 1B   UNRESOLVED STAFF COMMENTS

None

ITEM 2    PROPERTIES

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

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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 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 and its subsidiary, 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.

                                     PART II
                                     -------

ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
       ISSUER PURCHASES OF EQUITY SECURITIES

This Form 10-K 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 Finance
Division Head's office at:

         Patrick Scanlon, Senior Vice President, Finance Division Head
                     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:

      Domestic Securities                    Janney Montgomery Scott, LLC
      Freedman Billings Ramsey               Knight Equity Markets, LP
      Hill Thompson Magid & Company, Inc.    Monroe Securities, Inc.
      Hudson Securities, Inc.                Stifel, Nicolaus & Company, Inc.

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

<Table>
<Caption>

                                         Dividends                                                    Dividends
                                           Paid                                                         Paid
2008                    High     Low     Per Share           2007                    High     Low     Per Share
--------------------------------------------------           --------------------------------------------------
<S>                     <C>      <C>      <C>                <C>                     <C>      <C>      <C>
First Quarter           $41      $35      $ .42              First Quarter           $43      $38      $ .37
Second Quarter           42       37        .42              Second Quarter           40       37        .37
Third Quarter            41       38        .41              Third Quarter            38       36        .37
Fourth Quarter           40       36        .41              Fourth Quarter           40       34        .47
                                          -----                                                        -----
                                          $1.66                                                        $1.58
</Table>

As of February 6, 2009 there were approximately 839 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 19 and 48 of this Form 10-K.

TRANSFER AGENT

Registrar & Transfer Co., 10 Commerce Drive, Cranford, NJ 07016 serves as the
Company's transfer agent.  Stockholders' questions should be directed to the
Registrar & Transfer Co. investor relations department at 800-368-5948.

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PENSECO FINANCIAL SERVICES CORPORATION

The following line graph sets forth comparative information regarding the
Company's cumulative shareholder return on its Common Stock over the last five
fiscal years. Total shareholder return is measured by dividing total dividends
(assuming dividend reinvestment) plus share price change for a period by the
share price at the beginning of the investment period. The Company's cumulative
shareholder return based on an investment of $100 at the beginning of the
five-year period beginning December 31, 2003 is compared to the cumulative total
return of the Russell 2000 Index ("Russell 2000") and the SNL Securities
Northeast Quadrant Pink Sheet Banks Index ("Pink Banks"), which more closely
reflects the Company's peer group. The yearly points marked on the horizontal
axis of the graph correspond to December 31st of that year.

                              [GRAPH APPEARS HERE]

<Table>
<Caption>

                                                                   Period Ending
--------------------------------------------------------------------------------------------------------------
Index                                12/31/03     12/31/04     12/31/05     12/31/06     12/31/07     12/31/08
--------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>
Penseco Financial Services
  Corporation                         $100.00      $106.10      $109.78      $115.71      $111.43      $108.24
Russell 2000                           100.00       118.33       123.72       146.44       144.15        95.44
SNL Northeast OTC-BB and
  Pink Banks                           100.00       116.50       116.15       120.03       116.89        95.21
</Table>

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ITEM 6 SELECTED FINANCIAL DATA

(in thousands, except per share amounts)

RESULTS OF OPERATIONS:

<Table>
<Caption>

                                               2008            2007            2006           2005         2004
-------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>               <C>           <C>         <C>
Interest Income                            $   33,898      $   34,329        $   31,922    $   28,170  $   25,385
Interest Expense                               10,830          12,739            11,054         8,580       7,579
-------------------------------------------------------------------------------------------------------------------
Net Interest Income                            23,068          21,590            20,868        19,590      17,806
Provision for Loan Losses                         861             657               433           263         144
-------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision
  for Loan Losses                              22,207          20,933            20,435        19,327      17,662
Non-Interest Income                            11,036           8,720             8,205         8,874       9,594
Non-Interest Expenses                          22,172          21,331            21,037        20,719      20,584
Income Taxes                                    2,458           1,624             1,595         1,613       1,071
-------------------------------------------------------------------------------------------------------------------
Net Income                                 $    8,613      $    6,698        $    6,008    $    5,869  $    5,601
-------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AMOUNTS:
Assets                                     $  628,967      $  580,793        $  569,821    $  575,688  $  563,708
Investment Securities                      $  157,480      $  145,448        $  166,080    $  229,957  $  262,678
Net Loans                                  $  435,873      $  399,939        $  365,722    $  317,562  $  276,576
Deposits                                   $  424,725      $  416,533        $  413,800    $  397,867  $  395,301
Long-Term Borrowings                       $   72,720      $   55,966        $   65,853    $   75,401  $   84,620
Stockholders' Equity                       $   73,642      $   69,715        $   66,571    $   63,799  $   62,376

PER SHARE AMOUNTS:
Earnings per Share                         $     4.01      $     3.12        $     2.80    $     2.73  $     2.61
Dividends per Share                        $     1.66      $     1.58        $     1.50    $     1.44  $     1.35
Book Value per Share                       $    34.28      $    32.45        $    30.99    $    29.70  $    29.04
Common Shares Outstanding                   2,148,000       2,148,000         2,148,000     2,148,000   2,148,000

FINANCIAL RATIOS:
Net Interest Margin                              3.93%           3.92%             3.89%         3.57%       3.18%
Return on Average Assets                         1.40%           1.15%             1.07%         1.03%        .96%
Return on Average Equity                        11.89%           9.75%             9.15%         9.23%       9.11%
Average Equity to Average Asset                 11.76%          11.81%            11.68%        11.19%      10.57%
Dividend Payout Ratio                           41.40%          50.64%            53.57%        52.75%      51.72%

</Table>

                                                                              8

<Page>9

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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

SUMMARY

Net income for 2008 increased $1,915 or 28.6%, to $8,613 or $4.01 per share
compared with the year ago period of $6,698 or $3.12 per share. The increase in
net income was primarily attributable to a one time after tax increase in income
of $1,129 ($.53 per share) related to VISA, Inc.'s Initial Public Offering,
which consisted of a gain from the mandatory partial share redemption by VISA
and the reversal of a litigation liability accrual that had been recorded by the
Company in the fourth quarter of 2007. Excluding the impact of the VISA
transaction, net income increased $458 or 6.5% from the twelve months of
2007(1). Net interest income increased $1,478 or 6.8% to $23,068 for the twelve
months ended December 31, 2008 compared to $21,590 for the same period of 2007.
The increase resulted from higher interest on investments of $504 or 7.1% due to
increased volume of securities of states & political subdivisions and U.S.
Agencies. Total interest expense declined $1,909 or 15.0% mainly due to lower
deposit costs. Net interest income after provision for loan losses increased
$1,274 or 6.1%. The provision for loan losses increased $204 to $861 during 2008
compared with $657 for the same period of 2007.

------------------------
     1 See pages 20 and 21 for a reconciliation of GAAP net income to net income
excluding the gain related to the VISA, Inc. initial public offering during the
years ended December 31, 2008.

                                                                              9

<Page>10

Earnings for 2007 were impacted by a fourth quarter charge, related to lawsuits
against VISA, Inc., which VISA member banks were required to recognize as a
contingent liability to indemnify VISA, Inc. as described further herein. The
Company recorded a total expense of $497, which is $328 net of tax, or $0.15 per
share. Net earnings for 2007 increased from 2006 mainly due to higher interest
income from strong loan demand experienced during 2007. This was offset by a
higher provision for loan losses, as well as, increased operating expenses.
Income taxes were slightly higher than year ago levels.

The Company's return on average assets was 1.40% in 2008 compared to 1.15% in
2007 and 1.07% in 2006. Return on average equity was 11.89%, 9.75% and 9.15% in
2008, 2007 and 2006, respectively.

RESULTS OF OPERATIONS

NET INTEREST INCOME

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

Net interest income increased $1.5 million or 6.9% to $23.1 million for 2008
compared to $21.6 million for 2007. Loan interest income was slightly lower for
2008. Investment income increased due to increased volume of securities of
states & political subdivisions and U.S. Agency securities. Interest expense for
2008 decreased $1.9 million or 15.0% to $10.8 million for 2008 compared to $12.7
million in 2007, mainly due to lower deposit costs.

Net interest income increased $.7 million or 3.3% to $21.6 million for 2007
compared to $20.9 million for 2006. Loan interest income was higher overall for
2007 due to increases in the volume of new loans. Investment income decreased
due in part to the return of principal on the Mortgage-Backed Securities
portfolio and maturities of U.S. Agency Securities. The proceeds were used to
fund loan demand. Interest expense for 2007 increased $1.6 million or 14.4% to
$12.7 million for 2007 compared to $11.1 million in 2006. The increase is
primarily due to competitive market pressures to pay higher rates.

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, 2008 was 3.93% compared with 3.92% for the year
ended December 31, 2007 and 3.89% for the year ended December 31, 2006.

Interest income in 2008 totaled $33.9 million, compared to $34.3 million in
2007, a decrease of $.4 million or 1.2%. The tax equivalent yield on average
interest-earning assets decreased to 6.07% in 2008, compared to 6.50% in 2007.
Average interest-earning assets increased in 2008 to $586.7 million from $551.3
million in 2007. Average loans, which are typically the Company's highest
yielding earning assets, increased $35.2 million or 9.1% in 2008. Average loans
represented 71.8% of 2008 average interest-earning assets, compared to 70.0% in
2007. Income on loans decreased $.2 million or .8% in 2008, compared to an
increase in loan income of $3.0 million or 12.8% during 2007. Investment
securities increased on average by $10.7 million or 7.2% to $160.1 million in
2008 compared to $149.4 million in 2007. Income on investments increased $.5
million or 7.0% to $7.6 million in 2008, from $7.1 million in 2007. Average
earning assets, including BOLI, increased to 96.4% of average total assets for
2008 compared to 96.0% for the year ago period.

The average rate paid on interest-bearing liabilities decreased during 2008 to
2.32%, compared to 2.94% in 2007.

Interest income in 2007 totaled $34.3 million, compared to $31.9 million in
2006, an increase of $2.4 million or 7.5%. The tax equivalent yield on average
interest-earning assets increased to 6.50% in 2007, compared to 6.20% in 2006.
Average interest-earning assets increased in 2007 to $551.3 million from $536.9
million in 2006. Average loans, which are typically the Company's highest
yielding earning assets, increased $46.0 million or 13.5% in 2007. Average loans
represented 70.0% of 2007 average interest-earning assets, compared to 63.3% in
2006. Income on loans increased $3.0 million or 12.8% in 2007, compared to an
increase in loan income of $4.8 million or 25.8% during 2006. Investment
securities decreased on average by $44.7 million or 23.0% to $149.4 million
compared to $194.1 million in 2006. Income on investments declined $1.3 million
or 15.5% to $7.1 million in 2007, from $8.4 million in 2006. Average earning
assets, including BOLI, increased to 96.0% of average total assets for 2007
compared to 95.7% for the year ago period.

The average rate paid on interest-bearing liabilities increased during 2007 to
2.94%, compared to 2.63% in 2006.

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.

                                                                             10

<Page>11

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 ended
December 31, 2008, 2007 and 2006.

<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------------
                                                 2008                            2007                            2006
ASSETS                               AVERAGE    REVENUE    YIELD/    AVERAGE    REVENUE    YIELD/    AVERAGE    REVENUE    YIELD/
                                     BALANCE    EXPENSE    RATE      BALANCE    EXPENSE    RATE      BALANCE    EXPENSE    RATE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>       <C>        <C>       <C>        <C>        <C>         <C>      <C>
Investment Securities:
 Available-for-Sale
  U.S. Agency obligations           $ 47,530    $ 2,270    4.78%     $ 38,992   $ 1,824    4.68%     $ 83,355    $ 3,186   3.82%
  States & political subdivision      40,127      1,818    6.86        31,098     1,385    6.75        24,851      1,114   6.79
  Federal Home Loan Bank stock         4,911        164    3.34         3,948       248    6.28         4,738        232   4.90
  Other                                2,497         92    3.68         4,208       156    3.71         3,119        108   3.46
 Held to Maturity:
  U.S. Agency obligations             35,775      1,677    4.69        41,866     1,907    4.56        48,801      2,174   4.45
  States & political subdivisions     29,235      1,562    8.10        29,246     1,559    8.08        29,221      1,574   8.16
Loans, net of unearned income:
  Real estate mortgages              270,368     16,376    6.06       246,504    15,825    6.42       202,709     13,578   6.70
  Commercial real estate              90,544      5,734    6.33        76,132     5,637    7.40        67,736      4,881   7.21
  Commercial                          24,286      1,612    6.64        23,036     1,928    8.37        31,690      2,131   6.72
  Consumer & other                    35,794      2,496    6.97        40,141     3,039    7.57        37,679      2,784   7.39
Federal funds sold                     1,739         29    1.67         8,795       456    5.18             -          -      -
Interest on balances with banks        3,883         68    1.75         7,288       365    5.01         3,047        160   5.25
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets/
   Total Interest Income             586,689    $33,898    6.07%      551,254   $34,329    6.50%      536,946    $31,922   6.20%
-----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                9,687                           10,575                          10,534
Bank premises and equipment            9,362                            9,609                           9,427
Accrued interest receivable            3,350                            3,338                           3,035
Cash surrender value life insurance    7,515                            7,199                           1,125
Other assets                           4,693                            4,067                           5,118
Less: Allowance for loan losses        4,986                            4,328                           3,895
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                        $616,310                         $581,714                        $562,290
-----------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
   Demand-Interest Bearing          $ 53,915    $   377     .70%     $ 55,803   $   570    1.02%     $ 49,753    $  347     .70%
   Savings                            76,326        412     .54        81,096       880    1.09        82,687       767     .93
   Money markets                     114,521      2,131    1.86        93,089     2,851    3.06        83,349     2,225    2.67
   Time-Over $100                     37,745      1,451    3.84        41,146     2,010    4.89        32,692     1,408    4.31
   Time-Other                         70,436      2,602    3.69        74,923     3,064    4.09        77,551     2,865    3.69
Repurchase agreements                 34,204        848    2.48        25,842       839    3.25        19,457       455    2.34
Short-term borrowings                  7,069        175    2.48         1,254        62    4.94         3,466       189    5.45
Long-term borrowings                  73,252      2,834    3.87        60,867     2,463    4.05        70,592     2,798    3.96
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
   Total Interest Expense            467,468    $10,830    2.32%      434,020   $12,739    2.94%      419,547   $11,054   2.63%
-----------------------------------------------------------------------------------------------------------------------------------
Demand-Non-interest bearing           72,015                           74,195                          72,950
All other liabilities                  4,366                            4,818                           4,141
Stockholders' equity                  72,461                           68,681                          65,652
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
   STOCKHOLDERS' EQUITY             $616,310                         $581,714                        $562,290
-----------------------------------------------------------------------------------------------------------------------------------
Interest Spread                                            3.75%                           3.56%                          3.57%
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                              $23,068                        $21,590                          $20,868
-----------------------------------------------------------------------------------------------------------------------------------

FINANCIAL RATIOS
Net interest margin                                        3.93%                           3.92%                          3.89%
Return on average assets                                   1.40%                           1.15%                          1.07%
Return on average equity                                  11.89%                           9.75%                          9.15%
Average equity to average assets                          11.76%                          11.81%                         11.68%
Dividend payout ratio                                     41.40%                          50.64%                         53.57%
</Table>

                                                                             11

<Page>12

<Table>
<Caption>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME

                                                                DOLLAR AMOUNT       CHANGE IN       CHANGE IN       CHANGE IN
                    2008 COMPARED TO 2007                         OF CHANGE           VOLUME           RATE        RATE-VOLUME
                    -----------------------------------------------------------------------------------------------------------
<S>                 <C>                                         <C>                  <C>             <C>            <C>
EARNING             Investment Securities:
ASSETS               Available-for-Sale
                      U.S. Agency obligations                    $   446             $   400         $     39       $     7
                      States & political subdivision                 433                 402               25             6
                      Equity securities                             (148)                 (3)            (117)          (28)
                     Held to Maturity:
                      U.S. Agency obligations                       (230)               (278)              54            (6)
                      States & political subdivisions                  3                  (1)               4             -
                     Loans, net of unearned income:
                      Real estate mortgages                          648               2,645           (2,291)          294
                      Commercial                                    (316)                105             (399)          (22)
                      Consumer and other                            (543)               (329)            (241)           27
                     Federal funds sold                             (427)               (366)            (309)          248
                     Interest bearing balances with banks           (297)               (171)            (238)          112
                    -----------------------------------------------------------------------------------------------------------
                       Total Interest Income                        (431)              2,404           (3,473)          638
                    -----------------------------------------------------------------------------------------------------------
INTEREST            Deposits:
BEARING              Demand-Interest Bearing                        (193)                (19)            (179)            5
LIABILITIES          Savings                                        (468)                (52)            (446)           30
                     Money markets                                  (720)                656           (1,117)         (259)
                     Time-Over $100                                 (559)               (166)            (432)           39
                     Time-Other                                     (462)               (184)            (300)           22
                    Repurchase agreements                              9                 272             (199)          (64)
                    Short-term borrowings                            113                 287              (31)         (143)
                    Long-term borrowings                             371                 502             (110)          (21)
                    -----------------------------------------------------------------------------------------------------------
                       Total Interest Expense                     (1,909)              1,296           (2,814)         (391)
                    -----------------------------------------------------------------------------------------------------------
                       NET INTEREST INCOME                       $ 1,478             $ 1,108         $   (659)      $ 1,029
                    ===========================================================================================================

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

                    2007 COMPARED TO 2006
                    -----------------------------------------------------------------------------------------------------------
EARNING             Investment Securities:
ASSETS               Available-for-Sale
                      U.S. Agency obligations                    $(1,362)            $(1,695)        $    717       $   384
                      States & political subdivision                 271                 280               (7)           (2)
                      Equity securities                               64                  (1)              73            (8)
                     Held to Maturity:
                      U.S. Agency obligations                       (267)               (309)              54           (12)
                      States & political subdivisions                (15)                  2              (17)            -
                     Loans, net of unearned income:
                      Real estate mortgages                        3,003               3,565             (487)          (75)
                      Commercial                                    (203)               (582)             523          (144)
                      Consumer and other                             255                 182               68             5
                      Federal funds sold                             456                   -                -           456
                      Interest bearing balances with banks           205                 223               (7)          (11)
                    -----------------------------------------------------------------------------------------------------------
                       Total Interest Income                       2,407               1,665              917          (175)
                    -----------------------------------------------------------------------------------------------------------
                     Deposits:
INTEREST              Demand-Interest Bearing                        223                  42              159             22
BEARING               Savings                                        632                  33              530             69
LIABILITIES           Money markets                                  626                 260              325             41
                      Time-Over $100                                 602                 364              190             48
                      Time-Other                                    (320)               (523)             239            (36)
                      Repurchase agreements                          384                 149              177             58
                      Short-term borrowings                         (127)               (121)              18            (24)
                      Long-term borrowings                          (335)               (385)              64            (14)
                    -----------------------------------------------------------------------------------------------------------
                       Total Interest Expense                      1,685                (181)           1,702            164
                    -----------------------------------------------------------------------------------------------------------
                       NET INTEREST INCOME                       $   722             $ 1,846         $   (785)      $   (339)
                    -----------------------------------------------------------------------------------------------------------
</Table>

                                                                             12

<Page>13

PROVISION FOR LOAN LOSSES

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

The provision for loan losses was $861 in 2008, an increase of 31.1% compared to
$657 for 2007. The increase in the provision was due to the Company's increased
loan portfolio, as well as management's viewpoint in valuing the loan portfolio
for loan losses as the economy has slowed down. The allowance for loan losses at
December 31, 2008 was $5,275 or 1.20% of total loans compared to $4,700 or 1.16%
of total loans at December 31, 2007.

The Company believes that the judgments used in establishing the allowance for
loan losses are based on reliable information. In assessing the sufficiency of
the allowance for loan losses, management considers how well prior estimates
have related to actual experience. The Company continually monitors the risk
elements, historical rates and other data used in establishing the allowance on
a periodic basis. Based on its assessment, the Company has not found it
necessary to change the allowance by material amounts.

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

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

NON-INTEREST INCOME

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

<Table>
<Caption>

Years Ended December 31,                        2008          2007          2006
----------------------------------------------------------------------------------
<S>                                           <C>           <C>           <C>
Trust department income                       $  1,474      $  1,535      $  1,483
Service charges on deposit accounts              1,477         1,014           860
Merchant transaction income                      4,502         4,256         3,947
Brokerage fee income                               596           261           271
Other fee income                                 1,279         1,211         1,152
Bank owned life insurance                          316           314            54
Other operating income                             167            80           119
VISA mandatory share redemption                  1,213             -             -
Realized gains on securities, net                   12            49           319
----------------------------------------------------------------------------------
  Total Non-Interest Income                   $ 11,036      $  8,720      $  8,205
----------------------------------------------------------------------------------
</Table>

Total non-interest income increased $2,316 or 26.6% to $11,036 during 2008, from
$8,720 for the same period of 2007. Trust department income decreased $61 due to
the decrease in market value of trust assets. Service charges on deposit
accounts increased $463 or 45.7% primarily due to the increased number of
accounts and increased service charge activity. Merchant transaction income
increased $246 or 5.8%, mainly due to higher transaction volume and new
business. Brokerage fee income increased $335 or 128.4% due to new and increased
business in the wealth management area. Other operating income increased $87 or
108.7% due to a gain on the sale of other real estate owned of $69, along with
an increase in general operating income. The Company realized a gain of $1,213
related to VISA, Inc.'s Initial Public Offering, which consisted of a mandatory
partial share redemption, during the first quarter of 2008, discussed earlier.
Realized gains on securities decreased $37 to $12 during 2008 from $49 for 2007.

Total non-interest income increased $515 or 6.3% to $8,720 during 2007, from
$8,205 for the same period of 2006. Service charges on deposit accounts
increased $154 or 17.9%, primarily due to increased service charge collections
during 2007. Merchant transaction income increased $309 or 7.8%, mainly due to
increased transaction volume and new business. Brokerage fee income decreased
$10 or 3.7%. Income from Bank owned life insurance, which was purchased in the
fourth quarter of 2006, increased $260 to $314 in 2007 from $54 in 2006.

                                                                             13

<Page>14

NON-INTEREST EXPENSES

VISA CONTINGENCY

In October 2007, Penn Security Bank & Trust Company, as a member of VISA U.S.A.
Inc. received shares of restricted stock in VISA, Inc. (VISA) as a result of a
global restructuring of VISA in preparation for an initial public offering in
2008.

In connection with this, VISA member banks were required to recognize a
contingent obligation to indemnify VISA under its revised bylaws for potential
losses arising from certain antitrust litigation, at the estimated fair value of
such obligation, in accordance with FASB Interpretation No. 45. The Company,
accordingly, recorded a $497 charge or $328, net of tax, in the fourth quarter
of 2007. Upon successful completion of the public offering in 2008, VISA
established an escrow account for the litigation, funded by a partial redemption
of member shares allowing the Company to reverse the $497 litigation accrual
during the first quarter of 2008.

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

<Table>
<Caption>

Years Ended December 31,                        2008          2007          2006
----------------------------------------------------------------------------------
<S>                                           <C>           <C>           <C>
Salaries and employee benefits                $10,157       $ 9,118       $10,315
Expense of premises and equipment, net          2,703         2,586         2,397
Merchant transaction expenses                   3,403         3,358         3,141
Other operating expenses                        5,909         6,269         5,184
----------------------------------------------------------------------------------
  Total Non-Interest Expenses                 $22,172       $21,331       $21,037
----------------------------------------------------------------------------------
</Table>

Total non-interest expenses increased $841 or 3.9% to $22,172 during 2008
compared with $21,331 for the same period of 2007. Salaries and employee
benefits expense increased $1,039 or 11.4% largely due to a $356 retirement
contribution to fifty employees negatively impacted by the Company's pension
freeze during the second quarter of 2008, and an additional $70 contribution to
the 401(k) plan benefiting all employees, and increased salaries resulting from
additional employee hires and increased commissions related to our wealth
management division. Premises and fixed assets expense increased $117 or 4.5%
due to computer system upgrades and increased occupancy expense. Merchant
transaction expenses increased $45 or 1.3% due to higher transaction volume.
Other operating expenses decreased $360 or 5.7% largely due to the $497 VISA
litigation charge accrual recorded by the Company during the fourth quarter of
2007(2). Excluding this VISA litigation accrual, other operating expense
increased year over year $634 mostly related to the Company's new brand and logo
expenses of $120, legal fees related to loan collection efforts of $128, and
professional expenses of $134 related to the pension freeze, $82 related to
outsourced audit and compliance services, and $78 related to computer system
updates.

Total non-interest expenses increased $294 or 1.4% to $21,331 during 2007
compared with $21,037 for the same period of 2006. Salaries and employee
benefits decreased $1,197 or 11.6%, primarily due to a one time charge of $1,119
recorded in the fourth quarter of 2006 in connection with the Voluntary Early
Retirement Initiative (VERI) program. Merchant transaction expenses increased
$217 or 6.9%, due to increased transaction volume. Other operating expenses
increased $1,085 or 20.9%, largely due to increases in advertising expense of
$233 and contributions of $100, in addition to the $497 liability recorded for
the VISA lawsuits discussed above, which is expected to be a one time charge.

INCOME TAXES

Federal income tax expense increased $834 or 51.4% to $2,458 in 2008 compared to
$1,624 in 2007, primarily due to the VISA initial public offering and overall
higher income.

Federal income tax expense increased $29 or 1.8% to $1,624 in 2007 compared to
$1,595 in 2006, due to increased operating income partly offset by higher
tax-free income.

The Company's effective income tax rate for 2008, 2007 and 2006 was 22.2%,
19.5% and 21.0%, respectively.

--------------------
        2  See pages 20 and 21 for a reconciliation of GAAP net income to net
income excluding the gain related to the VISA, Inc. initial public offering
during the years ended December 31, 2008.

                                                                             14

<Page>15

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

For further discussion pertaining to Federal income taxes, see Note 15 to the
Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets increased $48.2 million or 8.3% during 2008 to $629.0 million at
December 31, 2008 compared to $580.8 million at December 31, 2007. Total assets
increased $11.0 million or 1.9% during 2007 to $580.8 million at December 31,
2007 compared to $569.8 million at December 31, 2006.

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:

<Table>
<Caption>

December 31,                           2008            2007            2006
-----------------------------------------------------------------------------
<S>                                  <C>             <C>             <C>
U.S. Agency obligations              $ 80,643        $ 69,516        $ 99,247
States & political subdivisions        70,010          68,714          59,471
Equity securities                       6,827           7,218           7,362
-----------------------------------------------------------------------------
  Total Investment Securities        $157,480        $145,448        $166,080
-----------------------------------------------------------------------------
</Table>


Equity securities at December 31, 2008 and 2007 consisted primarily of other
financial institutions' stock and Federal Home Loan Bank of Pittsburgh (FHLB)
stock, which is a required investment in order to participate in an available
line of credit program. The FHLB stock is stated at par value as it is
restricted to purchases and sales with the FHLB. The FHLB suspended its stock
repurchase and dividend payments during December 2008. Based on current
financial information available, management does not believe the FHLB stock
value is impaired as of December 31, 2008.

In recent periods, United States and global markets, as well as general economic
conditions, have been disrupted and volatile. Concerns regarding the financial
strength of financial institutions have led to distress in credit markets and
issues relating to liquidity among financial institutions. The United States and
other governments have taken steps to try to stabilize the financial system,
including investing in financial institutions. The Company has not applied for
and is not participating in any government sponsored Capital Purchase Programs.
Our businesses, financial conditions and results of operations could be
adversely affected by (1) continued disruption and volatility in financial
markets, (2) continued capital and liquidity concerns regarding financial
institutions generally and our counterparties specifically, including the
Federal Home Loan Bank, (3) limitations resulting from governmental action in an
effort to stabilize or provide additional regulation of the financial system, or
(4) recessionary conditions that are deeper or last longer than currently
anticipated.

The Company does not hold any Federal National Mortgage Association (Fannie Mae)
or Federal Home Loan Mortgage Corporation (Freddie Mac) preferred or common
equity securities and does not hold any trust preferred securities.

A summary of transactions involving available-for-sale debt securities in 2008,
2007 and 2006 are as follows:

<Table>
<Caption>

December 31,                      2008          2007          2006
---------------------------------------------------------------------
<S>                             <S>           <S>            <S>
Proceeds from sales             $ 11,798      $    -         $   -
Gross realized gains                  11           -             -
Gross realized losses                  -           -             -

</Table>

                                                                             15

<Page>16

LOAN PORTFOLIO

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

<Table>
<Caption>

December 31,                                            2008         2007         2006         2005         2004
------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>          <C>          <C>          <C>
Real estate - construction and land development      $ 21,949      $ 25,858     $ 23,714     $ 13,132     $  6,805
Real estate mortgages                                 355,528       318,437      284,323      227,853      196,149
Commercial                                             27,793        24,505       26,265       42,894       41,560
Credit card and related plans                           3,272         3,324        3,282        3,152        2,872
Installment                                            28,135        26,542       25,532       26,293       25,679
Obligations of states & political subdivisions          4,471         5,973        6,806        8,038        7,111
------------------------------------------------------------------------------------------------------------------
  Loans, net of unearned income                       441,148       404,639      369,922      321,362      280,176
Less: Allowance for loan losses                         5,275         4,700        4,200        3,800        3,600
------------------------------------------------------------------------------------------------------------------
Loans, net                                           $435,873      $399,939     $365,722     $317,562     $276,576
------------------------------------------------------------------------------------------------------------------
</Table>

LOANS

Total net loans increased $36.0 million or 9.0% to $435.9 million at December
31, 2008 from $399.9 million at December 31, 2007. This increase is mainly due
to strong loan demand with a mix of fixed and variable rate loans backed by real
estate.

Total net loans increased $34.2 million or 9.4% to $399.9 million at December
31, 2007 from $365.7 million at December 31, 2006. This increase is mainly due
to strong loan demand with a mix of fixed and variable rate loans backed by real
estate.

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. Due to the
consistent application of conservative underwriting standards, the Company's
loan quality has remained strong during the current general economic downturn.
The Company has not engaged in any sub-prime credit lending and is therefore,
not subject to the credit risks associated with such loans.

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

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

                                                                             16

<Page>17

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>

As of                                                  2008         2007         2006         2005         2004
------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>          <C>          <C>          <C>
Non-accrual loans                                    $1,454        $1,610       $3,180       $1,627       $1,991
Other real estate owned                                   -             -            -           91          176
------------------------------------------------------------------------------------------------------------------
  Total non-performing assets                        $1,454        $1,610       $3,180       $1,718       $2,167
------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
  Secured by real estate                             $  810        $   57       $  177       $    -       $    -
  Guaranteed student loans                              203           408          251          152          253
  Credit card loans                                      17             2            6           21           13
  Commercial loans                                      119             -            -            -            -
  Consumer loans                                          4            12            -            -            -
------------------------------------------------------------------------------------------------------------------
  Total loans past due 90 days or
    more and accruing                                $1,153        $  479       $  434       $  173       $  266
------------------------------------------------------------------------------------------------------------------
</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 future principal and
interest is probable.

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,454, $1,610 and $3,180 at December 31, 2008, 2007 and 2006, respectively.
The decrease in 2007 was primarily due to the resoulution of a single borrower
relationship outstanding in 2006. If interest on those loans had been accrued,
such income would have been $192, $153 and $209 for 2008, 2007 and 2006,
respectively. Interest income on those loans, which is recorded only when
received, amounted to $29, $17 and $10 for 2008, 2007 and 2006, respectively.
There are no commitments to lend additional funds to individuals whose loans are
in non-accrual status.

Real estate loans of $810 that are past due 90 days or more and still accruing
are primarily 1-4 family residential loans with a favorable loan to value ratio.

Management's 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, 2008 there are no significant loans as to which management
has serious doubt about their collectibility.

During the second quarter of 2008, the Company was notified that The Education
Resources Institute, Inc. (TERI), a guarantor of a portion of our student loan
portfolio, had filed for Reorganization under Chapter 11 of the Federal
Bankruptcy Code. Currently, the Company holds $8.4 million of TERI loans. The
Company does not anticipate that TERI's bankruptcy filing will significantly
impact the Company's financial statements. These loans are placed on non-accrual
status when they become more than 90 days past due. At December 31, 2008 there
was $144 in such loans placed on non-accrual status.

At December 31, 2008, 2007 and 2006, 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.

The Company does not engage in any sub-prime or ALT-A credit lending. Therefore,
the Company is not subject to any credit risks associated with such loans.

                                                                             17

<Page>18

LOAN LOSS EXPERIENCE

The following table presents the Company's loan loss experience during the
periods indicated:

<Table>
<Caption>

Years Ended December 31,                        2008        2007        2006        2005        2004
------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>          <C>         <C>         <C>
Balance at beginning of year                   $4,700     $4,200       $3,800      $3,600      $3,500
------------------------------------------------------------------------------------------------------
Charge-offs:
 Real estate mortgages                             83         84           74          31           -
 Commercial and all others                          -         10           18           -          12
 Credit card and related plans                     55         66           49          68          34
 Installment loans                                179          5           26          14           7
------------------------------------------------------------------------------------------------------
Total charge-offs                                 317        165          167         113          53
------------------------------------------------------------------------------------------------------
Recoveries:
 Real estate mortgages                              -          5            -          46           3
 Commercial and all others                         14          1          131           -           -
 Credit card and related plans                     16          1            3           3           2
 Installment loans                                  1          1            -           1           4
------------------------------------------------------------------------------------------------------
Total recoveries                                   31          8          134          50           9
------------------------------------------------------------------------------------------------------
Net charge-offs                                   286        157           33          63          44
------------------------------------------------------------------------------------------------------
Provision charged to operations                   861        657          433         263         144
------------------------------------------------------------------------------------------------------
    Balance at End of Year                     $5,275     $4,700       $4,200      $3,800      $3,600
------------------------------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding                     0.07%      0.04%        0.01%       0.02%       0.02%
------------------------------------------------------------------------------------------------------
</Table>

The allowance for loan losses at December 31, 2008 was $5,275 or 1.20% of total
loans compared to $4,700 or 1.16% of total loans at December 31, 2007.

The allowance for loan losses is allocated as follows:

<Table>
<Caption>

December 31,                            2008            2007            2006            2005            2004
----------------------------------------------------------------------------------------------------------------------
                                  Amount   %(1)    Amount   %(1)   Amount   %(1)   Amount   %(1)   Amount   %(1)
----------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>    <C>       <C>   <C>      <C>    <C>       <C>   <C>       <C>
Real estate mortgages            $1,200     86%    $1,200    85%   $1,200   83%    $1,200    75%   $1,100    72%
Commercial and all others         3,275      6      2,900     7     2,500    9      2,190    16     2,070    18
Credit card and related plans       300      1        300     1       250    1        185     1       180     1
Personal installment loans          500      7        300     7       250    7        225     8       250     9
----------------------------------------------------------------------------------------------------------------------
  Total                          $5,275    100%    $4,700   100%   $4,200  100%    $3,800   100%   $3,600   100%
----------------------------------------------------------------------------------------------------------------------
</Table>

(1) - Percent of loans in each category to total loans

DEPOSITS

The primary source of funds to support the Company's operations is its deposit
base. Company deposits increased $8.2 million to $424.7 million at December 31,
2008 from $416.5 million at December 31, 2007. Largely, the Company experienced
growth in transaction accounts and time deposits due to increased marketing
efforts. Company deposits increased $2.7 million to $416.5 million at December
31, 2007 from $413.8 million at December 31, 2006. The Company experienced
growth in transaction accounts due to increased marketing efforts along with
higher interest rates, offset by a decline in time deposits.

The maturities of time deposits of $100,000 or more at December 31, 2008 are as
follows:

<Table>
<Caption>

        <S>                                     <C>
        Three months or less                    $ 17,998
        Over three months through six months       7,956
        Over six months through twelve months      8,271
        Over twelve months                         3,735
                                                --------
        Total                                   $ 37,960
                                                ========
</Table>
                                                                             18

<Page>19

DIVIDEND POLICY

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

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

ASSET/LIABILITY MANAGEMENT

The Company's policy is to match its level of rate-sensitive assets and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations. While no single measure can completely identify
the impact of changes in interest rates on net interest income, one gauge of
interest rate-sensitivity is to measure, over a variety of time periods, the
differences in the amounts of the Company's rate-sensitive assets and
rate-sensitive liabilities. These differences, or "gaps", provide an indication
of the extent to which net interest income may be affected by future changes in
interest rates. A positive gap exists when rate-sensitive assets exceed
rate-sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprise 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 reprise 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.

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

In connection with the Agreement and Plan of Merger dated December 5, 2008,
between the Company and Old Forge Bank, the Company expects to complete the
merger with Old Forge Bank in the first quarter of 2009 requiring the payment of
$17.4 million cash consideration and the issuance of approximately $40.6 million
of Company stock. The Company will also incur approximately $1.2 million, in
after tax merger related costs. For further discussion see Note 23 to the
Consolidated Financial Statements.

The Company offers collateralized repurchase agreements, which 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. At
December 31, 2008, the Company had $148,975 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.

                                                                             19

<Page>20

Financial instruments whose contract amounts represent credit risk at December
31, 2008 and 2007 are as follows:

<Table>
<Caption>

                                         2008              2007
-----------------------------------------------------------------
<S>                                    <C>                <C>
Commitments to extend credit:
  Fixed rate                           $26,396            $40,105
  Variable rate                        $92,935            $78,868
Standby letters of credit              $11,173            $13,104
</Table>

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.

At December 31, 2008 the Bank has entered into contracts for the renovation of
a branch, in the amount of $1,909, approximately $113 of which had been
disbursed as of December 31, 2008.

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. At December 31, 2008, the Bank has issued
standby letters of credit for the accounts of related parties in the amount of
$7,990.

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 shares of common
stock. Management has no plans to offer additional shares of common stock at
this time.

The Company's total risk-based capital ratio was 19.81% at December 31, 2008.
The Company's risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold. This is the current
criteria which the FDIC uses in determining the lowest insurance rate for
deposit insurance. The Company's risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital requirements without the necessity of increasing its
equity capital.

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

<Table>
<Caption>

Year Ended December 31,                    2008         2007
-------------------------------------------------------------
<S>                                      <C>          <C>
Balance at beginning of year             $69,715      $66,571
Net income                                 8,613        6,698
Other comprehensive income                (1,121)        (160)
Cash dividends declared                   (3,565)      (3,394)
-------------------------------------------------------------
Total Stockholders' Equity                73,642       69,715
-------------------------------------------------------------
</Table>

NON-GAAP FINANCIAL MEASURES: (VISA TRANSACTION)

Certain financial measures contained in this 10-K exclude the decrease of the
liability accrual related to VISA's covered litigation provision as well as the
gain from the mandatory redemption of a portion of the Company's class B shares
in VISA. Financial measures which exclude the above-referenced items have not
been determined in accordance with generally accepted accounting principles
(GAAP) and are therefore non-GAAP financial measures. Management of the Company
believes that investors' understanding of the Company's performance is enhanced
by disclosing these non-GAAP financial measures as a reasonable basis for

                                                                             20

<Page>21

comparison of the Company's ongoing results of operations. These non-GAAP
measures should not be considered a substitute for GAAP-basis measures and
results. Our non-GAAP measures may not be comparable to non-GAAP measures of
other companies. The attached Non-GAAP Reconciliation Schedule provides a
reconciliation of these non-GAAP financial measures to the most closely
analogous measure determined in accordance with GAAP.

In March 2008, VISA, Inc. (VISA) completed its initial public offering. Penn
Security Bank & Trust Company and certain other VISA member banks are
shareholders in VISA. Following the initial public offering, the Company
received $1.2 million in proceeds from the offering, as a mandatory partial
redemption of 28,351 shares, reducing the Company's holdings from 73,333 to
44,982 shares of Class B common stock. Using proceeds from this offering, VISA
established a $3.0 billion escrow account to cover the resolution of pending
litigation and related claims. The partial redemption proceeds of $1.2 million
are reflected in other non-interest income in 2008.

The remaining unredeemed shares of VISA Class B common stock are restricted and
may not be transferred until the later of (1) three years from the date of the
initial public offering or (2) the period of time necessary to resolve the
covered litigation. A conversion ratio of 0.71429 was established for the
conversion rate of Class B shares into Class A shares. If the funds in the
escrow account are insufficient to settle all the covered litigation, VISA may
sell additional Class A shares, use the proceeds to settle litigation, and
further reduce the conversion ratio. If funds remain in the escrow account after
all litigation is settled, the Class B conversion ratio will be increased to
reflect that surplus. As of December 31, 2008, the value of the Class A shares
was $52.45 per share. The value of unredeemed Class A equivalent shares owned by
the Company was $1.7 million as of December 31, 2008, and has not yet been
reflected in the accompanying financial statements.

In connection with VISA's establishment of the litigation escrow account, the
Company reversed a $497 thousand reserve in the first quarter of 2008, reflected
as a reduction of other non-interest expense. This reserve was created in the
fourth quarter of 2007, pending completion of the VISA, Inc. initial public
offering as a charge to other non-interest expense.

                        NON-GAAP RECONCILIATION SCHEDULE
                     PENSECO FINANCIAL SERVICES CORPORATION
                                   (UNAUDITED)
                                 (IN THOUSANDS)

The following tables present the reconciliation of non-GAAP financial measures
to reported GAAP financial measures.

<Table>
<Caption>
                                                      Years Ended December 31,
                                                      ------------------------
                                                         2008          2007         Change
                                                      ------------------------------------
<S>                                                    <C>            <C>         <C>
Net interest income after provision for loan losses    $22,207        $20,933     $ 1,274
Non-interest income                                     11,036          8,720       2,316
Non-interest expense                                   (22,172)       (21,331)       (841)
Income tax provision                                    (2,458)        (1,624)       (834)
                                                       --------       --------    --------
     Net income                                          8,613          6,698       1,915

ADJUSTMENTS
-----------
Non-interest income
  Gain on mandatory redemption of VISA, Inc.
  class B common stock                                  (1,213)             -      (1,213)
Non-interest expense
  Covered litigation provision                            (497)           497        (994)
                                                       --------       --------    --------
  Total Adjustments pre-tax                             (1,710)           497      (2,207)
Income tax provision                                       581           (169)        750
                                                       --------       --------    --------
  After tax adjustments to GAAP                         (1,129)           328     (1,457)
                                                       --------       --------    --------
  Adjusted net income                                  $ 7,484        $ 7,026     $  458
                                                       ========       ========    ========
Return on Average Assets                                  1.21%          1.21%
Return on Average Equity                                 10.33%         10.23%
</Table>

Return on average equity (ROE) and return on average assets (ROA) for the year
ended December 31, 2008 was 11.89% (10.33% excluding the VISA IPO impact) and
1.40% (1.21% excluding the VISA IPO impact), respectively. ROE was 9.75% (10.23%
excluding the VISA IPO impact) and ROA was 1.15% (1.21% excluding the VISA IPO
impact) for the same period last year.

                                                                             21

<Page>22

ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company currently does not enter into derivative financial instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial instruments with similar characteristics. However, the Company is
party to traditional financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, financial guarantees
and letters of credit. These traditional instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Balance Sheets.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party up to a
stipulated amount and with specified terms and conditions.

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

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

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

                                                                             22

<Page>23

MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2008

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

<Table>
<Caption>

                                                                                                      NON-RATE             FAIR
                                       2009      2010      2011      2012      2013     THEREAFTER   SENSITIVE   TOTAL     VALUE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>       <C>       <C>       <C>      <C>         <C>         <C>       <C>
ASSETS
Fixed interest rate securities:
 U.S. Agency obligations               $ 25,247  $ 17,503  $ 14,076  $ 3,379   $ 2,409  $  8,429    $       -   $ 71,043  $ 71,705
   YIELD                                   4.96%     4.10%     3.97%    5.15%     5.15%     5.15%           -       4.58%        -
 State & political subdivisions           6,131     8,966    14,030    7,797     6,560    26,526            -     70,010    71,545
   YIELD                                   8.51%     8.53%     7.62%    7.61%     6.65%     6.75%           -       7.54%        -
Variable interest rate securities:
 U.S. Agency obligations                  9,600         -         -        -         -         -            -      9,600     9,597
   YIELD                                   3.42%        -         -        -         -         -            -       3.42%        -
 Federal Home Loan Bank stock                 -         -         -        -         -         -        5,568      5,568     5,568
   YIELD                                      -         -         -        -         -         -            -          -         -
 Other                                        -         -         -        -         -     1,259            -      1,259     1,259
   YIELD                                      -         -         -        -         -      1.78%           -       1.78%        -
Fixed interest rate loans:
 Real estate mortgages                  115,321    40,502    22,096    7,760     2,231     6,522            -    194,432   196,185
   YIELD                                   6.25%     6.29%     6.34%    6.53%     6.81%     6.39%           -       6.29%        -
 Commercial                               2,453       612       461    1,045       224       733            -      5,528     5,405
   YIELD                                   6.10%     6.40%     6.84%    6.31%     6.94%     6.94%           -       6.38%        -
 Consumer and other                       6,791     1,601     1,038      766       654     6,867            -     17,717    16,903
   YIELD                                   5.91%     7.41%     7.24%    7.08%     6.97%     6.30%           -       6.36%        -
Variable interest rate loans:
 Real estate mortgages                  113,361    21,169    21,262    8,055    14,004     5,194            -    183,045   184,696
   YIELD                                   4.43%     6.18%     6.69%    6.74%     6.25%     6.75%           -       5.18%        -
 Commercial                              18,572     1,413       975      457       591       257            -     22,265    20,854
   YIELD                                   3.96%     6.43%     6.68%    7.10%     6.12%     6.74%           -       4.39%        -
 Consumer and other                      14,796       114       240    2,601       159       251            -     18,161    17,326
   YIELD                                   5.91%     7.86%     6.43%    8.02%     6.86%     6.29%           -       6.19%        -
Less: Allowance for loan losses               -         -         -        -         -     5,275            -      5,275         -
Interest bearing balances with banks      2,109         -         -        -         -         -            -      2,109     2,109
   YIELD                                    .50%        -         -        -         -         -            -        .50%        -
Cash surrender life insurance             7,684         -         -        -         -         -            -      7,684     7,684
   YIELD                                   4.15%        -         -        -         -         -            -       4.15%        -
Cash and due from banks                       -         -         -        -         -         -        7,246      7,246     7,246
Other assets                                  -         -         -        -         -         -       18,575     18,575         -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                           $322,065  $ 91,880  $ 74,178  $31,860   $26,832  $ 50,763    $  31,389   $628,967  $618,082
-----------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Variable interest rate deposits:
 Demand-Interest bearing               $  6,352  $     -   $     -   $    -    $     -  $ 45,623    $       -   $ 51,975  $ 51,975
   YIELD                                   1.19%       -         -        -          -       .31%           -        .42%        -
 Savings                                 10,398        -         -        -          -    64,509            -     74,907    74,907
   YIELD                                    .75%       -         -        -          -       .35%           -        .41%        -
 Money markets                          115,811        -         -        -          -         -            -    115,811   115,811
   YIELD                                   1.13%       -         -        -          -         -            -       1.13%        -
Fixed interest rate deposits:
 Time-Over $100,000                      34,225    1,555     1,220      549        411         -            -     37,960    38,336
   YIELD                                   2.99%    3.19%     4.40%    4.22%      4.64%        -            -       3.08%        -
 Time-Other                              50,860   11,141     4,989    1,868      2,514       244            -     71,616    72,325
   YIELD                                   2.88%    3.39%     4.04%    4.69%      4.13%     4.09%           -       3.14%        -
Demand-Non interest bearing                   -        -         -        -          -         -       72,456     72,456    72,456
Repurchase agreements                    29,155        -         -        -          -         -            -     29,155    29,164
   YIELD                                   1.35%       -         -        -          -         -            -       1.35%        -
Short-term borrowings                    24,204        -         -        -          -         -            -     24,204    24,197
   YIELD                                    .66%       -         -        -          -         -            -        .66%        -
Long-term borrowings                     13,340   11,108    10,368   10,368     10,867    16,669            -     72,720    75,415
   YIELD                                   3.50%    3.56%     3.64%    3.71%      3.69%     4.59%           -       3.84%        -
Other liabilities                             -        -         -        -          -         -        4,521      4,521         -
Stockholders' equity                          -        -         -        -          -         -       73,642     73,642         -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                   $284,345 $ 23,804  $ 16,577   $12,785   $13,792  $127,045    $ 150,619   $628,967  $554,586
-----------------------------------------------------------------------------------------------------------------------------------
EXCESS OF ASSETS (LIABILITIES)
SUBJECT TO INTEREST RATE CHANGE        $ 37,720 $ 68,076  $ 57,601   $19,075   $13,040  $(76,282)   $(119,230)  $      -
-----------------------------------------------------------------------------------------------------------------------------------
</Table>

                                                                             23

<Page>24

ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                           CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>

DECEMBER 31,                                                    2008                2007
--------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>
Cash and due from banks                                     $   7,246          $   10,677
Interest bearing balances with banks                            2,109                 967
--------------------------------------------------------------------------------------------
 Cash and Cash Equivalents                                      9,355              11,644

Investment securities:
 Available-for-sale, at fair value                             94,996              77,328
 Held-to-maturity (fair value of $64,678
  and $69,491, respectively)                                   62,484              68,120
--------------------------------------------------------------------------------------------
 Total Investment Securities                                  157,480             145,448

Loans, net of unearned income                                 441,148             404,639
Less: Allowance for loan losses                                 5,275               4,700
--------------------------------------------------------------------------------------------
 Loans, Net                                                   435,873             399,939

Bank premises and equipment                                    10,391               9,323
Other real estate owned                                             -                   -
Accrued interest receivable                                     3,518               3,558
Cash surrender value of life insurance                          7,684               7,368
Other assets                                                    4,666               3,513
--------------------------------------------------------------------------------------------
 TOTAL ASSETS                                               $ 628,967          $  580,793
--------------------------------------------------------------------------------------------
Deposits:
 Non-interest bearing                                       $  72,456          $   73,926
 Interest bearing                                             352,269             342,607
--------------------------------------------------------------------------------------------
 Total Deposits                                               424,725             416,533

Other borrowed funds:
 Repurchase agreements                                         29,155              20,492
 Short-term borrowings                                         24,204              13,201
 Long-term borrowings                                          72,720              55,966
Accrued interest payable                                        1,118               1,498
Other liabilities                                               3,403               3,388
--------------------------------------------------------------------------------------------
 TOTAL LIABILITIES                                            555,325             511,078
--------------------------------------------------------------------------------------------
Common stock, $.01 par value, 15,000,000 shares
  authorized, 2,148,000 shares issued and outstanding              21                  21
Surplus                                                        10,819              10,819
Retained earnings                                              64,745              59,697
Accumulated other comprehensive income                         (1,943)               (822)
--------------------------------------------------------------------------------------------
 TOTAL STOCKHOLDERS' EQUITY                                    73,642              69,715
--------------------------------------------------------------------------------------------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 628,967          $  580,793
--------------------------------------------------------------------------------------------
</Table>

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

                                                                             24

<Page>25

                        CONSOLIDATED STATEMENTS OF INCOME


<Table>
<Caption>

YEARS ENDED DECEMBER 31,                                       2008               2007               2006
------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>                <C>
Interest and fees on loans                                   $ 26,218           $ 26,429           $ 23,374
Interest and dividends on investments:
 U.S. Treasury securities and U.S. Agency obligations           3,947              3,731              5,360
 States & political subdivisions                                3,380              2,944              2,688
 Other securities                                                 256                404                340
Interest on Federal funds sold                                     29                456                  -
Interest on balances with banks                                    68                365                160
------------------------------------------------------------------------------------------------------------
 TOTAL INTEREST INCOME                                         33,898             34,329             31,922
------------------------------------------------------------------------------------------------------------
Interest on time deposits of $100,000 or more                   1,451              2,010              1,408
Interest on other deposits                                      5,522              7,365              6,204
Interest on other borrowed funds                                3,857              3,364              3,442
------------------------------------------------------------------------------------------------------------
 TOTAL INTEREST EXPENSE                                        10,830             12,739             11,054
------------------------------------------------------------------------------------------------------------
 NET INTEREST INCOME                                           23,068             21,590             20,868
Provision for loan losses                                         861                657                433
------------------------------------------------------------------------------------------------------------
  NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES          22,207             20,933             20,435
------------------------------------------------------------------------------------------------------------
Trust department income                                         1,474              1,535              1,483
Service charges on deposit accounts                             1,477              1,014                860
Merchant transaction income                                     4,502              4,256              3,947
Brokerage fee income                                              596                261                271
Other fee income                                                1,279              1,211              1,152
Bank-owned life insurance                                         316                314                 54
Other operating income                                            167                 80                119
VISA mandatory share redemption                                 1,213                  -                  -
Realized gains on securities, net                                  12                 49                319
------------------------------------------------------------------------------------------------------------
 TOTAL NON-INTEREST INCOME                                     11,036              8,720              8,205
------------------------------------------------------------------------------------------------------------
Salaries and employee benefits                                 10,157              9,118             10,315
Expense of premises and equipment, net                          2,703              2,586              2,397
Merchant transaction expenses                                   3,403              3,358              3,141
Other operating expenses                                        5,909              6,269              5,184
------------------------------------------------------------------------------------------------------------
 TOTAL NON-INTEREST EXPENSES                                   22,172             21,331             21,037
------------------------------------------------------------------------------------------------------------
Income before income taxes                                     11,071              8,322              7,603
Applicable income taxes                                         2,458              1,624              1,595
------------------------------------------------------------------------------------------------------------
 NET INCOME                                                  $  8,613           $  6,698           $  6,008
------------------------------------------------------------------------------------------------------------
 EARNINGS PER SHARE                                          $   4.01           $   3.12           $   2.80
------------------------------------------------------------------------------------------------------------
</Table>

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

                                                                             25

<Page>26

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
--------------------------------------------
                                                                                                ACCUMULATED
                                                                                                   OTHER              TOTAL
                                                         COMMON                   RETAINED      COMPREHENSIVE      STOCKHOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                  STOCK       SURPLUS     EARNINGS         INCOME             EQUITY
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>         <C>             <C>                <C>
Balance, December 31, 2005                               $  21        $ 10,819    $ 53,607        $   (648)          $ 63,799
Comprehensive income:
 Net income, 2006                                            -               -       6,008               -              6,008
 Other comprehensive income, net of tax
   Unrealized gains on securities, net of
     reclassification adjustment                             -               -           -             648                648
   Minimum pension liability adjustment                      -               -           -           1,011              1,011
                                                                                                  --------           --------
  Other comprehensive income                                                                         1,659              1,659
                                                                                                                     --------
Comprehensive income                                                                                                    7,667
Cash dividends declared ($1.50 per share)                    -               -      (3,222)              -             (3,222)
Adjustment to initially apply FASB Statement
  No. 158, net of tax                                        -               -           -          (1,673)            (1,673)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006                                  21          10,819      56,393            (662)            66,571
Comprehensive income:
 Net income, 2007                                            -               -       6,698               -              6,698
 Other comprehensive income, net of tax
   Unrealized losses on securities, net of
     reclassification adjustment                             -               -           -             (57)               (57)
   Unrealized losses on employee benefit plans, net          -               -           -            (103)              (103)
                                                                                                  --------           --------
 Other comprehensive income                                                                           (160)              (160)
                                                                                                                     ---------
Comprehensive income                                                                                                    6,538
Cash dividends declared ($1.58 per share)                    -               -      (3,394)              -             (3,394)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2007                                  21          10,819      59,697            (822)            69,715
Comprehensive income:
 Net income, 2008                                            -               -       8,613               -              8,613
 Other comprehensive income, net of tax
   Unrealized losses on securities, net of
     reclassification adjustment                             -               -           -            (728)              (728)
   Unrealized losses on employee benefit plans, net-         -               -           -            (393)              (393)
                                                                                                  --------           --------
  Other comprehensive income                                                                        (1,121)            (1,121)
                                                                                                                     --------
Comprehensive income                                                                                                    7,492
Cash dividends declared ($1.66 per share)                    -               -      (3,565)              -             (3,565)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2008                               $  21        $ 10,819    $ 64,745        $ (1,943)          $ 73,642
---------------------------------------------------------------------------------------------------------------------------------
</Table>

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

                                                                             26

<Page>27

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<Table>
<Caption>

YEARS ENDED DECEMBER 31,                                                2008           2007          2006
-----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>           <C>
Net Income                                                          $   8,613       $   6,698     $  6,008
Adjustments to reconcile net income to net cash
 provided by operating activities:
   Depreciation                                                           795             861          723
   Provision for loan losses                                              861             657          433
   Deferred income tax provision (benefit)                                244            (344)        (254)
   Amortization of securities (net of accretion)                          317             366          419
   Gain on VISA mandatory share redemption                             (1,213)              -            -
   Increase in cash surrender value of life insurance                    (316)           (314)         (54)
   Net realized (gains) losses on securities                              (12)            (49)        (319)
   (Gain) loss on other real estate                                       (69)            (19)          10
   Decrease (increase) in interest receivable                              40              74         (159)
   Increase in other assets                                              (350)            (36)        (304)
   Decrease in income taxes payable                                      (565)            (14)          (4)
   (Decrease) increase in interest payable                               (380)             26          211
   (Decrease) increase in other liabilities                              (484)             82          940
-----------------------------------------------------------------------------------------------------------
   NET CASH PROVIDED BY OPERATING ACTIVITIES                            7,481           7,988        7,650
-----------------------------------------------------------------------------------------------------------
Purchase of investment securities available-for-sale                  (51,389)        (21,412)     (25,770)
Proceeds from sales and maturities of investment
 securities available-for-sale                                         24,976          21,962       68,287
Proceeds from repayments of investment
 securities available-for-sale                                          7,603          13,779       15,028
Proceeds from repayments of investment
 securities to be held-to-maturity                                      5,369           5,899        7,213
Proceeds from VISA mandatory share redemption                           1,213               -            -
Net loans originated                                                  (36,817)        (34,950)     (48,676)
Proceeds from other real estate                                            91              95          164
Investment in premises and equipment                                   (1,863)           (713)        (741)
Purchase of life insurance policies                                         -               -       (7,000)
-----------------------------------------------------------------------------------------------------------
   NET (USED) CASH PROVIDED BY INVESTING ACTIVITIES                   (50,817)        (15,340)       8,505
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in demand and savings deposits                  2,426          17,781       (1,374)
Net proceeds (payments) on time deposits                                5,766         (15,048)      17,307
Increase (decrease) in repurchase agreements                            8,663           7,051      (16,973)
Net increase in short-term borrowings                                  11,003           7,715          860
Increase in long-term borrowings                                       27,000               -            -
Payments on long-term borrowings                                      (10,246)         (9,887)      (9,548)
Cash dividends paid                                                    (3,565)         (3,394)      (3,222)
-----------------------------------------------------------------------------------------------------------
   NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                    41,047           4,218      (12,950)
-----------------------------------------------------------------------------------------------------------
   Net (decrease) increase in cash and cash equivalents                (2,289)         (3,134)       3,205
Cash and cash equivalents at January 1                                 11,644          14,778       11,573
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31                            $   9,355       $  11,644     $ 14,778
-----------------------------------------------------------------------------------------------------------
</Table>

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

                                                                             27

<Page>28

                      GENERAL NOTES TO FINANCIAL STATEMENTS

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

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

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

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

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

BASIS OF PRESENTATION

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

The Statements are presented on the accrual basis of accounting.

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

USE OF ESTIMATES

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

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

EMERGING ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurement. The
Statement also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement and sets out a fair value hierarchy with the highest
priority being quoted prices in active markets. Under the Statement, fair value
measurements are disclosed by level within that hierarchy. In February 2008, the
FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No.
157, which permits a one-year deferral for the implementation of SFAS No. 157
with regard to nonfinancial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company adopted SFAS No. 157 for the fiscal year beginning January 1, 2008,
except for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis for which delayed application is permitted until the Company's year
beginning January 1, 2009.

The adoption of the remaining provisions of SFAS No. 157 is not expected to have
a material impact on the Company's financial position, results of operations or
cash flows.

In September 2006, the FASB ratified Emerging Issues Task Force (EITF) issue No.
06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4), and in March
2007, the FASB ratified EITF Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF 06-10). EITF 06-4
requires deferred compensation or postretirement benefit aspects of an
endorsement-type split-dollar life insurance arrangement to be recognized as a
liability by the employer and states the obligation is not effectively settled
by the purchase of a life insurance policy. The liability for future benefits
should be recognized based on the substantive agreement with the employee, which
may be either to provide a future death benefit or to pay for the future cost of
the life insurance. EITF 06-10 provides recognition guidance for postretirement
benefit liabilities related to collateral assignment split-dollar life insurance
arrangements, as well as recognition and measurement of the associated asset on
the basis of the terms of the collateral assignment split-dollar life insurance
arrangement. EITF 06-4 and EITF 06-10 are effective for fiscal years beginning
after December 15, 2007.

                                                                             28

<Page>29

The adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.

In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, Business Combinations (SFAS No. 141 (R)) and Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements, and Amendment of ARB No. 51 (SFAS No. 160). These new standards
significantly change the accounting for and reporting of business combination
transactions and noncontrolling interests (previously referred to as minority
interests) in consolidated financial statements. Both standards are effective
for fiscal years beginning on or after December 15, 2008, with early adoption
prohibited.

The effects of SFAS No. 141 (R) on the Company's financial statements will
depend on the nature and significance of any acquisitions subject to SFAS No.
141 (R). The adoption of SFAS No. 160 is not expected to have a material impact
on the Company's financial position, results of operations or cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires
additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are
accounted for under Statement No. 133 and its related interpretations, and the
effect of derivative instruments and related hedged items on financial position,
financial performance and cash flows. SFAS No. 161 also requires disclosure of
the fair values of derivative instruments and their gains and losses in a
tabular format. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008, or the Company's quarter ending March 31,
2009. As this pronouncement is only disclosure-related, the Company does not
anticipate that SFAS No. 161 will have an impact on its financial position and
results of operations.

In April 2008, the FASB issued Staff Position (FSP) No. 142-3, Determination of
the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. It is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years and should be applied prospectively to
intangible assets acquired after the effective date. Early adoption is not
permitted. FSP FAS 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives and should be applied to all
intangible assets recognized as of, and subsequent to the effective date. The
impact of FSP FAS 142-3 on the Company will depend on the size and nature of
acquisitions on or after January 1, 2009.

In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers'
Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1). FSP FAS
132(R)-1 requires more detailed disclosures about employers' plan assets in a
defined benefit pension or other postretirement plan, including employers'
investment strategies, major categories of plan assets, concentrations of risk
within plan assets, and inputs and valuation techniques used to measure the fair
value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
measurements using significant unobservable inputs (Level 3), disclosure of the
effect of the measurement on changes in plan assets for the period. The
disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for
fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, the Company does not anticipate that FAS 132 (R)-1 will have
an impact on its financial position and results of operations.

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.

Realized gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and are reported as a
separate component of other income in the Statements of Income. Unrealized gains
and losses are included as a separate item in computing comprehensive income.

                                                                             29

<Page>30

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

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

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

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

PREMISES AND EQUIPMENT

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

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, 2008, 2007 and 2006, amounted to $603, $612 and $379,
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).

STOCK APPRECIATION RIGHTS EXPENSE

The Company records its obligation under its stock appreciation rights plan in
accordance with Statement of Financial Accounting Standards No. 123R, Accounting
For Stock Based Compensation (SFAS 123R).

                                                                             30

<Page>31

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,
2008, 2007 and 2006 as follows:

<Table>
<Caption>

                                            2008           2007         2006
----------------------------------------------------------------------------
<S>                                       <C>            <C>         <C>
Income taxes paid                         $ 2,836        $ 1,730     $ 1,752
Interest paid                             $11,210        $12,713     $10,843
</Table>

Non-cash transactions during the years ended December 31, 2008, 2007 and 2006,
comprised entirely of the net acquisition of real estate in the settlement of
loans, amounted to $22, $76 and $83, respectively.

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).

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 current year
presentation.

NOTE 2 -- CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

<Table>
<Caption>

December 31,                                2008       2007
------------------------------------------------------------
<S>                                       <C>        <C>
Cash items in process of collection       $ 3,026    $ 4,781
Non-interest bearing balances                 735      1,830
Cash on hand                                3,485      4,066
------------------------------------------------------------
    Total                                 $ 7,246    $10,677
------------------------------------------------------------
</Table>

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

                                                                             31

<Page>32

NOTE 3 -- INVESTMENT SECURITIES

The amortized cost and fair value of investment securities at December 31, 2008
and 2007 are as follows:

<Table>
<Caption>

                               AVAILABLE-FOR-SALE

                                                      Gross         Gross
                                   Amortized       Unrealized     Unrealized      Fair
2008                                  Cost            Gains         Losses        Value
-----------------------------------------------------------------------------------------
<S>                                <C>              <C>            <C>          <C>
U.S. Agency securities             $ 25,221         $   919        $     -      $ 26,140
Mortgage-backed securities           20,873             392             16        21,249
States & political subdivisions      41,726             514          1,460        40,780
-----------------------------------------------------------------------------------------
  Total Debt Securities              87,820           1,825          1,476        88,169
Equity securities                     6,835             623            631         6,827
-----------------------------------------------------------------------------------------
  Total Available-for-Sale         $ 94,655         $ 2,448        $ 2,107      $ 94,996
-----------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>
                                                      Gross         Gross
                                   Amortized       Unrealized     Unrealized      Fair
2007                                  Cost            Gains         Losses        Value
-----------------------------------------------------------------------------------------
<S>                                <C>              <C>            <C>          <C>
U.S. Agency securities             $ 14,929         $   144        $     -      $ 15,073
Mortgage-backed securities           15,402             161              -        15,563
States & political subdivisions      38,740             830             96        39,474
-----------------------------------------------------------------------------------------
  Total Debt Securities              69,071           1,135             96        70,110
Equity securities                     6,812             921            515         7,218
-----------------------------------------------------------------------------------------
  Total Available-for-Sale         $ 75,883         $ 2,056        $   611      $ 77,328
-----------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

                                HELD-TO-MATURITY

                                                      Gross         Gross
                                   Amortized       Unrealized     Unrealized      Fair
2008                                  Cost            Gains         Losses        Value
-----------------------------------------------------------------------------------------
<S>                                <C>              <C>            <C>          <C>
Mortgage-backed securities         $ 33,254         $   661        $     2      $ 33,913
States & political subdivisions      29,230           1,558             23        30,765
-----------------------------------------------------------------------------------------
  Total Held-to-Maturity           $ 62,484         $ 2,219        $    25      $ 64,678
-----------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

                                                      Gross         Gross
                                   Amortized       Unrealized     Unrealized      Fair
2007                                  Cost            Gains         Losses        Value
-----------------------------------------------------------------------------------------
<S>                                <C>              <C>            <C>          <C>
Mortgage-backed securities         $ 38,880         $     3        $   341      $ 38,542
States & political subdivisions      29,240           1,709              -        30,949
-----------------------------------------------------------------------------------------
  Total Held-to-Maturity           $ 68,120         $ 1,712        $   341      $ 69,491
-----------------------------------------------------------------------------------------
</Table>

Equity securities at December 31, 2008 and 2007 consisted primarily of other
financial institutions' stock and Federal Home Loan Bank of Pittsburgh (FHLB)
stock, which is a required investment in order to participate in an available
line of credit program. The FHLB stock is stated at par value as it is
restricted to purchases and sales with the FHLB. The FHLB suspended its stock
repurchase and dividend payments during December 2008. Based on current
financial information available, management does not believe the FHLB stock
value is impaired as of December 31, 2008.

The Company does not hold any Federal National Mortgage Association (Fannie Mae)
or Federal Home Loan Mortgage Corporation (Freddie Mac) preferred or common
equity securities and does not hold any trust preferred securities.

A summary of transactions involving available-for-sale debt securities in 2008,
2007 and 2006 are as follows:

<Table>
<Caption>

December 31,                            2008        2007        2006
----------------------------------------------------------------------
<S>                                   <C>          <C>         <C>
Proceeds from sales                   $11,798      $   -       $    -
Gross realized gains                       11          -            -
Gross realized losses                       -          -            -
</Table>

                                                                             32

<Page>33

Investment securities with amortized costs and fair values of $125,804 and
$128,573, respectively, at December 31, 2008 and $128,682 and $131,134,
respectively, at December 31, 2007, 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, 2008 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.

<Table>
<Caption>

                                           Available-for-Sale               Held-to-Maturity
------------------------------------------------------------------------------------------------
                                       Amortized          Fair         Amortized        Fair
                                         Cost             Value          Cost           Value
------------------------------------------------------------------------------------------------
<S>                                    <C>               <C>           <C>            <C>
Due in one year or less:
    U.S. Agency securities             $ 7,022           $ 7,216       $      -       $      -
After one year through five years:
    U.S. Agency securities              18,199            18,924              -              -
After five years through ten years:
    States & political subdivisions      1,241             1,334          5,173          5,433
After ten years:
    States & political subdivisions     40,485            39,446         24,057         25,332
------------------------------------------------------------------------------------------------
    Subtotal                            66,947            66,920         29,230         30,765
Mortgage-backed securities              20,873            21,249         33,254         33,913
------------------------------------------------------------------------------------------------
    Total Debt Securities             $ 87,820          $ 88,169       $ 62,484       $ 64,678
------------------------------------------------------------------------------------------------
</Table>

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, 2008 and
2007 are as follows:

<Table>
<Caption>
                                          Less than twelve months         Twelve months or more           Totals
                                          ----------------------------------------------------------------------------------
                                          Fair        Unrealized          Fair        Unrealized      Fair        Unrealized
December 31, 2008                         Value         Losses            Value          Losses       Value         Losses
----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>                <C>           <C>           <C>          <C>
Mortgage-backed securities                $     -      $    -             $ 5,351       $   18        $ 5,351      $    18
States & political subdivisions            21,569       1,247               1,409          236         22,978        1,483
Equities                                       37          15                 395          616            432          631
----------------------------------------------------------------------------------------------------------------------------
  Total                                   $21,606      $1,262             $ 7,155       $  870        $28,761      $ 2,132
----------------------------------------------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

                                          Less than twelve months         Twelve months or more           Totals
                                          ----------------------------------------------------------------------------------
                                          Fair        Unrealized          Fair        Unrealized      Fair        Unrealized
December 31, 2007                         Value         Losses            Value          Losses       Value         Losses
----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>                <C>           <C>           <C>          <C>
Mortgage-backed securities                $     -      $    -             $38,285       $  341        $38,285      $   341
States & political subdivisions             8,817          96                   -            -          8,817           96
Equities                                    1,075         285                 464          230          1,539          515
----------------------------------------------------------------------------------------------------------------------------
   Total                                  $ 9,892      $  381             $38,749       $  571        $48,641      $   952
----------------------------------------------------------------------------------------------------------------------------
</Table>

The table at December 31, 2008, includes forty-two (42) securities that have
unrealized losses for less than twelve months and twenty (20) securities that
have been in an unrealized loss position for twelve or more months. The table at
December 31, 2007, includes twenty-five (25) securities that have unrealized
losses for less than twelve months and seven (7) securities that have been in an
unrealized loss position for twelve or more months. The Company has analyzed its
investment portfolio and determined that the market value fluctuation in these
securities is consistent with the broader market and not a cause for recognition
of a current loss.

MORTGAGE-BACKED SECURITIES

The unrealized losses on the Company's investments in mortgage-backed securities
were caused by interest rate fluctuations. The contractual cash flows of these
investments are guaranteed by an agency of the U.S. government. Accordingly, it
is expected that these

                                                                             33

<Page>34

securities would not be settled at a price less than the amortized cost of the
Company's investment. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company has
the ability to hold these investments until a recovery of fair value, which may
be maturity, the Company does not consider these investments to be other-than-
temporarily impaired at December 31, 2008.

STATES AND POLITICAL SUBDIVISIONS

The unrealized losses on the Company's investments in states and political
subdivisions were caused by interest rate fluctuations. The contractual terms of
these investments do not permit the issuer to settle the securities at a price
less than the par value of the investment. Because the Company has the ability
to hold these investments until a recovery of fair value, which may be maturity,
the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2008.

MARKETABLE EQUITY SECURITIES

The unrealized losses on the Company's investments in marketable equity
securities were caused primarily by interest rate fluctuations and other market
conditions. The Company's investments in marketable equity securities consist
primarily of investments in common stock of companies in the financial services
industry. The Company has analyzed its equity portfolio and determined that the
market value fluctuation in these equities is consistent with the broader market
and not a cause for recognition of a current loss. Because the Company has the
ability and intent to hold these investments for a reasonable period of time
sufficient for a forecasted recovery of fair value, the Company does not
consider these investments to be other-than-temporarily impaired at December 31,
2008.

NOTE 4 -- LOANS

Major classifications of loans are as follows:

<Table>
<Caption>

December 31,                                            2008        2007
---------------------------------------------------------------------------
<S>                                                   <C>          <C>
Loans secured by real estate:
  Construction and land development                   $ 21,949     $ 25,858
  Secured by 1-4 family residential properties:
  Revolving, open-end loans                             28,738       22,432
  Secured by first liens                               200,920      184,193
  Secured by junior liens                               23,107       27,877
  Secured by multi-family properties                     3,795        3,092
  Secured by non-farm, non-residential properties       98,968       80,843
Commercial and industrial loans to U.S. addressees      27,793       24,505
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                          3,272        3,324
  Other (installment and student loans, etc.)           25,009       25,482
Obligations of states & political subdivisions           4,471        5,973
All other loans                                          3,126        1,060
----------------------------------------------------------------------------
  Gross Loans                                          441,148      404,639
Less: Unearned income on loans                               -            -
----------------------------------------------------------------------------
  Loans, Net of Unearned Income                       $441,148     $404,639
----------------------------------------------------------------------------
</Table>

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,454, $1,610 and $3,180 at December 31, 2008, 2007 and 2006, respectively.
The decrease in 2007 was primarily due to the resolution of a single borrower
relationship outstanding in 2006. If interest on those loans had been accrued,
such income would have been $192, $153 and $209 for 2008, 2007 and 2006,
respectively. Interest income on those loans, which is recorded only when
received, amounted to $29, $17 and $10 for 2008, 2007 and 2006, respectively.
Also, at December 31, 2008 and 2007, the Bank had loans totaling $1,153 and
$479, respectively, which were past due 90 days or more and still accruing
interest.

The Company does not engage in any sub-prime or Alt-A credit lending. Therefore,
the Company is not subject to any credit risks associated with such loans. The
Company's lending is primarily residential and commercial secured mortgage
loans, in Northeastern Pennsylvania, based upon conservative underwriting
standards.

                                                                             34

<Page>35

NOTE 5 -- ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

<Table>
<Caption>

Years Ended December 31,                    2008      2007      2006
-------------------------------------------------------------------------
<S>                                       <C>        <C>       <C>
Balance at beginning of year              $ 4,700    $ 4,200   $ 3,800
Provision charged to operations               861        657       433
Recoveries credited to allowance               31          8       134
-------------------------------------------------------------------------
                                            5,592      4,865     4,367
Losses charged to allowance                  (317)      (165)     (167)
-------------------------------------------------------------------------
    Balance at End of Year                $ 5,275    $ 4,700   $ 4,200
-------------------------------------------------------------------------
</Table>

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

<Table>
<Caption>

Years Ended December 31,      Book Provision      Tax Deduction
------------------------      --------------      -------------
        <S>                      <C>                 <C>
         2008                    $ 861               $ 286
         2007                    $ 657               $ 157
         2006                    $ 433               $  33

</Table>

The balance of the Reserve for Bad Debts as reported for Federal income tax
purposes was $0 at December 31, 2008, 2007 and 2006.

NOTE 6 --LOAN SERVICING

The Company services $38,828 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 $586 and $604, at
December 31, 2008 and 2007, respectively. The balance of the servicing rights
was $41 and $91 at December 31, 2008 and 2007, respectively, net of
amortization.

The Company has recorded new mortgage servicing rights of $9 and $0 at December
31, 2008 and 2007, respectively. Amortization expense of $59 and $106 was
recorded for the years ended December 31, 2008 and 2007, respectively.

There was no allowance for impairment recorded at December 31, 2008 or 2007.

NOTE 7 -- BANK PREMISES AND EQUIPMENT

<Table>
<Caption>

December 31,                            2008       2007
---------------------------------------------------------
<S>                                  <C>         <C>
Land                                 $ 3,117     $ 3,117
Buildings and improvements            15,970      14,787
Furniture and equipment               15,350      14,670
---------------------------------------------------------
                                      34,437      32,574
Less: Accumulated depreciation        24,046      23,251
---------------------------------------------------------
  Net Bank Premises and Equipment    $10,391     $ 9,323
---------------------------------------------------------
</Table>

Buildings and improvements are being depreciated over 10 to 39.5 year periods
and equipment over 3 to 10 year periods. Depreciation expense amounted to $795
in 2008, $861 in 2007 and $723 in 2006.

Occupancy expenses were reduced by rental income received in the amount of $154,
$64 and $64 in the years ended December 31, 2008, 2007 and 2006, respectively.

NOTE 8 -- OTHER REAL ESTATE OWNED

Real estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned was $0 as of December
31, 2008 and 2007.

                                                                             35

<Page>36

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

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

<Table>
<Caption>

                                                  Equity in
                Percent                           underlying                            Bank's
              of voting          Total           net assets at        Amount         proportionate
                 stock         investment           balance             of           part of loss for
Year             owned          and loan          sheet date         dividends         the period
-----------------------------------------------------------------------------------------------------
<S>              <C>           <C>                 <C>                 <C>             <C>
2008             100%          $ 3,250             $ 3,235             None            $   -
2007             100%          $ 3,250             $ 3,235             None            $   -
2006             100%          $ 3,250             $ 3,235             None            $   -
</Table>

NOTE 10 -- CASH SURRENDER VALUE OF LIFE INSURANCE

The Company has purchased Bank Owned Life Insurance (BOLI) policies on certain
officers.

The policies are split-dollar life insurance policies which provide for the
Company to receive the cash value of the policy and to split the residual
proceeds with the officer's designated beneficiary upon the death of the
insured, while the officer is employed at the Company. The majority of the
residual proceeds are retained by the Company per the individual agreements with
the insured officers.

NOTE 11 -- DEPOSITS

<Table>
<Caption>

December 31,                            2008         2007
------------------------------------------------------------
<S>                                   <C>         <C>
Demand - Non-interest bearing         $ 72,456    $ 73,926
Demand - Interest bearing               51,975      54,819
Savings                                 74,907      80,054
Money markets                          115,811     103,924
Time - Over $100,000                    37,960      40,395
Time - Other                            71,616      63,415
------------------------------------------------------------
  Total                               $424,725   $ 416,533
------------------------------------------------------------
</Table>


<Table>
<Caption>

Scheduled maturities of time deposits are as follows:

                <S>        <C>
               2009      $ 85,085
               2010        12,696
               2011         6,209
               2012         2,417
               2013         2,925
2014 and thereafter           244
---------------------------------
              Total      $109,576
---------------------------------
</Table>

                                                                             36

<Page>37

NOTE 12 -- OTHER BORROWED FUNDS

At December 31, 2008 and 2007, other borrowed funds consisted of demand notes to
the U.S. Treasury, Federal Home Loan Bank overnight borrowings 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 $49,599 and
$50,869, respectively, at December 31, 2008 and $49,990 and $50,009,
respectively, at December 31, 2007, were pledged to secure repurchase
agreements.

<Table>
<Caption>

Year Ended December 31,                                   2008        2007
----------------------------------------------------------------------------
<S>                                                     <C>         <C>
Amount outstanding at year end                          $53,359     $33,693
Average interest rate at year end                           .68%       3.27%
Maximum amount outstanding at any month end             $53,359     $33,920
Average amount outstanding                              $43,421     $27,096
Weighted average interest rate during the year
   Federal funds purchased                                 2.47%       4.94%
   Repurchase agreements                                   2.48%       3.25%
   Demand notes to U.S. Treasury                           2.60%       5.76%
</Table>

The Company has an available credit facility with the Federal Reserve Bank of
Philadelphia in the amount of $10,000, secured by pledged securities with
amortized costs and fair values of $10,088 and $10,290, respectively, at
December 31, 2008 and $10,143 and $10,053, respectively, at December 31, 2007
and with interest rates of .50% at December 31, 2008 and 4.25% at December 31,
2007. 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, 2008 and 2007.

The Company has a $15.9 million Borrower In Custody (BIC) line of credit, with
the Federal Reserve Bank of Philadelphia, secured by pledged securities with
amortized costs and fair values of $15,869 and $15,868, respectively, at
December 31, 2008. There was no outstanding balance as of December 31, 2008.

The Company has the availability of a $5,000 overnight Federal funds line of
credit with Wells Fargo. Also, the Company has a $19,000 overnight Federal Funds
line with PNC Bank. There was no balance outstanding as of December 31, 2008 and
2007.

The Company maintains a collateralized maximum borrowing capacity of $148,975
with the Federal Home Loan Bank of Pittsburgh. There was a balance of $23,650
outstanding as of December 31, 2008.

                                                                             37

<Page>38

NOTE 13 -- LONG-TERM DEBT

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

<Table>
<Caption>

A summary of long-term debt, including amortizing principal               Aggregate maturities of long-term debt at
and interest payments, at December 31, 2008 is as follows:                December 31, 2008 are as follows:

  Monthly
Installment        Fixed Rate     Maturity Date      Balance              December 31,            Principal
--------------------------------------------------------------            ----------------------------------------
<S>                <C>            <C>              <C>                    <C>                    <C>
Amortizing Loans
$ 253                3.22%          03/15/10       $   3,714              2009                    $ 12,455
   90                3.10%          02/28/13           4,219              2010                      10,539
  430                3.74%          03/13/13          20,250              2011                      10,083
   67                3.44%          03/02/15           4,466              2012                      10,394
   13                3.48%          03/31/15             904              2013                      10,887
   10                3.83%          04/02/18             945              Thereafter                18,362
  186                4.69%          03/13/23          23,222                                      ---------
--------------------------------------------------------------                                    $ 72,720
     Total amortizing                                 57,720                                      =========
--------------------------------------------------------------
Non-amortizing loans
                     2.61%          03/02/09           1,000
                     2.62%          08/31/09           1,000
                     2.61%          03/01/10           1,000
                     2.61%          08/30/10           1,000
                     2.88%          02/28/11           2,000
                     3.27%          02/29/12           2,000
                     3.49%          02/28/13           7,000
--------------------------------------------------------------
     Total non-amortizing                             15,000
--------------------------------------------------------------
     Total long term-debt                           $ 72,720
--------------------------------------------------------------
</Table>

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

NOTE 14 --BENEFIT PLANS

The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement
Profit Sharing 401(k) Plan, an Employees' Pension Plan, unfunded supplemental
executive defined benefit and defined contribution plans, a Postretirement Life
Insurance Plan, a Stock Appreciation Rights Plan (SAR), and a Long-Term
Incentive Plan.

Under the 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, 2008 and 2007, the ESOP held 67,754 and 67,101 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, $70
and $70 to the ESOP plan during the years ended December 31, 2008, 2007 and
2006, respectively.

Under the Retirement Profit Sharing Plan, amounts approved by the Board of
Directors have been paid into a fund and each employee was 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 and $70 to the plan during the years ended December 31,
2007 and 2006, respectively. Effective July 1, 2008, the Retirement Profit
Sharing Plan became a 401(k) Deferred Compensation and Profit Sharing Plan for
eligible employees. Eligible employees may elect deferrals of up to the maximum
amounts permitted by law. The Bank's contributions to the plan in 2008 included
a Safe Harbor contribution of $202, and a discretionary match of $119 equal to
one-half of employee deferrals, up to a maximum match of 3%. The Company also
provided a benefit of $356, allocated to fifty employees who were negatively
impacted by the Employees' Pension Plan freeze in the second quarter of 2008. A
portion of this benefit was rolled into the 401(k) plan and the balance used to
fund individual Supplemental Employee Retirement Plans (SERP) for the impacted
employees.

                                                                             38

<Page>39

Under the Employees' Pension Plan (currently under curtailment), amounts
computed on an actuarial basis were being paid by the Company into a trust fund.
The plan provided 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. As of June 22, 2008 no further benefits are being accrued in this 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 (currently under curtailment)
provided certain officers with additional retirement benefits to replace
benefits lost due to limits imposed on qualified plans by Federal tax law.
Benefits under this plan were actuarially computed and recorded as a liability.
As of June 22, 2008 no further benefits are being accrued in this plan.
Effective July 1, 2008, the Company established an Unfunded Supplemental
Executive Defined Contribution Plan to replace 401(k) plan benefits lost due to
compensation limits imposed on qualified plans by Federal tax law. The annual
benefit is a maximum of 6% of the executive compensation in excess of Federal
limits.

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. Annual expense amounts are
calculated on an actuarial basis and are recorded as a liability.

The Company granted 10,000 SAR's to an executive on January 3, 2006 at a strike
price of $43.00 per share. The Company also granted 8,500 SAR's to an executive
on February 29, 2008 at a strike price of $37.50 per share. All rights vest on a
straight-line basis over a five year period and are expected to be settled in
cash when exercised. The Company calculates the value of the vested rights using
the Black-Scholes method and has recorded an expense of $14 in 2008 and $19 in
2007.

Under the 2008 Long-Term Incentive Plan (the "2008" Plan"), the Compensation
Committee of the Board of Directors has broad authority with respect to awards
granted under the 2008 plan, including, without limitation, the authority to:

   |0| Designate the individuals eligible to receive awards under the 2008
       plan.

   |0| Determine the size, type and date of grant for individual awards,
       provided that awards approved by the Committee are not effective
       unless and until ratified by the Board of Directors.

   |0| Interpret the 2008 plan and award agreements issued with respect to
       individual participants.

Persons eligible to receive awards under the 2008 Plan include directors,
officers, employees, consultants and other service providers of the Company and
its subsidiaries, except that incentive stock option may be granted only to
individuals who are employees on the date of grant.

The total number of shares of the company's common stock available for grant as
wards under the 2008 plan shall not exceed in the aggregate five percent of the
outstanding shares of the Company's common stock as of February 15, 2008, or
107,400 shares of the Company's common stock.

The 2008 plan authorizes grants of stock options, stock appreciation rights,
dividend equivalents, performance awards, restricted stock and restricted stock
units. There were no awards made under the 2008 plan.

                                                                              39

<Page>40

<Table>
<Caption>

Obligations and funded status of the plans:

                                                        Pension Benefits           Other Benefits
                                                        ----------------           --------------
December 31,                                            2008        2007          2008        2007
-----------------------------------------------------------------------------   ---------------------
<S>                                                    <C>         <C>          <C>          <C>
Change in benefit obligation:
  Benefit obligation, beginning                        $ 13,558    $ 12,600     $  292       $  299
  Service cost                                              209         438          5            5
  Interest cost                                             752         738         18           18
  Amendments                                             (1,969)          -          -            -
  Change in assumptions                                    (159)       (154)        30          (17)
  Actuarial (gain) loss                                       -         559          -            3
  Benefit paid                                             (609)       (623)       (18)         (16)
-----------------------------------------------------------------------------   ---------------------
  Benefit obligation, ending                             11,782      13,558        327          292
-----------------------------------------------------------------------------   ---------------------
Change in plan assets:
  Fair value of plan assets, beginning                   12,255      11,548          -            -
  Actual return on plan assets                           (1,775)      1,051          -            -
  Employer contribution                                     100         279          -            -
  Benefits paid                                            (609)       (623)         -            -
-----------------------------------------------------------------------------   ---------------------
  Fair value of plan assets, ending                       9,971      12,255          -            -
-----------------------------------------------------------------------------   ---------------------

Funded status at end of year                           $ (1,811)   $ (1,303)    $ (327)      $ (292)
-----------------------------------------------------------------------------   ---------------------
</Table>

<Table>
<Caption>

Amounts recognized in the balance sheet consist of:

                                                        Pension Benefits           Other Benefits
                                                        ----------------           --------------
December 31,                                            2008        2007          2008        2007
-----------------------------------------------------------------------------   ---------------------
<S>                                                    <C>         <C>          <C>          <C>

Non Current Assets                                     $    616    $    443     $    -       $    -
Non Current Liabilities                                $  1,811    $  1,303     $  327       $  292
</Table>

<Table>
<Caption>

Amounts recognized in the accumulated other comprehensive income consist of:

                                                        Pension Benefits           Other Benefits
                                                        ----------------           --------------
December 31,                                            2008        2007          2008        2007
-----------------------------------------------------------------------------   ---------------------
<S>                                                    <C>         <C>          <C>          <C>
Prior service costs                                    $      -    $     52     $   20        $  27
Net actuarial loss (gain)                                 3,280       2,656        (16)         (45)
Deferred taxes                                           (1,115)       (921)        (1)           6
-----------------------------------------------------------------------------   ---------------------
  Net amount recognized                                 $ 2,165     $ 1,787     $    3         $(12)
-----------------------------------------------------------------------------   ---------------------
</Table>

The accumulated benefit obligation for all defined benefit pension plans was
$11,783 and $11,531 at December 31, 2008 and 2007, respectively.

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

<Table>
<Caption>

                                               Pension Benefits
                                               ----------------
                                               2008        2007
-------------------------------------------------------------------
<S>                                            <C>         <C>
Projected benefit obligation                   $   4       $ 14
Accumulated benefit obligation                     4          4
Fair value of plan assets                          -          -
</Table>

                                                                             40

<Page>41

Components of net periodic pension cost and other amounts recognized in other
comprehensive income:

<Table>
<Caption>

                                                              Pension Benefits
                                                              ----------------
Years Ended December 31,                             2008          2007          2006
-----------------------------------------------------------------------------------------
<S>                                                <C>          <C>           <C>
Components of net periodic pension cost:
  Service cost                                     $   209      $   438       $   436
  Interest cost                                        752          738           673
  Expected return on plan assets                      (985)        (962)         (890)
  Amortization of prior service cost                     -            1             -
  Amortization of unrecognized net loss                 86          141           166
  Curtailment loss                                      30            -             -
-----------------------------------------------------------------------------------------
    Net periodic pension cost                      $    92      $   356       $   385
-----------------------------------------------------------------------------------------

Other changes in plan assets and benefit obligations recognized in other
comprehensive income:

Net loss                                               624         175              -
Prior service cost                                     (52)          -              -
Deferred tax                                          (194)        (60)             -
FASB 158 recognition of deferred cost, net               -           -          1,673
Reverse effect of additional minimum labiality           -           -         (1,011)
-----------------------------------------------------------------------------------------
   Total recognized in other comprehensive income      378         115            662
-----------------------------------------------------------------------------------------
Total recognized in net period pension
   Cost and other comprehensive income             $   470      $  471        $ 1,047
-----------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

                                                               Other Benefits
                                                               --------------
Years Ended December 31,                             2008          2007          2006
-----------------------------------------------------------------------------------------
<S>                                                <C>          <C>           <C>
Components of net periodic pension cost:
  Service Cost                                     $    5       $    5        $     6
  Interest Cost                                        18           18             17
  Amortization of prior service cost                    7            7              7
  Amortization of unrecognized net gain                 -            -              -
-----------------------------------------------------------------------------------------
   Net periodic other benefit cost                     30           30             30
-----------------------------------------------------------------------------------------

Other changes in plan assets and benefit obligations recognized in other
comprehensive income:

Net loss                                               29          (11)             -
Prior service cost                                     (7)          (7)             -
Deferred tax                                           (7)           6              -
-----------------------------------------------------------------------------------------
   Total recognized in other comprehensive income      15          (12)             -
-----------------------------------------------------------------------------------------
Total recognized in net period pension
   Cost and other comprehensive income             $   45       $   18        $    30
-----------------------------------------------------------------------------------------
</Table>

The estimated net loss for the defined benefit pension plans that will be
amortized from accumulated other comprehensive income into net periodic benefit
cost over the next fiscal year is $175. There is no estimated amortization of
net loss for the defined benefit postretirement plan that will be amortized from
accumulated other comprehensive income over the next fiscal year.

                                                                             41

<Page>42

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

<Table>
<Caption>

                                             Pension Benefits           Other Benefits
                                             ----------------          ----------------
December 31,                                 2008        2007          2008       2007
---------------------------------------------------------------------------------------
<S>                                          <C>         <C>           <C>       <C>
Discount rate                                6.00%       6.00%         6.00%     6.00%
Expected long-term return on plan assets     8.50%       8.50%            -         -
Rate of compensation increase                3.50%       3.50%         3.50%     3.50%
</Table>

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

The Company's pension plan weighted-average asset allocations at December 31,
2008 and 2007, by asset category are as follows:

<Table>
<Caption>

Plan Assets at December 31,
---------------------------
                                        2008       2007
---------------------------------------------------------
<S>                                   <C>        <C>
Asset Category
--------------
Equity securities                      45.3%       56.7%
Corporate bonds                        30.8        21.3
U.S. Government securities             21.6        21.1
Cash and cash equivalents               2.3          .9
---------------------------------------------------------
                                      100.0%      100.0%
---------------------------------------------------------
</Table>

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, 2008 or
2007.

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

The Company does not expect to contribute to the Employees' Pension Plan in 2009
due to the curtailment of the Plan in June 2008. The Company expects to
contribute $18 to its Postretirement Life Insurance Plan in 2009.

                                                                             42

<Page>43

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

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

<Table>
<Caption>

                      Pension Benefits      Other Benefits
                      ----------------      --------------
        <S>              <C>                    <C>
        2009             $   600                $  18
        2010                 595                   18
        2011                 602                   18
        2012                 645                   18
        2013                 739                   19
        2014-2018          4,666                  106
</Table>

NOTE 15 -- INCOME TAXES

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

<Table>
<Caption>

Years Ended December 31,                        2008          2007          2006
----------------------------------------------------------------------------------
<S>                                         <C>            <C>           <C>
Currently payable                           $  2,214       $ 1,968       $ 1,849
Deferred provision (benefit)                     244          (344)         (254)
----------------------------------------------------------------------------------
  Total                                     $  2,458       $ 1,624       $ 1,595
----------------------------------------------------------------------------------
</Table>

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

<Table>
<Caption>

Years Ended December 31,                        2008          2007          2006
----------------------------------------------------------------------------------
<S>                                         <C>            <C>           <C>
Tax at statutory rate                       $  3,764       $ 2,829       $ 2,585
Reduction for non-taxable interest            (1,409)       (1,301)       (1,052)
Other additions                                  103            96            62
----------------------------------------------------------------------------------
  Applicable Income Taxes                   $  2,458       $ 1,624       $ 1,595
----------------------------------------------------------------------------------
</Table>

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

<Table>
<Caption>

Years Ended December 31,                     2008        2007        2006
--------------------------------------------------------------------------------
<S>                                         <C>        <C>         <C>
Accretion of discount on bonds              $  (6)     $   18      $  (29)
Accelerated depreciation                      316          21          13
Supplemental benefit plans                    (46)          -          51
Allowance for loan losses                    (196)       (192)       (243)
Prepaid pension cost                            7         (22)        (46)
Accrued liabilities                           169        (169)          -
--------------------------------------------------------------------------------
  Total                                     $ 244      $ (344)     $ (254)
--------------------------------------------------------------------------------
</Table>

                                                                             43

<Page>44

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

<Table>
<Caption>

December 31,                                 2008        2007
--------------------------------------------------------------
<S>                                       <C>         <C>
Deferred tax assets:
  Allowance for loan losses               $ 1,794     $ 1,598
  Accrued pension costs                       616         443
  Accrued supplemental benefit plans           46           -
  Accumulated depreciation                      -         288
  Accrued liabilities                           -         169
  Post retirement losses                        1           -
--------------------------------------------------------------
   Total Deferred Tax Assets                2,457       2,498
--------------------------------------------------------------
Deferred tax liabilities:
  Unrealized securities gains                 116         492
  Accumulated accretion                        52          58
  Accumulated depreciation                     28           -
   Post retirement gains                        -           6
--------------------------------------------------------------
    Total Deferred Tax Liabilities            196         556
--------------------------------------------------------------
    Net Deferred Tax Assets               $ 2,261     $ 1,942
--------------------------------------------------------------
</Table>

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.

NOTE 16 -- ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income was ($1,943), ($822) and ($662) at
December 31, 2008, 2007 and 2006, respectively.

OTHER COMPREHENSIVE INCOME

Other comprehensive income (comprehensive income, excluding net income),
beginning with the 2006 period, includes two components, the change in
unrealized holding gains and losses on available for sale securities and the
change in the unfunded pension liability. The components of other comprehensive
income are reported net of related tax effects in the Consolidated Statements of
Changes in Stockholders' Equity.

In 2006, accumulated other comprehensive income includes the initial application
of FASB No. 158 to record the unrecognized components of net periodic pension
cost. As of 2007, changes in these components are shown in other comprehensive
income.

A reconciliation of other comprehensive income for the years ended December 31,
2008, 2007 and 2006 is as follows:

<Table>
<Caption>

                                                                                         Tax
                                                                        Before-Tax     Benefit     Net-of-Tax
2008                                                                      Amount      (Expense)      Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>          <C>
Unrealized losses on available-for-sale securities:
   Unrealized losses arising during the year                            $ (1,092)      $   371      $  (721)
   Less:  Reclassification adjustment for gains realized in income            12            (5)           7
                                                                        -------------------------------------
   Net unrealized losses                                                  (1,104)          376         (728)
Change in funded status of employee benefit plans                           (595)          202         (393)
-------------------------------------------------------------------------------------------------------------
  Other Comprehensive Income                                            $ (1,699)      $   578      $(1,121)
-------------------------------------------------------------------------------------------------------------
</Table>

                                                                             44

<Page>45

<Table>
<Caption>

                                                                                         Tax
                                                                        Before-Tax     Benefit     Net-of-Tax
2007                                                                      Amount      (Expense)      Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>          <C>
Unrealized losses on available-for-sale securities:
   Unrealized losses arising during the year                            $    (38)      $    13      $   (25)
   Less:  Reclassification adjustment for gains realized in income            49           (17)          32
                                                                        -------------------------------------
   Net unrealized losses                                                     (87)           30          (57)
Change in funded status of employee benefit plans                           (157)           54         (103)
-------------------------------------------------------------------------------------------------------------
  Other Comprehensive Income                                                (244)           84         (160)
-------------------------------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

                                                                                         Tax
                                                                        Before-Tax     Benefit     Net-of-Tax
2006                                                                      Amount      (Expense)      Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>          <C>
Unrealized gains on available-for-sale securities:
   Unrealized gains arising during the year                             $  1,302       $  (443)     $   859
   Less:  Reclassification adjustment for gains realized in income           319          (108)         211
                                                                        -------------------------------------
   Net unrealized gains                                                      983          (335)         648
Change in minimum pension liability                                        1,531          (520)       1,011
-------------------------------------------------------------------------------------------------------------
   Other Comprehensive Income                                           $  2,514       $  (855)     $ 1,659
-------------------------------------------------------------------------------------------------------------
</Table>

NOTE 17 --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, 2008 and 2007 are as follows:

<Table>
<Caption>

                                              2008                2007
------------------------------------------------------------------------
<S>                                        <C>                 <C>
Commitments to extend credit:
  Fixed rate                               $ 26,396            $ 40,105
  Variable rate                            $ 92,935            $ 78,868
Standby letters of credit                  $ 11,173            $ 13,104
</Table>

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.

                                                                             45

<Page>46

NOTE 18 -- 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.

                                                                             46

<Page>47

<Table>
<Caption>

                                                        December 31, 2008        December 31, 2007
------------------------------------------------------------------------------------------------------
                                                       Carrying      Fair       Carrying     Fair
                                                        Amount       Value       Amount      Value
------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>         <C>          <C>
Financial Assets:
  Cash and due from banks                              $  7,246     $  7,246    $ 10,677     $ 10,677
  Interest bearing balances with banks                    2,109        2,109         967          967
------------------------------------------------------------------------------------------------------
   Cash and cash equivalents                              9,355        9,355      11,644       11,644
  Investment Securities:
   Available-for-sale:
     U.S. Agency obligations                             47,389       47,389      30,636       30,636
     States & political subdivisions                     40,780       40,780      39,474       39,474
     Federal Home Loan Bank stock                         5,568        5,568       4,389        4,389
     Other securities                                     1,259        1,259       2,829        2,829
   Held-to-maturity:
     U.S. Agency obligations                             33,254       33,913      38,880       38,542
  States & political subdivisions                        29,230       30,765      29,240       30,949
------------------------------------------------------------------------------------------------------
    Total investment securities                         157,480      159,674     145,448      146,819
  Loans, net of unearned income:
   Real estate mortgages                                377,477      380,881     344,295      346,052
   Commercial                                            27,793       26,259      24,505       24,409
   Consumer and other                                    35,878       34,229      35,839       35,758
   Less:  Allowance for loan losses                       5,275                    4,700
------------------------------------------------------------------------------------------------------
    Loans, net                                          435,873      441,369     399,939      406,219
  Cash surrender value of life insurance                  7,684        7,684       7,368        7,368
------------------------------------------------------------------------------------------------------
    Total Financial Assets                              610,392     $618,082     564,399     $572,050
                                                                    ========                 ========
Other assets                                             18,575                   16,394
------------------------------------------------------------------------------------------------------
    Total Assets                                       $628,967                 $580,793
------------------------------------------------------------------------------------------------------
Financial Liabilities:
  Demand - Non-interest bearing                        $ 72,456     $ 72,456    $ 73,926     $ 73,926
Demand - Interest bearing                                51,975       51,975      54,819       54,819
  Savings                                                74,907       74,907      80,054       80,054
Money markets                                           115,811      115,811     103,924      103,924
  Time                                                  109,576      110,661     103,810      104,153
------------------------------------------------------------------------------------------------------
    Total Deposits                                      424,725      425,810     416,533      416,876
  Repurchase agreements                                  29,155       29,164      20,492       20,453
  Short-term borrowings                                  24,204       24,197      13,201       13,201
  Long-term borrowings                                   72,720       75,415      55,966       56,028
------------------------------------------------------------------------------------------------------
    Total Financial Liabilities                         550,804     $554,586     506,192     $506,558
                                                                    ========                 =========
Other Liabilities                                         4,521                    4,886
Stockholders' Equity                                     73,642                   69,715
------------------------------------------------------------------------------------------------------
    Total Liabilities and Stockholders' Equity         $628,967                 $580,793
------------------------------------------------------------------------------------------------------
Standby Letters of Credit                              $   (112)    $   (112)   $   (131)    $   (131)
</Table>
                                                                             47

<Page>48

NOTE 19 -- 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 $85 in 2008, $83 in 2007 and $90 in 2006. 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, 2008 are as
follows:

<Table>
<Caption>


                                      Mount      Meadow     ATM
                                      Pocono     Avenue     Sites     Total
---------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>       <C>
2009                                  $ 58       $ 23       $  8      $ 89
2010                                    58         23          6        87
2011                                    25          8          6        39
2012                                     -          -          -         -
2013 and beyond                          -          -          -         -
---------------------------------------------------------------------------
  Total minimum payments required     $141       $ 54       $ 20      $215
---------------------------------------------------------------------------
</Table>

NOTE 20 -- 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:

<Table>
<Caption>

Years Ended December 31,                2008        2007
-----------------------------------------------------------
<S>                                    <C>         <C>
Beginning Balance                      $ 9,703     $ 9,058
Additions                                3,584       3,694
Reclassifications                            -        (251)
Collections                             (3,271)     (2,798)
-----------------------------------------------------------
     Ending Balance                    $10,016     $ 9,703
-----------------------------------------------------------
</Table>

In addition to the loan amounts shown above, the Bank has issued standby letters
of credit for the accounts of related parties in the amount of $7,990.

NOTE 21 -- 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 judgments 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. Management believes, as of December 31, 2008, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2008, 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.

                                                                             48

<Page>49

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,
2008, the balances in the capital stock and surplus accounts totaling $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.

<Table>
<Caption>

                         Actual                                                Regulatory Requirements
-------------------------------------------------------------------    -------------------------------------------
                                                                          For Capital              To Be
                                                                       Adequacy Purposes      "Well Capitalized"
                                                                       -----------------      ------------------
As of December 31, 2008                         Amount     Ratio       Amount     Ratio        Amount     Ratio
------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>       <C>          <C>         <C>
Total Capital (to Risk Weighted Assets)
  PFSC (Company)                                $80,630    19.81%  >   $32,570 >  8.0%  >     $40,712  >  10.0%
                                                                   -           -        -              -
  PSB (Bank)                                    $77,275    19.03%  >   $32,486 >  8.0%  >     $40,607  >  10.0%
                                                                   -           -        -              -
Tier 1 Capital (to Risk Weighted Assets)
  PFSC (Company)                                $75,544    18.56%  >   $16,285 >  4.0%  >     $24,427  >   6.0%
                                                                   -           -        -              -
  PSB (Bank)                                    $72,197    17.78%  >   $16,243 >  4.0%  >     $24,364  >   6.0%
                                                                   -           -        -              -
Tier 1 Capital (to Average Assets)
  PFSC (Company)                                $75,544    12.26%  >         * >    *   >     $30,813  >   5.0%
                                                                   -           -        -              -
  PSB (Bank)                                    $72,197    11.73%  >         * >    *   >     $30,765  >   5.0%
                                                                   -           -        -              -
</Table>

PFSC - *3.0% ($18,488), 4.0% ($24,651) or 5.0% ($30,813) depending on the bank's
CAMELS Rating and other regulatory risk factors.

PSB - *3.0% ($18,459), 4.0% ($24,612) or 5.0% ($30,765) depending on the bank's
CAMELS Rating and other regulatory risk factors.

<Table>
<Caption>

                                                                          For Capital              To Be
                                                                       Adequacy Purposes      "Well Capitalized"
                                                                       -----------------      ------------------
As of December 31, 2007                         Amount     Ratio       Amount     Ratio        Amount     Ratio
------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>       <C>          <C>         <C>
Total Capital (to Risk Weighted Assets)
  PFSC (Company)                               $75,145     19.89%  >   $30,222 > 8.0%   >     $37,777  >  10.0%
                                                                   -           -        -              -
  PSB (Bank)                                   $71,840     19.11%  >   $30,080 > 8.0%   >     $37,601  >  10.0%
                                                                   -           -        -              -
Tier 1 Capital (to Risk Weighted Assets)
  PFSC (Company)                               $70,445     18.65%  >   $15,111 > 4.0%   >     $22,666  >   6.0%
                                                                   -           -        -              -
  PSB (Bank)                                   $67,140     17.86%  >   $15,040 > 4.0%   >     $22,561  >   6.0%
                                                                   -           -        -              -
Tier 1 Capital (to Average Assets)
  PFSC (Company)                               $70,445     12.11%  >         * >   *    >     $29,081  >   5.0%
                                                                   -           -        -              -
  PSB (Bank)                                   $67,140     11.62%  >         * >   *    >     $28,900  >   5.0%
                                                                   -           -        -             -
</Table>

PFSC - *3.0% ($17,449), 4.0% ($23,265) or 5.0% ($29,081) depending on the bank's
CAMELS Rating and other regulatory risk factors.

PSB - *3.0% ($17,340), 4.0% ($23,120) or 5.0% ($28,900) depending on the bank's
CAMELS Rating and other regulatory risk factors.

                                                                             49

<Page>50

NOTE 22 -- PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION) The
condensed Company-only information follows:

BALANCE SHEETS

<Table>
<Caption>

DECEMBER 31,                                             2008            2007
----------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Cash                                                   $    16         $     5
Interest bearing balances with banks                     2,085             920
----------------------------------------------------------------------------------
   Cash and Cash Equivalents                             2,101             925
Investment in bank subsidiary                           70,300          66,141
Equity investments                                       1,239           2,809
Other Assets                                                 2               -
----------------------------------------------------------------------------------
TOTAL ASSETS                                           $73,642         $69,875
----------------------------------------------------------------------------------
TOTAL LIABILITIES                                      $     -         $   160
TOTAL STOCKHOLDERS' EQUITY                              73,642          69,715
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $73,642         $69,875
----------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,                                                2008        2007        2006
---------------------------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>         <C>
Dividends from bank subsidiary                                       $ 3,565     $ 3,394     $ 3,222
Dividends on investment securities                                        91          99         106
Interest on balances with banks                                           19          40           5
Gain on sale of equities                                                   1          49         319
---------------------------------------------------------------------------------------------------------
  Total income                                                         3,676       3,582       3,652
Other non-interest expense                                                69          88          21
---------------------------------------------------------------------------------------------------------
Net income before undistributed earnings of bank subsidiary          $ 3,607       3,494       3,631
Undistributed earnings of bank subsidiary                              5,006       3,204       2,377
---------------------------------------------------------------------------------------------------------
Net Income                                                           $ 8,613     $ 6,698     $ 6,008
---------------------------------------------------------------------------------------------------------
</Table>

<Table>
<Caption>

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,                                                2008        2007        2006
---------------------------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>         <C>
Operating Activities:
Net income                                                           $ 8,613     $ 6,698     $ 6,008
Adjustments to reconcile net income to net cash
  provided by operating activities:
   Gain on sale of equities                                               (1)        (49)       (319)
   Equity in undistributed net income of bank subsidiary              (5,006)     (3,204)     (2,377)
   (Decrease) increase in other liabilities                              (23)         23           -
---------------------------------------------------------------------------------------------------------
   NET CASH PROVIDED BY OPERATING ACTIVITIES                           3,583       3,468       3,312
---------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of equity investments                                             -      (1,055)       (160)
Proceeds from sales of equity securities                               1,158         351       1,544
---------------------------------------------------------------------------------------------------------
   NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES                    1,158        (704)      1,384
---------------------------------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                                                   (3,565)     (3,394)     (3,222)
---------------------------------------------------------------------------------------------------------
   NET CASH USED BY FINANCING ACTIVITIES                              (3,565)     (3,394)     (3,222)
---------------------------------------------------------------------------------------------------------
   Net increase (decrease) in cash and cash equivalents                1,176        (630)      1,474
Cash and cash equivalents at January 1                                   925       1,555          81
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31                             $ 2,101      $  925     $ 1,555
---------------------------------------------------------------------------------------------------------
</Table>

                                                                             50

<Page>51

NOTE 23 -- AGREEMENT AND PLAN OF MERGER

An Agreement and Plan of Merger (The Agreement) by and between Penseco Financial
Services Corporation, Penn Security Bank and Trust Company and Old Forge Bank,
dated December 5, 2008, provides for, among other things, Penseco to acquire Old
Forge Bank through a two-step merger transaction. Old Forge Bank will be merged
with and into Penn Security Bank and Trust Company. Following the merger, Penn
Security Bank and Trust Company will continue to operate as a banking subsidiary
of Penseco Financial Services Corporation.

Shareholders of Old Forge Bank will be entitled to receive the merger
consideration in either cash or shares of Penseco common stock, or any
combination thereof, subject to certain limitations and allocation procedures
set forth in the Agreement. The per share amount will be calculated from the
cash consideration and the value of the stock consideration based on the Penseco
closing price, as such term is defined in the Agreement. The per share amount
will be approximately $103.76, provided that the Penseco closing price is
between $35.99 and $39.77 per share.

Penseco and Old Forge Bank have agreed to use reasonable best efforts to obtain
all regulatory approvals required to complete the transactions contemplated by
the merger agreement. These approvals include approval from the Federal Deposit
Insurance Corporation, under the Federal Bank Merger Act, and the Pennsylvania
Department of Banking under the Pennsylvania Banking Code of 1965, as well as
various other regulatory authorities. The transaction is also subject to the
non-objection of the Federal Reserve Bank of Philadelphia, because the merger
involves an acquisition by a bank holding company. Old Forge Bank and Penseco
have completed the filing of applications and notifications to obtain the
required regulatory approvals. The Company hopes to consummate the acquisition
of Old Forge Bank on or before April 1, 2009.

NOTE 24 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<Table>
<Caption>

                                        First        Second        Third       Fourth
2008                                    Quarter      Quarter      Quarter      Quarter
----------------------------------------------------------------------------------------
<S>                                     <C>          <C>          <C>          <C>
Net Interest Income                     $ 5,577      $ 5,667      $ 5,828      $ 5,996
Provision for Loan Losses                   235          216          167          243
Other Income                              3,618        2,364        2,986        2,068
Other Expenses and Taxes                  6,003        5,887        6,405        6,335
Net Income                                2,957        1,928        2,242        1,486
Earnings Per Share                      $  1.38      $   .90      $  1.04      $   .69
</Table>

<Table>
<Caption>

                                        First        Second        Third       Fourth
2007                                    Quarter      Quarter      Quarter      Quarter
----------------------------------------------------------------------------------------
<S>                                     <C>          <C>          <C>          <C>
Net Interest Income                     $ 5,245      $ 5,342      $ 5,530      $ 5,473
Provision for Loan Losses                    96          124          308          129
Other Income                              2,096        1,980        2,663        1,981
Other Expenses and Taxes                  5,575        5,498        5,704        6,178
Net Income                                1,670        1,700        2,181        1,147
Earnings Per Share                      $   .78      $   .79      $  1.01      $   .54
</Table>

NOTE 25 -- FAIR VALUE MEASUREMENTS (SFAS NO. 157)

Effective January 1, 2008, the Company adopted SFAS No. 157, which, among other
things, requires enhanced disclosures about assets and liabilities carried at
fair value. SFAS No. 157 establishes a hierarchal disclosure framework
associated with the level of pricing observability utilized in measuring assets
and liabilities at fair value. The three broad levels defined by SFAS No. 157
hierarchy are as follows:

Level I:  Quoted prices are available in active markets for identical assets or
          liabilities as of the record date.

Level II: Pricing inputs are other than quoted prices in active markets, which
          are either directly or indirectly observable as of the reported date.
          The nature of these assets and liabilities include items for which
          quoted prices are available but traded less frequently, and items that
          are fair valued using other financial instruments, the parameters of
          which can be directly observed.

                                                                             51

<Page>52

Level III: Assets and liabilities that have little to no pricing observability
           as of the reported date. These items do not have two-way markets and
           are measured using management's best estimate of fair value, where
           the inputs into the determination of fair value require significant
           management judgment or estimation.

The following table presents the assets reported on the consolidated statements
of financial condition at their fair value as of December 31, 2008 by level
within the fair value hierarchy. As required by SFAS No. 157, financial assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.

<Table>
<Caption>

                                                  December 31, 2008
                                    -----------------------------------------------
                                    Level I     Level II     Level III       Total
                                    -------     --------     ---------     --------
<S>                                 <C>         <C>          <C>           <C>
Assets:
  Securities available-for-sale     $6,777      $88,169      $   50        $94,996
</Table>

The Company has no other assets or liabilities measured at fair value on a
non-recurring basis as of December 31, 2008.

                                                                             52

<Page>53

MMQ
Francis J. Merkel, CPA
Joseph J. Quinn, CPA/ABV, CVA
Daniel J. Gerrity, CPA
Mary Ann E. Novak, CPA

McGrail Merkel Quinn & Associates
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Penseco Financial Services Corporation

We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and subsidiary as of December 31, 2008 and
2007, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Penseco
Financial Services Corporation and subsidiary as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Penseco Financial Services
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated February 26, 2009 expressed an
unqualified opinion on the effectiveness of Penseco Financial Services
Corporation's internal control over financial reporting.


/S/ McGrail Merkel Quinn & Associates
Scranton, Pennsylvania
February 26, 2009


                              RSM McGladrey Network
                          An Independently Owned Member

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

                                   www.mmq.com

                                                                             53

<Page>54

MMQ
Francis J. Merkel, CPA
Joseph J. Quinn, CPA/ABV, CVA
Daniel J. Gerrity, CPA
Mary Ann E. Novak, CPA

McGrail Merkel Quinn & Associates
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Penseco Financial Services Corporation

We have audited Penseco Financial Services Corporation and subsidiary's internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Penseco Financial
Services Corporation and subsidiary's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.

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

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

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

In our opinion, Penseco Financial Services Corporation and subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Penseco Financial Services Corporation and subsidiary and our
report dated February 26, 2009 expressed an unqualified opinion.

/S/ McGrail Merkel Quinn & Associates
Scranton, Pennsylvania
February 26, 2009

                              RSM McGladrey Network
                          An Independently Owned Member
      Clay Avenue Professional Plaza, 1173 Clay Avenue, Scranton, PA 18510
                         570 961-0345 Fax: 570 961-8650
                                   www.mmq.com

                                                                             54

<Page>55

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 2008 or
2007.

ITEM 9A CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our Chief Executive Officer and Finance Division Head, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon this
evaluation, our Chief Executive Officer and our Finance Division Head concluded
that our disclosure controls and procedures were effective as of the end of the
period covered by this annual report. Management's annual report on internal
control over financial reporting is included below.

The Company continually assesses the adequacy of its internal control over
financial reporting and enhances its controls in response to internal control
assessments, and internal and external audit and regulatory recommendations. No
change in internal control over financial reporting during the quarter ended
December 31, 2008, or through the date of this Annual Report on Form 10-K, have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

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

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

        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Finance Division Head, has evaluated
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2008 based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Controls-Integrated Framework. Based on this assessment, management believes
that, as of December 31, 2008, the Company's internal control over financial
reporting is effective.

The effectiveness of the Company's internal control over financial reporting as
of December 31, 2008 has been audited by McGrail, Merkel, Quinn & Associates, an
independent registered public accounting firm, as stated in their report
appearing on page 54.

ITEM 9B OTHER INFORMATION

None

                                                                             55

<Page>56

                                    PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

                             Code of Ethical Conduct
                             -----------------------

The Company has a Code of Ethical Conduct applicable to all employees including
the Company's Principal Executive Officer and Principal Financial Officer
(Finance Division Head). 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, on our website
(www.pennsecurity.com) or by contacting:

         Patrick Scanlon, Senior Vice President, Finance Division Head
                     Penseco Financial Services Corporation
                          150 North Washington Avenue
                            Scranton, PA 18503-1848
                                 1-800-327-0394

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

The information required by this Item as to Directors of the Company contained
under the headings "Stock Ownership", Item 1 "Election of Directors", "Corporate
Governance" and "Certain Relationships and Related Transactions" within the
Proxy Statement relating to the Company's Annual Meeting of Shareholders, to be
held May 5, 2009, ("The Proxy Statement") is incorporated herein by reference.

The information required by this item as to the Audit Committee's financial
expert (or lack thereof) is incorporated herein by reference to the section
entitled "Corporate Governance-Committees of the Board of Directors" in the
Proxy Statement.

ITEM 11 EXECUTIVE COMPENSATION

The information contained under the headings "Executive Compensation", "Director
Compensation", "Compensation Discussion and Analysis", "Compensation and
Benefits Committee Report" and "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement is incorporated herein by reference.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
        RELATED STOCKHOLDER MATTERS

The information contained under the heading "Stock Ownership" in the Proxy
Statement is incorporated herein by reference.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE

The information contained under the headings "Certain Relationships and Related
Transactions" and "Corporate Governance" and "Item 1- Election of Directors" in
the Proxy Statement is incorporated herein by reference.

ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained under the heading "Item 2- Ratification of Independent
Registered Public Accounting Firm" in the Proxy Statement is incorporated herein
by reference.

                                                                             56

<Page>57

                                     PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements - The following financial statements are
        incorporated by reference in Part II, Item 8 hereof:
        Balance Sheets
        Consolidated Statements of Income
        Consolidated Statements of Stockholders' Equity
        Consolidated Statements of Cash Flows
        General Notes to Financial Statements
        Report of Independent Registered Public Accounting Firm

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

    (3) Exhibits
        The following exhibits are filed herewith or incorporated by reference
        as part of this Annual Report.
        3(i)   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)  By-Laws (Incorporated herein by reference to Exhibit 3(ii) of
               Registrant's report on Form 10-K filed with the SEC on March
               16, 2006.)
        10     Material contracts (Incorporated herein by reference to Exhibit
               10 of Registrant's report on Form 10-K filed with the SEC on
               March 16, 2006.)
        14     Code of Ethics (Incorporated herein by reference to Exhibit 10 of
               Registrant's report on Form 10-K filed with the SEC on March
               16, 2006.)
        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.)
        31     Certifications required under Section 302 of the Sarbanes-Oxley
               Act 2002
        32     Certifications required under Section 906 of the Sarbanes-Oxley
               Act of 2002

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

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

                                                                             57

<Page>58

                                   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 27, 2009.

By:   /s/ Craig W. Best
      ------------------------------------
      Craig W. Best
      President and CEO

By:   /s/ Patrick Scanlon
      ------------------------------------
      Patrick Scanlon
      Senior Vice President, Finance Division Head

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 27, 2009.

By: /s/ Craig W. Best              By: /s/ Robert W. Naismith, Ph. D.
    -----------------------------      --------------------------------------
    Craig W. Best                      Robert W. Naismith, Ph. D.
    President and CEO                  Director

By: /s/ Edwin J. Butler            By: /s/ James B. Nicholas
    -----------------------------      --------------------------------------
    Edwin J. Butler                    James B. Nicholas
    Director                           Director

By: /s/ Richard E. Grimm           By: /s/ Emily S. Perry
    -----------------------------      --------------------------------------
    Richard E. Grimm                   Emily S. Perry
    Director                           Director

By: /s/ Russell C. Hazelton        By: /s/ Sandra C. Phillips
    -----------------------------      --------------------------------------
    Russell C. Hazelton                Sandra C. Phillips
    Director                           Director

By: /s/ D. William Hume            By: /s/ Otto P. Robinson, Jr.
    -----------------------------      --------------------------------------
    D. William Hume                    Otto P. Robinson, Jr.
    Director, Chairman of The Board    Director

By:  /s/ James G. Keisling         By: /s/ Steven L. Weinberger
    -----------------------------      --------------------------------------
    James G. Keisling                  Steven L. Weinberger
    Director                           Director

By: /s/ P. Frank Kozik
    -----------------------------
    P. Frank Kozik
    Director

                                                                             58

<Page>59

                                 CERTIFICATIONS


I, Craig W. Best, 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;

c) 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

d) 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 26, 2009

/s/ Craig W. Best
-------------------
Craig W. Best
President and CEO

                                                                             59

<Page>60

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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;

c) 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

d) 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 26, 2009

/s/ Patrick Scanlon
-------------------
Patrick Scanlon
Senior Vice President, Finance Division Head

                                                                             60

<Page>61

       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, 2008 (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/ Craig W. Best
-------------------
Craig W. Best
President and CEO
February 26, 2009




       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, 2008 (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
Senior Vice President, Finance Division Head
February 26, 2009

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