(INSIDE COVER)

Customer Services

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

DEPOSIT ACCOUNTS

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

LENDING

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

OTHER SERVICES

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


BRANCH LOCATIONS  (with ATMs)

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

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

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

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

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

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

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

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

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


Other ATM locations

Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA

Marshall's Creek Food Market, Inc.
Milford Road
East Stroudsburg, PA

Meadow Ave. & Hemlock St.
Scranton, PA

Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA

Red Barn Village
Newton Ransom Blvd
Newton, PA

Skytop Lodge
One Skytop
Skytop, PA


                              www.pennsecurity.com

<PAGE>

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

In thousands, except
per share data               2002        2001        2000
---------------------------------------------------------
Earnings per share      $    3.14   $    2.62   $    2.21
Dividends per share     $    1.35   $    1.25   $    1.15
Total Capital           $  58,975   $  54,648   $  50,067
Total Deposits          $ 414,664   $ 406,531   $ 387,439
Total Assets            $ 496,956   $ 482,551   $ 467,230

                                    Contents
                                    --------
Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................3
Promotions and Appointments....................................................4
Community Events...............................................................7

                                   Form 10-K

  Part I,   Item 1  Business...................................................9
            Item 2  Properties................................................10
            Item 3  Legal Proceedings.........................................10
            Item 4  Submission of Matters to a Vote of Security Holders.......10
  Part II,  Item 5  Market for Registrant's Common Equity and
                      Related Stockholder Matters.............................11
            Item 6  Selected Financial Data...................................12
            Item 7  Management Discussion and Analysis of Financial Condition
                      and Results of Operations...............................13
            Item 7A Quantitative and Qualitative Disclosures
                      About Market Risk.......................................22
            Item 8  Financial Statements and Supplementary Data...............24
                    Consolidated Balance Sheets...............................24
                    Consolidated Statements of Income.........................25
                    Consolidated Statements of Stockholders' Equity...........26
                    Consolidated Statements of Cash Flows.....................27
                    General Notes to Financial Statements.....................28
                    Independent Auditor's Report..............................38
            Item 9  Changes in and Disagreements with Accountants on
                      Accounting and Financial Disclosure.....................39
  Part III, Item 10 Directors and Executive Officers of the Registrant........39
            Item 11 Executive Compensation....................................39
            Item 12 Security Ownership of Certain Beneficial Owners
                      and Management..........................................39
            Item 13 Certain Relationships and Related Transactions............39
            Item 14 Controls and Procedures...................................39
  Part IV,  Item 15 Exhibits, Financial Statement Schedules and
                      Reports on Form 8-K.....................................40
  Signatures..................................................................41
  Certifications..............................................................42
  Index to Exhibits...........................................................43
Company Officers..............................................................44
Company Board Members..........................................Inside Back Cover

                  Penseco Financial Services Corporation / 2002 Annual Report  1

<PAGE>

                               President's Letter
                               ------------------
Dear Shareholder

I am,  once  again,  pleased  to report  to you that 2002 was a record  year for
Penseco Financial  Services  Corporation.  Earnings per share increased to $3.14
per share for 2002 from $2.62 per share for 2001.  Dividends  increased to $1.35
per share for 2002 from $1.25 per share for 2001. Total Assets increased to $497
million  at year end 2002 from $483  million  at year end 2001.  Total  Deposits
increased  to $415  million at year end 2002 from $407 million at year end 2001.
Capital  increased  to $59 million at year end 2002 from $55 million at year end
2001. These record results came as we celebrated the 100th year of Penn Security
Bank's service to our community.
     A number of special events marked our recognition of this centennial  year.
Beginning on New Year's Eve 2001,  we were the major  sponsor of the First Night
Celebration in Scranton. Literally,  thousands of people were entertained in our
Central  City office lobby as clowns,  face  painting  and  storytellers  amused
children.  Then  opera  arias and  popular  songs  entertained  classical  music
enthusiasts and finally "The Magics", a "doo wop" band,  entertained until 11:30
PM,  followed  by a  gigantic  fireworks  display  at  midnight.  Adding  to the
excitement was the commencement of the external illumination of our Central City
office.
     In March,  the Bank  entered  a float in the St.  Patrick's  Day  parade in
Scranton, displaying our one hundred years of service to the thousands of people
lining the parade route. In May,  coinciding  with the 100th  Anniversary of the
filing of the  application  to form a bank with the  Pennsylvania  Department of
Banking, we held a "Customers' Week" in our branches, offering coffee, doughnuts
and other refreshments.  In August, the week in which, 100 years prior, the Bank
received its charter to operate, we had another Customers' Week with prizes from
drawings and special treats at the branches.
     October 1, exactly 100 years from the first day of business of the Bank, we
hosted  a  dinner  for  major  shareholders,  depositors,  directors,  executive
officers, borrowers and dignitaries.  Silver anniversary commemorative coins and
a 100th Anniversary booklet, detailing the history of the Bank, were given out.
     Finally,  the year ended with another First Night Celebration on New Year's
Eve 2002  with "The  Magics"  and "The  Irish  Balladeers"  entertaining  in our
Central City office lobby.
     While we celebrated our anniversary,  we were mindful of what was happening
in the economy and indeed, the world.
     The Federal Reserve,  having lowered short-term rates eleven times in 2001,
lowered them again in 2002. Prime Rate, at the end of 2002 stood at 4.25%,  down
from  9.50% at the  beginning  of 2001.  Long  term  rates  also  have  declined
dramatically,  with 15 year and 30 year  home  mortgage  rates at 5 3/8% and 6%,
respectively.  The economy and equity markets are still in a state of shock from
the dramatic  decline in equity prices caused by the confluence of the ending of
a market bubble,  economic  recession,  terrorist acts, possible war and certain
tax law changes  creating  federal  deficits  and proving to be  ineffective  in
stimulating the economy. As a result, we have experienced a flood of present and
new  customers  refinancing  loans  to take  advantage  of  lower  rates.  As we
anticipate that current rates,  now at 40 year lows, will begin to rise when the
economy  begins to accelerate,  we have been selling all  low-yield,  fixed-rate
residential  mortgage  loans into the  secondary  market,  although we have been
retaining the servicing on these loans.  Although  providing revenue in the form
of gains on the sale of these loans,  it has resulted in a decline in the amount
of loans  outstanding  in our loan  portfolio,  which has  proved  difficult  to
replace  with  shorter  term or  variable  rate loans.  We have been  working on
several  types of new loan  products  to help  fill the  gap.  In  addition,  we
continue to evaluate the addition of new fee generating services in the Bank.
     In July of 2002, the Federal Government enacted the Sarbanes-Oxley Act as a
result of a number  of high  profile  accounting  irregularities  and  unethical
practices  at a number of large  corporations.  The  purpose  of this Act was to
restore the  confidence of investors  that  information  in quarterly and annual
reports was accurate. This Act, as it applies to our Corporation,  will require,
among other things:

-    Certifications  by our Chief Executive  Officer and Chief Financial Officer
     of our financial statements.
-    Reporting of insider trades within two business days of transaction.
-    The Audit Committee is to be made up of "independent" directors.
-    A disclosure  whether the Audit  Committee has a "financial  expert" on it,
     and if not, why it does not.
-    Establishment of a  "whistleblower"  procedure whereby employees can report
     irregularities to the Audit Committee, anonymously.
-    The Audit Committee must have the ability to hire separate legal counsel.
-    The Audit firm may not be hired to do  non-audit  work,  other than certain
     specific items.
-    Severe penalties for false certifications.
-    A disclosure  of whether  there is a Company  policy  regarding  ethics and
     conflicts of interest, applicable to corporate officers.

     The audit program at our organization  has always been strong.  We have our
own,  full-time,  internal  auditor  reporting to the Audit  Committee who has a
staff of four  full-time  assistants.  In addition,  a firm of Certified  Public
Accountants  is hired by the Audit  Committee  to perform an external  audit and
certify our financial  statements.  In addition to that,  since we are a banking
company,  we are  examined  every  year on an  alternate  basis  by  either  the
Pennsylvania Department of Banking or the Federal Deposit Insurance Corporation.
Our four member Audit Committee includes

2  Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

three  members with  substantial  education and  experience  in  accounting  and
financial  management,  of which, one is a Chief Executive Officer of a company,
one is a Chief  Financial  Officer  of a company  and one is a former  Executive
Vice-President of our organization.  The Audit Committee,  as well as the entire
Board of Directors,  are ethical people who will "stand up and blow the whistle"
if anything is wrong.  We are not sure whether any of them fit the definition of
"audit committee financial expert", but we think that they have the expertise to
assure that our financial statements are fairly presented.
     The  Company  has had for many  years a Code of  Ethics  applicable  to all
employees  including the  Company's  principal  Executive  Officer and principal
Financial Officer (Controller). The purpose of the Code is to promote honest and
ethical conduct, full and fair disclosures of financial information,  compliance
with laws and regulations and accountability for actions.
     During the year, the following appointments and promotions were made: Linda
Wolf,  Assistant  Director  of  Human  Resources,   Louis  J.  Rizzo,  Assistant
Vice-President, Brokerage, Mark J. Zakoski, Assistant Vice-President, Brokerage,
John R. Anderson III, Assistant  Vice-President,  Loan Administration,  Carol J.
Grunza,  Loan  Administration  Officer and Robin L.  Jenkins,  Assistant  Branch
Operations Officer.  These people are to be congratulated on their achievements.
Also  during  the  year,  Gerard  P.  Vasil,  who had been  Manager  of our Data
Processing Department, retired after 25 years of dedicated service to the Bank.
     This year we also lost the  valued  service  of two of our  Advisory  Board
members  due to the deaths of  Attorney  Patrick  Mellody,  from our Green Ridge
office, and Mary Citro, from our East Stroudsburg office.
     We  think  that  our  strong  capital  position,  good  earnings,  advanced
technology and solid customer base,  both in our traditional  geographic  market
and niche national  markets,  provide an excellent  foundation for our continued
success.  In this  endeavor you can help us by  recommending  us to your family,
friends,  and business  organizations.  This is your  institution - let it serve
you.

Sincerely yours,
Otto P. Robinson, Jr., President

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

The bottom of this page of the 2002 Annual Report to  Shareholders  contains one
picture. A description of the picture follows:

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

Seated left to right:

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

Standing left to right:

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

                  Penseco Financial Services Corporation / 2002 Annual Report  3

<PAGE>

This page of the 2002 Annual Report to  Shareholders  contains six  pictures.  A
description of each picture follows, starting at the top, from left to right:


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

Linda Wolf
Assistant Director of Human Resources

Louis J. Rizzo
Assistant Vice-President, Brokerage

Mark J. Zakoski
Assistant Vice-President, Brokerage

John R. Anderson III
Assistant Vice-President, Loan Administration

Carol J. Grunza
Loan Administration Officer

Robin L. Jenkins
Assistant Branch Operations Officer

4  Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

This page of the 2002 Annual Report to Shareholders contains one picture.

                              A Century of Service
                              --------------------

100 years ago, a new bank was opened in South  Scranton  known as the South Side
Bank. Today that Bank, now Penn Security Bank & Trust Company,  has evolved into
an institution with 9 offices,  19 ATM's and one-half billion dollars in assets.
Our  employees  throughout  our  branch  offices  are  privileged  to serve  the
Scranton,  Abington and Pocono  communities.  As we begin our second  century of
service, we remain dedicated to providing  outstanding financial services to our
customers and the communities in which they live in.

        We remain Strong, Independent, Innovative, Caring and Enduring.

                  Penseco Financial Services Corporation / 2002 Annual Report  5

<PAGE>

                             Centennial Celebration
                             ----------------------

On October  1, 2002,  exactly  100 years from the first day of  business  of the
Bank,  we  hosted  a  dinner  for  major  shareholders,  depositors,  directors,
executive officers, borrowers and dignitaries.

The  remainder of this page of the 2002 Annual Report to  Shareholders  contains
five pictures from the Centennial dinner.

6  Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

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

The top of this page of the 2002  Annual  Report to  Shareholders  contains  two
pictures.


These above  pictures  are from the 2002 Annual St.  Patrick's  Day parade.  The
float was created by the employees of Penn Security Bank.


The bottom of this page of the 2002 Annual Report to  Shareholders  contains one
pictures.


Debbie  Wright,  Branch  Manager of our Moscow Office  greets a customer  during
Customer Appreciation Week.

                  Penseco Financial Services Corporation / 2002 Annual Report  7

<PAGE>

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


                                   FORM 10-K


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


                  For the Fiscal Year Ended December 31, 2002

                        Commission File Number 000-23777



                     PENSECO FINANCIAL SERVICES CORPORATION



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

                          Securities Registered Under
                            Section 12(g) of the Act

                    Common Stock, Par Value $ .01 per share



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

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

THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY  NON-AFFILIATES
OF THE REGISTRANT ON FEBRUARY 14, 2003,  BASED ON THE AVERAGE OF THE CLOSING BID
AND ASKED  PRICES OF SUCH STOCK ON THAT DATE EQUALS  APPROXIMATELY  $78,939,000.
THE NUMBER OF SHARES OF COMMON STOCK  OUTSTANDING AS OF FEBRUARY 14, 2003 EQUALS
2,148,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions  of  the   Corporation's   2002  Annual  Report  to  Stockholders   are
incorporated by reference in Parts I and II.

Portions of the Corporation's definitive proxy statement relating to the 2003
Annual Meeting of Stockholders are incorporated by reference in Part III.

8  Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                     PENSECO FINANCIAL SERVICES CORPORATION

                                     PART I
                                     ------
ITEM 1  Business

GENERAL

PENSECO FINANCIAL SERVICES CORPORATION,  (the "Company"), which is headquartered
in Scranton,  Pennsylvania, was formed under the general corporation laws of the
State of Pennsylvania in 1997 and is registered as a financial  holding company.
The  Company  became  a  holding  company  upon  the  acquisition  of all of the
outstanding shares of Penn Security Bank and Trust Company (the "Bank"), a state
chartered  bank, on December 31, 1997.  The Company is subject to supervision by
the Federal Reserve Board. The Bank, as a state chartered financial institution,
is subject to supervision by the Federal Deposit  Insurance  Corporation and the
Pennsylvania Department of Banking.
     The Company's  principal  banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania,  containing trust, investor services, marketing,
audit,  credit card,  human  resources,  executive,  data processing and central
bookkeeping offices. There are eight additional offices.
     Through it's banking subsidiary, the Company generates interest income from
it's outstanding loans receivable and it's investment portfolio. Other income is
generated  primarily  from  merchant  transaction  fees,  trust fees and service
charges on deposit  accounts.  The Company's  primary costs are interest paid on
deposits  and  general  operating  expenses.  The Bank  provides  a  variety  of
commercial and retail banking services to business and  professional  customers,
as well as retail customers, on a personalized basis. The Bank's primary lending
products are real estate,  commercial and consumer  loans.  The Bank also offers
ATM access, credit cards, active investment accounts,  trust department services
and other various lending, depository and related financial services. The Bank's
primary   deposit   products  are  savings  and  demand  deposit   accounts  and
certificates of deposit.
     The  Bank  has a third  party  marketing  agreement  with  Fiserv  Investor
Services,  Inc.  that  allows  the  bank to offer a full  range  of  securities,
brokerage and annuity sales to it's customers. The investor services division is
located in the headquarters building and the services are offered throughout the
entire branch system.
     The Company is not dependent  upon a single  customer,  or a few customers,
the loss of one or more of which  would have a material  adverse  effect on it's
operations.  The operations and earnings of the  Corporation  are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.

COMPETITION

The Bank operates in a competitive environment in which it must share its market
with many local  independent banks as well as several banks which are affiliates
or  branches  of very large  regional  holding  companies.  The Bank  encounters
competition from diversified financial institutions,  ranging in size from small
banks to the nationwide banks operating in it's region,  and include  commercial
banks,   savings  and  loan  associations,   credit  unions  and  other  lending
institutions.
     The  principal  competitive  factors  among the Bank's  competitors  can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits,  especially time deposits,  and interest rates
and fees  charged to  customers  on loans are very  competitive.  From a service
perspective,  the Bank competes in areas such as convenience of location,  types
of services, service costs and banking hours.

EMPLOYEES

As  of  February  14,  2003,  the  Company  employed  202  full-time  equivalent
employees.  The employees of the Company are not  represented  by any collective
bargaining  group.  Management  of the  Company  considers  relations  with  its
employees to be good.

SUPERVISION AND REGULATION

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

                  Penseco Financial Services Corporation / 2002 Annual Report  9

<PAGE>

     As a  financial  holding  company,  the Company is  permitted  to engage in
banking-related  activities as authorized by the Federal Reserve Board, directly
or through  subsidiaries or by acquiring  companies already  established in such
activities subject to the FRB regulations relating to those activities.
     The Bank,  as a  Pennsylvania  state-chartered  financial  institution,  is
subject to  supervision,  regulation  and  examination  by the  Commonwealth  of
Pennsylvania  Department  of  Banking  and  by  the  Federal  Deposit  Insurance
Corporation  (the  "FDIC"),  which  insures  the Bank's  deposits to the maximum
extent permitted by law.

FORWARD LOOKING INFORMATION

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


ITEM 2  Properties

There  are  nine  offices   positioned   throughout  the  greater   Northeastern
Pennsylvania  region.  They are located in the South  Scranton,  East  Scranton,
Green Ridge, and Central City sections of Scranton,  the Borough of Moscow,  the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners.  Through these offices, the
Company  provides  a full  range of  banking  and trust  services  primarily  to
Lackawanna, Wayne, Monroe and the surrounding counties. All offices are owned by
the Bank or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc.,
with the exception of the Mount Pocono Office, which is owned by the Bank but is
located on land occupied under a long-term lease.
     The principal office,  located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district,  houses the
operations,   trust,  investor  services,   marketing,  credit  card  and  audit
departments  as well as the  Company's  executive  offices.  Several  remote ATM
locations  are leased by the Bank,  which are  located  throughout  Northeastern
Pennsylvania.  All branches and ATM locations  are equipped with closed  circuit
television monitoring.


ITEM 3  Legal Proceedings

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


ITEM 4  Submission of Matters to a Vote of Security Holders

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

10 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                                    PART II
                                    -------

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

This Annual  Report is the  Company's  annual  disclosure  statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934.  Questions may
be  directed  to  any  branch  location  of the  Company  or by  contacting  the
Controller's office at:

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

The Company has had for many years a Code of Ethics applicable to all employees
including the Company's principal Executive Officer and principal Financial
Officer (Controller). The purpose of the Code is to promote honest and ethical
conduct, full and fair disclosures of financial information, compliance with
laws and regulations and accountability for actions. Copies of the Code may be
obtained, at no charge, by contacting the above.

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

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

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


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


                               Dividends Paid
2001              High     Low   Per Share
---------------------------------------------
First Quarter     $ 25    $ 20   $  .25
Second Quarter      25      22      .25
Third Quarter       30      23      .25
Fourth Quarter      32      27      .50
                                 ------
                                 $ 1.25
                                 ======


DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,899                     2002
             2,685                     2001
             2,470                     2000
             2,363                     1999
             2,255                     1998


As of  February  14 , 2003  there were  approximately  988  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 21 and 35.

TRANSFER AGENT

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


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

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


                             First     Second    Third     Fourth
2001                        Quarter   Quarter   Quarter   Quarter
-----------------------------------------------------------------
Net Interest Income         $ 4,461   $ 4,795   $ 5,124   $ 4,956
Provision for Loan Losses       150       291       284       229
Other Income                  2,680     1,944     2,624     1,938
Other Expenses                5,629     4,631     5,054     4,763
Net Income                    1,088     1,396     1,800     1,338
Earnings Per Share          $   .51   $   .65   $   .84   $   .62

                  Penseco Financial Services Corporation / 2002 Annual Report 11

<PAGE>

ITEM 6  Selected Financial Data

(in thousands, except per share data)

RESULTS OF OPERATIONS:

<TABLE>
<CAPTION>

                                       2002         2001         2000         1999         1998
-----------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>          <C>
Interest Income                 $    27,899  $    31,860  $    31,043  $    28,320  $    29,975
Interest Expense                      8,011       12,524       13,698       11,213       13,179
-----------------------------------------------------------------------------------------------
Net Interest Income                  19,888       19,336       17,345       17,107       16,796
Provision for Loan Losses               813          954          233           89          595
-----------------------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                        19,075       18,382       17,112       17,018       16,201
Other Income                         11,032        9,186        8,233        7,746        6,838
Other Expenses                       21,098       20,077       19,306       18,312       16,986
Income Taxes                          2,256        1,869        1,296        1,781        1,772
-----------------------------------------------------------------------------------------------
Net Income                      $     6,753  $     5,622  $     4,743  $     4,671  $     4,281
===============================================================================================

BALANCE SHEET DATA:
Assets                          $   496,956  $   482,551  $   467,230  $   428,614  $   436,099
Investment Securities           $   139,132  $   128,623  $   125,808  $   106,511  $   118,762
Net Loans                       $   285,509  $   320,208  $   304,641  $   278,577  $   280,389
Deposits                        $   414,664  $   406,531  $   387,439  $   367,332  $   377,526
Stockholders' Equity            $    58,975  $    54,648  $    50,067  $    45,743  $    44,961

PER SHARE DATA:
Earnings per Share              $      3.14  $      2.62  $      2.21  $      2.17  $      1.99
Dividends per Share             $      1.35  $      1.25  $      1.15  $      1.10  $      1.05
Book Value per Share            $     27.46  $     25.44  $     23.31  $     21.30  $     20.93
Common Shares Outstanding         2,148,000    2,148,000    2,148,000    2,148,000    2,148,000

FINANCIAL RATIOS:
Net Interest Margin                   4.21%        4.30%        4.08%        4.22%        4.12%
Return on Average Assets              1.37%        1.18%        1.06%        1.08%         .99%
Return on Average Equity             11.79%       10.57%        9.96%       10.12%        9.54%
Average Equity to Average Assets     11.58%       11.19%       10.60%       10.70%       10.38%
Dividend Payout Ratio                42.99%       47.71%       52.04%       50.69%       52.76%
</TABLE>

12 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

ITEM 7  Management Discussion and Analysis of Financial Condition and Results of
          Operations

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

SUMMARY

Net  earnings  for 2002  totalled  $6,753,  an increase of 20.1% from the $5,622
earned in 2001, which in turn was an increase of 18.5% from the $4,743 earned in
2000. Net earnings per share were $3.14 in 2002, compared with $2.62 in 2001 and
$2.21 in 2000.  Net  earnings  for 2002  increased  from 2001  results due to an
increase  in the net  interest  income,  fee  income,  mainly  from  the sale of
non-portfolio  mortgages and the sale of U.S.  Agency  securities,  offset by an
increase in  operating  costs,  primarily  salaries  and  employee  benefits and
applicable income tax expense. Net earnings for 2001 increased from 2000 results
due to an increase  in the net  interest  margin.  Also,  fee income  increased,
offset by increases in operating costs and applicable income tax expense.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  6,753                     2002
             5,622                     2001
             4,743                     2000
             4,671                     1999
             4,281                     1998


The  Company's  return on average  assets was 1.37% in 2002 compared to 1.18% in
2001 and 1.06% in 2000. Return on average equity was 11.79%, 10.57% and 9.96% in
2002, 2001 and 2000, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
             1.37%                     2002
             1.18%                     2001
             1.06%                     2000
             1.08%                     1999
              .99%                     1998


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
            11.79%                     2002
            10.57%                     2001
             9.96%                     2000
            10.12%                     1999
             9.54%                     1998


                  Penseco Financial Services Corporation / 2002 Annual Report 13

<PAGE>

RESULTS OF OPERATIONS


Net Interest Income

The principal component of the Company's earnings is net interest income,  which
is the difference  between interest and fees earned on  interest-earning  assets
and interest paid on deposits and other borrowings.
     Net interest income was $19.9 million in 2002,  compared with $19.3 million
in 2001,  an  increase of 3.1%.  The  increase  in net  interest  income in 2002
resulted  from an increase in  interest-earning  assets.  Also,  the Company had
increases in its deposit  transaction  accounts,  which have the lowest carrying
costs.
     Net interest income was $19.3 million in 2001,  compared with $17.3 million
in 2000,  an increase of 11.6%.  The  increase  in net  interest  income in 2001
resulted from increases in loan income,  increases in securities  income,  along
with lower funding costs mainly due to the Federal  Reserve Bank reducing  short
term interest rates eleven times during the year.
     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, 2002 was 4.2% compared with
4.3% for the year ended  December 31, 2001, and 4.1% for the year ended December
31, 2000.
     Interest  income in 2002 totalled $27.9 million,  compared to $31.9 million
in  2001,   decreasing   12.5%  from  the  prior  year.  The  yield  on  average
interest-earning  assets  was 5.9% in 2002,  compared  to 7.1% in 2001.  Average
interest-earning  assets increased in 2002 to $472.8 million from $450.0 million
in 2001. Average loans, which are the Company's highest yielding earning assets,
decreased $9.3 million in 2002, while investment securities increased on average
by  $13.7   million.   Average   loans   represented   67.0%  of  2002   average
interest-earning assets, compared to 72.4% in 2001.
     Interest  expense also decreased in 2002 to $8.0 million from $12.5 million
in 2001, a decrease of $4.5 million or 36.0%.  This  decrease  resulted from the
Federal  Reserve  cutting  short  term  interest  rates in late  2001 due to the
economy  showing  anemic  growth.  The  average  rate  paid on  interest-bearing
liabilities  during  2002 was 2.2%,  compared  to 3.5% a decrease  of 37.1% from
2001.
     Interest  income in 2001 totalled $31.9 million,  compared to $31.0 million
in 2000, increasing 2.9% from the prior year.
     The yield on average  interest-earning assets was 7.1% in 2001, compared to
7.3% in  2000.  Average  interest-earning  assets  increased  in 2001 to  $450.0
million from $424.9  million in 2000.  Average  loans,  which are the  Company's
highest  yielding  earning  assets,  increased  $28.5  million  in  2001,  while
investment  securities  increased  on average  by $7.7  million.  Average  loans
represented 72.4% of 2001 average  interest-earning assets, compared to 70.0% in
2000.
     Interest expense also decreased in 2001 to $12.5 million from $13.7 million
in 2000, a decrease of $1.2 million or 8.8%.  This  decrease  resulted  from the
Federal  Reserve  cutting short term interest rates due to the economy  slipping
into a recession.  The average rate paid on interest-bearing  liabilities during
2001 was 3.5%, compared to 4.0% a decrease of 12.5% from 2000.
     The most  significant  impact on net  interest  income  between  periods is
derived  from the  interaction  of changes in the volume of and rates  earned or
paid on interest-earning assets and interest-bearing  liabilities. The volume of
earning   dollars  in  loans  and   investments,   compared  to  the  volume  of
interest-bearing  liabilities  represented by deposits and borrowings,  combined
with the spread, produces the changes in net interest income between periods.


 NET INTEREST INCOME (in millions)        YEAR
---------------------------------------------
       $ 19,888                          2002
         19,336                          2001
         17,345                          2000
         17,107                          1999
         16,796                          1998


14 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

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

The table below presents  average  balances,  interest income on a fully taxable
equivalent basis and interest expense,  as well as average rates earned and paid
on the Company's  major asset and liability  items for the years 2002,  2001 and
2000.

<TABLE>
<CAPTION>

                                                    2002                            2001                            2000
------------------------------------------------------------------------------------------------------------------------------------
                                        Average   Revenue/   Yield/     Average   Revenue/   Yield/     Average   Revenue/   Yield/
                                        Balance   Expense     Rate      Balance   Expense    Rate       Balance   Expense     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>         <C>
ASSETS
Investment securities:
  Available-for-sale:
    U.S. Treasury securities           $  36,550  $  1,575    4.31%    $  40,596  $  2,262    5.57%    $  60,684  $  3,465     5.71%
    U.S. Agency obligations               57,544     3,267    5.68        47,802     3,130    6.55        20,011     1,338     6.69
    States & political subdivisions        8,962       439    7.42         6,725       245    5.52        15,522       572     5.58
    Federal Home Loan Bank stock           1,960        69    3.52         1,881       122    6.49         1,798       127     7.06
    Other                                    391        10    2.56           211         6    2.84            20         1     5.00
  Held-to-maturity:
    U.S. Agency obligations                1,862        58    3.11         3,192       185    5.80         4,407       259     5.88
    States & political subdivisions       29,715     1,641    8.37        22,852     1,189    7.88        13,122       735     8.49
Loans, net of unearned income:
  Real estate mortgages                  245,016    16,412    6.70       250,000    19,148    7.66       227,819    18,249     8.01
  Commercial                              32,168     1,751    5.44        27,885     2,117    7.59        19,613     1,845     9.41
  Consumer and other                      39,405     2,390    6.07        47,961     3,418    7.13        49,930     3,717     7.44
Federal funds sold                        12,995       189    1.45           181         6    3.31         6,729       414     6.15
Interest on balances with banks            6,277        98    1.56           651        32    4.92         5,253       321     6.11
------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                  472,845  $ 27,899    5.90%      449,937  $ 31,860    7.08%      424,908  $ 31,043    7.31%
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                    8,234                           8,310                          11,514
Bank premises and equipment               10,411                          11,218                          12,104
Accrued interest receivable                3,432                           3,831                           2,628
Other assets                               3,083                           5,063                           1,125
Less: Allowance for loan losses            3,662                           3,185                           3,004
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                           $ 494,343                       $ 475,174                       $ 449,275
====================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand-Interest bearing              $  26,204  $    159     .61%    $  25,033  $    240     .96%    $  23,380  $    250     1.07%
  Savings                                 71,470       700     .98        64,513       965    1.50        65,927       983     1.49
  Money markets                           91,561     1,329    1.45        86,154     2,616    3.04        75,959     2,927     3.85
  Time - Over $100                        37,741     1,398    3.70        32,998     1,779    5.39        38,407     2,262     5.89
  Time - Other                           116,659     4,139    3.55       114,943     5,784    5.03       115,345     6,236     5.41
Federal funds purchased                        -         -       -             3         -       -            22         1     4.55
Repurchase agreements                     20,278       276    1.36        17,366       570    3.28        15,101       786     5.20
Short-term borrowings                        562        10    1.78        15,520       570    3.67         4,522       253     5.59
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                 364,475  $  8,011    2.20%      356,530  $ 12,524    3.51%      338,663  $ 13,698     4.04%
------------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing             69,482                          61,823                          61,162
All other liabilities                      3,124                           3,656                           1,813
Stockholders' equity                      57,262                          53,165                          47,637
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                 $ 494,343                       $ 475,174                       $ 449,275
====================================================================================================================================
Interest Spread                                               3.70%                           3.57%                            3.27%
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                               $ 19,888                        $ 19,336                        $ 17,345
====================================================================================================================================

Financial Ratios
Net interest margin                                           4.21%                           4.30%                            4.08%
Return on average assets                                      1.37%                           1.18%                            1.06%
Return on average equity                                     11.79%                          10.57%                            9.96%
Average equity to average assets                             11.58%                          11.19%                           10.60%
Dividend payout ratio                                        42.99%                          47.71%                           52.04%
</TABLE>

                  Penseco Financial Services Corporation / 2002 Annual Report 15

<PAGE>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

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


<TABLE>
<CAPTION>
                                                     Dollar                             Change
                                                     Amount   Change in   Change in    in Rate-
             2001 compared to 2000                 of Change   Volume        Rate       Volume
             ----------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>          <C>
EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities          $ (1,203)  $ (1,147)   $    (84)    $    28
                 U.S. Agency obligations              1,792      1,859         (28)        (39)
                 States & political subdivisions       (327)      (324)         (6)          3
                 Equity securities                        -         19         (17)         (2)
               Held-to-maturity:
                 U.S. Agency obligations                (74)       (71)         (4)          1
                 States & political subdivisions        454        545         (52)         39)
             Loans, net of unearned income:
               Real estate mortgages                    899      1,775        (798)        (78)
               Commercial                               272        778        (356)       (150)
               Consumer and other                      (299)      (146)       (154)          1
             Federal funds sold                        (408)      (403)       (191)        186
             Interest bearing balances with banks      (289)      (281)        (63)         55
             ----------------------------------------------------------------------------------
               Total Interest Income                    817      2,604      (1,753)        (34)
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                (10)        18         (26)         (2)
LIABILITIES    Savings                                  (18)       (21)          3           -
               Money markets                           (311)       393        (615)        (89)
               Time - Over $100                        (483)      (318)       (192)         27
               Time - Other                            (452)       (22)       (438)          8
             Federal funds purchased                     (1)        (1)          -           -
             Repurchase agreements                     (216)       118        (290)        (44)
             Short-term borrowings                      317        615         (87)       (211)
             ----------------------------------------------------------------------------------
               Total Interest Expense                (1,174)       782      (1,645)       (311)
             ----------------------------------------------------------------------------------
               Net Interest Income                 $  1,991   $  1,822    $   (108)    $   277
             ==================================================================================
</TABLE>

16 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

PROVISION FOR LOAN LOSSES

The  provision  for loan losses  represents  management's  determination  of the
amount  necessary  to bring  the  allowance  for  loan  losses  to a level  that
management  considers  adequate to reflect the risk of future losses inherent in
the Company's loan  portfolio.  The process of  determining  the adequacy of the
allowance  is  necessarily   judgmental  and  subject  to  changes  in  external
conditions.  Accordingly,  there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.

OTHER INCOME

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

Years Ended December 31,            2002        2001        2000
----------------------------------------------------------------
Trust department income         $  1,266    $  1,233    $  1,329
Service charges on
  deposit accounts                 1,123       1,126         718
Merchant transaction income        5,519       5,331       5,354
Other fee income                   1,562       1,291         975
Other operating income               553         231         211
Realized gains (losses) on
  securities, net                  1,009         (26)       (354)
----------------------------------------------------------------
  Total Other Income            $ 11,032    $  9,186    $  8,233
================================================================

Total other income  increased $1,846 or 20.1% during 2002 to $11,032 from $9,186
for 2001.  Components of this increase  include $1,009 from the gain on the sale
of U.S. Agency  securities,  merchant  transaction  income of $188 along with an
increase in fee income of $158 due to our  brokerage  division and a gain on the
sale of low-yield, fixed-rate non-portfolio mortgage loans of $444.
     Total  other  income  increased  $953 or 11.6%  during  2001 to $9,186 from
$8,233 for 2000.  Components of this increase include service charges on deposit
accounts  of $408 or  56.8%  mainly  due to the  ongoing  implementation  of the
recommendations  of a  cost/revenue  study held in the first quarter of 2001, an
increase in other fee income of $316 or 32.4% from the same period last year, of
which $199 was due to our brokerage division. The loss on the sale of securities
in 2001 was $26 compared to a $354 loss in 2000.

OTHER EXPENSES

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

Years Ended December 31,            2002        2001        2000
----------------------------------------------------------------
Salaries and employee
  benefits                      $  9,048    $  8,180    $  7,951
Occupancy expenses, net            1,384       1,416       1,387
Furniture and equipment
  expenses                         1,208       1,245       1,189
Merchant transaction
  expenses                         4,731       4,636       4,784
Other operating expenses           4,727       4,600       3,995
----------------------------------------------------------------
  Total Other Expenses          $ 21,098    $ 20,077    $ 19,306
================================================================

Other  expenses  increased  $1,021 or 5.1% for 2002 to $21,098  from $20,077 for
2001.  Salaries and employee benefits increased $868 or 10.6% to $9,048 for 2002
from  $8,180  for  2001  partly  due to  staff  additions,  replacements,  merit
increases and pension costs.  Merchant  transaction  expenses increased $95, the
result of additional  volume.  Also, other operating  expenses increased $127 or
2.8%, mainly due to increased  expenses in advertising and other centennial year
expenses.
     Other expenses  increased $771 or 4.0% for 2001 to $20,077 from $19,306 for
2000.  Salaries and employee benefits  increased $229 or 2.9% to $8,180 for 2001
from $7,951 for 2000. Also, other operating  expenses increased $605 or 15.1% to
$4,600 from $3,995 due to increases in  advertising  costs  associated  with our
loan  growth  and  non-recurring  insurance  costs of $117  and $180 in  outside
consulting services.

INCOME TAXES

Federal income tax expense increased $387 or 20.7% to $2,256 in 2002 compared to
$1,869 in 2001, due to increased operating income.
     Federal  income  tax  expense  increased  $573 or 44.2% to  $1,869  in 2001
compared to $1,296 in 2000.  This was largely the result of increased net income
from normal business operations
     The  Company's  effective  income tax rate for 2002 was 25.0%,  the same as
2001.
     The  effective  income  tax rate for 2001 was 25.0%  compared  to 21.5% for
2000. This increase resulted from larger tax free income recorded during 2000.
     For further  discussion  pertaining to Federal income taxes, see Note 13 to
the Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets  increased  $14.4 million or 3.0% during 2002 to $497.0  million at
December 31, 2002 compared to $482.6  million at December 31, 2001. For the year
ended December 31, 2001 total assets  increased  $15.4 million to $482.6 million
or a 3.3% increase over $467.2 million at December 31, 2000.


ASSETS (in millions)             YEAR
-------------------------------------
       $ 496,956                 2002
         482,551                 2001
         467,230                 2000
         428,614                 1999
         436,099                 1998


INVESTMENT PORTFOLIO

The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
     The following  table presents the carrying value, by security type, for the
Company's investment portfolio.

December 31,                         2002        2001       2000
-----------------------------------------------------------------
U.S.Treasury securities         $  36,456   $  36,069   $  54,662
U.S. Agency obligations            52,026      60,520      39,654
States & political subdivisions    49,294      29,741      29,624
Equity securities                   1,356       2,293       1,868
-----------------------------------------------------------------
  Total Investment Securities   $ 139,132   $ 128,623   $ 125,808
=================================================================

                  Penseco Financial Services Corporation / 2002 Annual Report 17

<PAGE>

LOAN PORTFOLIO

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

<TABLE>
<CAPTION>

December 31,                           2002        2001        2000        1999         1998
--------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>          <C>
Real estate - construction
  and land development            $   5,031   $   9,124   $   9,321   $   3,241    $   4,152
Real estate mortgages               217,883     246,486     234,212     216,574      221,879
Commercial                           30,077      30,001      21,566      18,995       18,169
Credit card and related plans         2,320       2,377       2,267       2,203        2,286
Installment                          27,306      30,142      30,290      28,693       28,538
Obligations of states &
  political subdivisions              6,239       5,678      10,085      11,821        8,195
--------------------------------------------------------------------------------------------
  Loans, net of unearned income     288,856     323,808     307,741     281,527      283,219
Less: Allowance for loan losses       3,347       3,600       3,100       2,950        2,830
--------------------------------------------------------------------------------------------
  Loans, net                      $ 285,509   $ 320,208   $ 304,641   $ 278,577    $ 280,389
============================================================================================
</TABLE>

LOANS

Total net loans  decreased  $34.7 million to $285.5 million at December 31, 2002
from $320.2  million at December 31, 2001, a decrease of 10.8%.  The decrease is
due to management's reluctance to carry low-yield,  fixed-rate mortgages,  while
concentrating on increasing variable rate loans.
     Total net loans  increased  $15.6 million to $320.2 million at December 31,
2001 from $304.6 million at December 31, 2000, an increase of 5.1%. The increase
was due to growth in the Company's real estate and commercial loan portfolios.


NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 285,509                       2002
         320,208                       2001
         304,641                       2000
         278,577                       1999
         280,389                       1998


LOAN QUALITY

The lending  activities of the Company are guided by the  comprehensive  lending
policy  established  by the Board of Directors.  Loans must meet criteria  which
include  consideration  of the character,  capacity and capital of the borrower,
collateral provided for the loan, and prevailing economic conditions.
     Regardless  of credit  standards,  there is risk of loss  inherent in every
loan  portfolio.  The  allowance  for loan losses is an amount  that  management
believes will be adequate to absorb  possible  losses on existing loans that may
become  uncollectible,  based on evaluations of the collectibility of the loans.
The evaluations take into consideration such factors as change in the nature and
volume of the loan  portfolio,  overall  portfolio  quality,  review of specific
problem  loans,  industry  experience,  collateral  value and  current  economic
conditions that may affect the borrower's  ability to pay.  Management  believes
that the allowance for loan losses is adequate.  While management uses available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for loan losses. Such agencies may
require the  Company to  recognize  additions  to the  allowance  based on their
judgment of information available to them at the time of their examination.
     The  allowance  for loan losses is  increased by periodic  charges  against
earnings  as  a  provision  for  loan  losses,  and  decreased  periodically  by
charge-offs  of loans  (or  parts of  loans)  management  has  determined  to be
uncollectible, net of actual recoveries on loans previously charged-off.

18 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

NON-PERFORMING ASSETS

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

<TABLE>
<CAPTION>

December 31,                                     2002      2001      2000      1999      1998
---------------------------------------------------------------------------------------------
<S>                                           <C>       <C>       <C>       <C>       <C>
Non-accrual loans                             $ 2,245   $ 1,917   $ 1,210   $   836   $   929
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        394       304       313       476       348
  Credit card and home equity loans                 -        22        23         -        27
---------------------------------------------------------------------------------------------
  Total non-performing loans                    2,639     2,243     1,546     1,312     1,304
Other real estate owned                            59       143       201        33       111
---------------------------------------------------------------------------------------------
  Total non-performing assets                 $ 2,698   $ 2,386   $ 1,747   $ 1,345   $ 1,415
=============================================================================================
</TABLE>

Loans are generally placed on a non-accrual status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on non-accrual  status, all interest previously accrued but not collected
is charged  against  current  income.  Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
     Loans on which the accrual of  interest  has been  discontinued  or reduced
amounted  to $2,245,  $1,917 and $1,210 at  December  31,  2002,  2001 and 2000,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $171,  $152 and $138 for 2002, 2001 and 2000,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $77,
$86 and $86 for 2002, 2001 and 2000,  respectively.  There are no commitments to
lend additional funds to individuals whose loans are on non-accrual status.
     The  management  process for  evaluating  the adequacy of the allowance for
loan losses  includes  reviewing each month's loan committee  reports which list
all  loans  that  do  not  meet  certain  internally  developed  criteria  as to
collateral adequacy, payment performance, economic conditions and overall credit
risk.  These  reports also address the current  status and actions in process on
each listed loan. From this  information,  adjustments are made to the allowance
for loan losses.  Such adjustments include both specific loss allocation amounts
and general  provisions  by loan category  based on present and past  collection
experience,  nature and volume of the loan portfolio, overall portfolio quality,
and current economic  conditions that may affect the borrower's  ability to pay.
As of December 31, 2002,  there are no significant  loans as to which management
has serious doubt about their collectibility.
     At December  31,  2002,  2001 and 2000,  the Company did not have any loans
specifically classified as impaired.
     Most of the Company's  lending  activity is with  customers  located in the
Company's  geographic  market area and repayment thereof is affected by economic
conditions in this market area.

LOAN LOSS EXPERIENCE

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


<TABLE>
<CAPTION>

Years Ended December 31,                   2002      2001      2000      1999      1998
---------------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>
Balance at beginning of year            $ 3,600     3,100   $ 2,950   $ 2,830   $ 2,600
Charge-offs:
  Real estate mortgages                      91        38        37        82        69
  Commercial and all others                 944       389        51        13       252
  Credit card and related plans              44        37        27        65        37
  Installment loans                          22        19        24        26        25
---------------------------------------------------------------------------------------
Total charge-offs                         1,101       483       139       186       383
---------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                      31        20        30         -         1
  Commercial and all others                   -         -         -       195         -
  Credit card and related plans               1         1         9        10         9
  Installment loans                           3         8        17        12         8
---------------------------------------------------------------------------------------
Total recoveries                             35        29        56       217        18
---------------------------------------------------------------------------------------
Net charge-offs (recoveries)              1,066       454        83       (31)      365
---------------------------------------------------------------------------------------
Provision charged to operations             813       954       233        89       595
---------------------------------------------------------------------------------------
  Balance at End of Year                $ 3,347   $ 3,600   $ 3,100   $ 2,950   $ 2,830
=======================================================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding              0.34%     0.14%     0.03%   (0.01)%     0.13%
=======================================================================================
</TABLE>

                  Penseco Financial Services Corporation / 2002 Annual Report 19

<PAGE>

The allowance for loan losses is allocated as follows:


<TABLE>
<CAPTION>

December 31,                    2002             2001             2000             1999             1998
---------------------------------------------------------------------------------------------------------------
                              Amount     %1    Amount     %1    Amount     %1    Amount     %1    Amount     %1
---------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Real estate mortgages        $ 1,600   77%    $ 1,700   79%    $ 1,500   79%    $ 1,500   78%    $ 1,550   80%
Commercial
  and all others               1,222    13      1,375   11       1,100   10         950   10         830    9
Credit card and
  related plans                  175     1        175    1         150    1         150    1         150    1
Personal installment loans       350     9        350    9         350   10         350   11         300   10
---------------------------------------------------------------------------------------------------------------
  Total                      $ 3,347  100%      3,600  100%    $ 3,100  100%    $ 2,950  100%    $ 2,830  100%
===============================================================================================================
</TABLE>

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

DEPOSITS

The primary  source of funds to support the Company's  operations is its deposit
base.  Company deposits increased $8.2 million to $414.7 million at December 31,
2002 from  $406.5  million at  December  31,  2001,  an  increase of 2.0% due to
increases in DDA and savings deposits.  Company deposits increased $19.1 million
to $406.5 million at December 31, 2001 from $387.4 million at December 31, 2000,
an increase of 4.9% due to increases in DDA, savings and time deposits.

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

  Three months or less                  $  12,226
  Over three months through six months      5,495
  Over six months through twelve months     5,672
  Over twelve months                       10,293
                                        ---------
  Total                                 $  33,686
                                        =========


DEPOSITS (in millions)            YEAR
--------------------------------------
       $ 414,664                  2002
         406,531                  2001
         387,439                  2000
         367,332                  1999
         377,526                  1998


ASSET/LIABILITY MANAGEMENT

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

LIQUIDITY

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

20 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

LIQUIDITY (continued)

     The Company remains in a highly liquid condition both in the short and long
term.  Sources of liquidity  include the Company's U.S. Treasury and U.S. Agency
bond  portfolios,  additional  deposits,  earnings,  overnight loans to and from
other companies  (Federal Funds) and lines of credit at the Federal Reserve Bank
and the Federal Home Loan Bank.  The Company is not a party to any  commitments,
guarantees or obligations that could materially affect its liquidity.
     Subsequent to the Balance Sheet Date,  the Bank  purchased a FHLMC (Freddie
Mac) pool of new twenty year residential  mortgages,  with a 5 1/2% coupon and a
face value of $100,000.  The Bank  financed  the purchase by borrowing  $100,000
from the  Federal  Home Loan Bank with  maturities  ranging  from 5 to 20 years.
Calculations  indicate a 100 basis point spread in the 1st year  declining to 81
basis points  after the 10th year and every year  thereafter.  These  calculated
spreads may vary  depending  on various  interest  rate  scenarios  which affect
prepayment speeds.
     The investment  resulted in increases in Total Assets and Total Liabilities
of approximately 20.7% and 22.8% from December 31, 2002, respectively.
     The Bank has estimated that the  transaction  will result in an increase in
net interest income of approximately $800 for the current fiscal year.

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, 2002 and 2001 are as follows:

                                    2002       2001
---------------------------------------------------
Commitments to extend credit:
  Fixed rate                    $ 12,273   $ 17,490
  Variable rate                 $ 66,257   $ 45,033
Standby letters of credit       $ 10,586   $  3,311

     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally  have  expiration  dates  of one  year or  less or  other
termination  clauses  and  may  require  payment  of a fee.  Since  many  of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment amounts do not necessarily represent future cash requirements.
     Standby letters of credit are conditional  commitments  issued to guarantee
the  performance  of a customer to a third  party.  The credit risk  involved in
issuing  letters of credit is essentially the same as that involved in extending
loan facilities to customers.

RELATED PARTIES

The Company does not have any material transactions involving related persons or
entities,  other than traditional  banking  transactions,  which are made on the
same  terms  and  conditions  as those  prevailing  at the  time for  comparable
transactions  with  unrelated  parties.  During 2002,  the Bank issued a standby
letter of credit for the account of a related party in the amount of $6,353.

CAPITAL RESOURCES

A strong  capital  position is important to the continued  profitability  of the
Company and promotes  depositor and investor  confidence.  The Company's capital
provides a basis for future growth and  expansion  and also provides  additional
protection against unexpected losses.
     Additional  sources of capital would come from  retained  earnings from the
operations  of the  Company  and  from  the  sale of  additional  common  stock.
Management has no plans to offer additional common stock at this time.
     The  Company's  total  risk-based  capital ratio was 17.99% at December 31,
2002. The Company's  risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold.  This is the current
criteria  which the FDIC  uses in  determining  the  lowest  insurance  rate for
deposit  insurance.  The Company's  risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately  capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital  requirements  without the necessity of increasing its
equity capital.

DIVIDEND POLICY

Payment of future  dividends  will be subject to the  discretion of the Board of
Directors  and will  depend  upon the  earnings of the  Company,  its  financial
condition, its capital requirements, its need for funds and other matters as the
Board deems appropriate.
     Dividends  on the  Company  common  stock,  if  approved  by the  Board  of
Directors,  are customarily paid on or about March 15, June 15, September 15 and
December 15.


STOCKHOLDERS' EQUITY (in millions)        YEAR
----------------------------------------------
        $ 58,975                          2002
          54,648                          2001
          50,067                          2000
          45,743                          1999
          44,961                          1998

                  Penseco Financial Services Corporation / 2002 Annual Report 21

<PAGE>

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

The Company  currently  does not enter into  derivative  financial  instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial  instruments  with similar  characteristics.  However,  the Company is
party to financial  instruments with off-balance sheet risk in the normal course
of  business  to meet the  financing  needs of its  customers.  These  financial
instruments  include  commitments  to extend  credit,  financial  guarantees and
letters of credit.  These  instruments  involve to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
Consolidated Balance Sheets. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition  established  in
the  contract.  Commitments  generally  have  fixed  expiration  dates  or other
termination  clauses and may require payment of a fee. Standby letters of credit
are conditional commitments issued to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.
     Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.
     The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability  Committee.  Interest  rate risk is the  potential  of  economic
losses  due to future  interest  rate  changes.  These  economic  losses  can be
reflected as a loss of future net interest  income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income.  Management  realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and an interest rate shock  simulation  report.  The Company
has no market risk sensitive  instruments held for trading purposes.  It appears
the Company's market risk is reasonable at this time.
     The following table provides  information  about the Company's  market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes  in  interest  rates.  For  loans,  securities,   and  liabilities  with
contractual  maturities,  the table  presents  principal  cash flows and related
weighted-average  interest  rates  by  contractual  maturities  as  well  as the
Company's  historical  experience of the impact of interest rate fluctuations on
the  prepayment  of  residential  and  home  equity  loans  and  mortgage-backed
securities.  For core deposits (e.g., DDA, interest checking,  savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable,  related weighted-average interest rates based on
the Company's  historical  experience,  management's  judgment,  and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.

22 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>


MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                                                                                     Non-Rate
                                          2003        2004      2005      2006      2007  Thereafter Sensitive     Total  Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>         <C>       <C>       <C>       <C>        <C>        <C>        <C>
ASSETS
Fixed interest rate securities:
  U.S. Treasury securities           $  15,223  $   15,659  $  5,574  $      -  $      -  $       -  $       -  $  36,456  $  36,456
    Yield                                3.64%       4.00%     6.79%         -         -          -          -      4.28%
  U.S. Agency obligations               10,266      23,708    16,632         -         -          -          -     50,606     50,606
    Yield                                6.98%       5.04%     6.78%         -         -          -          -      6.01%
  States & political subdivisions            -           -         -         -         -     49,294          -     49,294     51,243
    Yield                                    -           -         -         -         -      7.55%          -      7.55%
Variable interest rate securities:
  U.S. Agency obligations                  660         660       100         -         -          -          -      1,420      1,408
    Yield                                3.11%       3.11%     3.11%         -         -          -          -      3.11%
  Federal Home Loan Bank stock               -           -         -         -         -        946          -        946        946
    Yield                                    -           -         -         -         -      3.25%          -      3.25%
  Other                                      -           -         -         -         -        410          -        410        410
    Yield                                    -           -         -         -         -      4.02%          -      4.02%
Fixed interest rate loans:
  Real estate mortgages                  6,669       6,846     6,672     7,114     6,855     61,673          -     95,829     97,069
    Yield                                7.35%       7.38%     7.41%     7.24%     7.40%      7.22%          -      7.27%
  Consumer and other                     1,592       1,405     1,271     1,136       988      1,115          -      7,507      7,514
    Yield                                6.95%       6.75%     6.42%     6.03%     5.64%      8.23%          -      6.70%
Variable interest rate loans:
  Real estate mortgages                 19,635      14,192    12,666    10,892    10,804     58,896          -    127,085    128,069
    Yield                                4.64%       4.79%     4.96%     4.89%     4.89%      5.35%          -      5.06%
  Commercial                            30,077           -         -         -         -          -          -     30,077     30,077
    Yield                                5.44%           -         -         -         -          -          -      5.44%
  Consumer and other                    11,252       4,601     4,246     3,849     3,982        428          -     28,358     28,593
    Yield                                5.37%       5.69%     5.06%     4.16%     4.16%      5.74%          -      5.05%
Less: Allowance for loan losses            802         313       288       266       262      1,416          -      3,347
Interest bearing deposits with banks    10,424           -         -         -         -          -          -     10,424     10,424
    Yield                                1.08%           -         -         -         -          -          -     1.08%
Federal funds sold                      33,075           -         -         -         -          -          -     33,075     33,075
    Yield                                1.13%           -         -         -         -          -          -     1.13%
Cash and due from banks                      -           -         -         -         -          -     11,120     11,120     11,120
Other assets                                 -           -         -         -         -          -     17,696     17,696
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                         $ 138,071  $   66,758  $ 46,873  $ 22,725  $ 22,367  $ 171,346  $  28,816  $ 496,956  $ 487,010
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing          $       -  $   31,363  $      -  $      -  $      -  $       -  $       -  $  31,363  $  31,363
    Yield                                    -        .46%         -         -         -          -          -       .46%
  Savings                                    -      73,786         -         -         -          -          -     73,786     73,786
    Yield                                    -        .73%         -         -         -          -          -       .73%
  Money markets                         89,462           -         -         -         -          -          -     89,462     89,462
    Yield                                1.06%           -         -         -         -          -          -      1.06%
  Time - Other                          11,255           -         -         -         -          -          -     11,255     11,255
    Yield                                3.13%           -         -         -         -          -          -      3.13%
Fixed interest rate deposits:
  Time - Over $100,000                  23,393       3,044     1,560     2,355     3,234        100          -     33,686     36,118
    Yield                                2.65%       3.65%     3.41%     5.78%     4.73%      5.00%          -      3.20%
  Time - Other                          57,128      12,819     5,796     4,458    14,000      2,351          -     96,552     97,608
    Yield                                2.75%       3.41%     3.74%     4.96%     4.81%      4.96%          -      3.35%
Demand - Non-interest bearing                -           -         -         -         -          -     78,560     78,560     78,560
Repurchase agreements                   19,419           -         -         -         -          -          -     19,419     19,419
    Yield                                1.03%           -         -         -         -          -          -      1.03%
Short-term borrowings                      890           -         -         -         -          -          -        890        890
    Yield                                 .94%           -         -         -         -          -          -       .94%
Other liabilities                            -           -         -         -         -          -      3,008      3,008
Stockholders' equity                         -           -         -         -         -          -     58,975     58,975
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity                 $ 201,547  $  121,012  $  7,356  $  6,813  $ 17,234  $   2,451  $ 140,543  $ 496,956  $ 438,461
------------------------------------------------------------------------------------------------------------------------------------
Excess of (liabilities) assets
subject to interest rate change      $ (63,476) $  (54,254) $ 39,517  $ 15,912  $  5,133  $ 168,895  $(111,727) $       -
====================================================================================================================================
</TABLE>

                  Penseco Financial Services Corporation / 2002 Annual Report 23

<PAGE>

ITEM 8 Financial Statements and Supplementary Data

                          Consolidated Balance Sheets

(in thousands, except per share data)

                 December 31,                                    2002       2001
                 ---------------------------------------------------------------
ASSETS           Cash and due from banks                    $  11,120  $  13,026
                 Interest bearing balances with banks          10,424      4,270
                 Federal funds sold                            33,075          -
                 ---------------------------------------------------------------
                   Cash and Cash Equivalents                   54,619     17,296

                 Investment securities:
                   Available-for-sale, at fair value          108,083     96,505
                   Held-to-maturity (fair value of $32,986
                     and $32,617, respectively)                31,049     32,118
                 ---------------------------------------------------------------
                   Total Investment Securities                139,132    128,623

                 Loans, net of unearned income                288,856    323,808
                   Less: Allowance for loan losses              3,347      3,600
                 ---------------------------------------------------------------
                   Loans, Net                                 285,509    320,208
                 Bank premises and equipment                    9,920     10,783
                 Other real estate owned                           59        143
                 Accrued interest receivable                    3,399      3,599
                 Other assets                                   4,318      1,899
                 ---------------------------------------------------------------
                   Total Assets                             $ 496,956  $ 482,551
                 ===============================================================

LIABILITIES      Deposits:
                   Non-interest bearing                     $  78,560  $  70,812
                   Interest bearing                           336,104    335,719
                 ---------------------------------------------------------------
                   Total Deposits                             414,664    406,531
                 Other borrowed funds:
                   Repurchase agreements                       19,419     18,140
                   Short-term borrowings                          890         17
                 Accrued interest payable                       1,317      1,577
                 Other liabilities                              1,691      1,638
                 ---------------------------------------------------------------
                   Total Liabilities                          437,981    427,903

STOCKHOLDERS'    Common stock, $.01 par value, 15,000,000
EQUITY             shares authorized, 2,148,000
                   shares issued and outstanding                   21         21
                 Surplus                                       10,819     10,819
                 Retained earnings                             45,060     41,206
                 Accumulated other comprehensive income         3,075      2,602
                 ---------------------------------------------------------------
                   Total Stockholders' Equity                  58,975     54,648
                 ---------------------------------------------------------------
                   Total Liabilities and
                   Stockholders' Equity                     $ 496,956  $ 482,551
                 ===============================================================

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

24 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                       Consolidated Statements of Income

(in thousands, except per share data)

<TABLE>
<CAPTION>

              Years Ended December 31,                      2002       2001       2000
              ------------------------------------------------------------------------
              <S>                                       <C>        <C>        <C>
INTEREST      Interest and fees on loans                $ 20,553   $ 24,683   $ 23,811
INCOME        Interest and dividends on investments:
                U.S. Treasury securities and U.S.
                  Agency obligations                       4,900      5,577      5,062
                States & political subdivisions            2,080      1,434      1,307
                Other securities                              79        128        128
              Interest on Federal funds sold                 189          6        414
              Interest on balances with banks                 98         32        321
              ------------------------------------------------------------------------
                Total Interest Income                     27,899     31,860     31,043
              ------------------------------------------------------------------------
INTEREST      Interest on time deposits
EXPENSE         of $100,000 or more                        1,398      1,779      2,262
              Interest on other deposits                   6,327      9,605     10,396
              Interest on other borrowed funds               286      1,140      1,040
              ------------------------------------------------------------------------
                Total Interest Expense                     8,011     12,524     13,698
              ------------------------------------------------------------------------
                Net Interest Income                       19,888     19,336     17,345
              Provision for loan losses                      813        954        233
              ------------------------------------------------------------------------
                Net Interest Income After Provision
                  for Loan Losses                         19,075     18,382     17,112
              ------------------------------------------------------------------------
OTHER         Trust department income                      1,266      1,233      1,329
INCOME        Service charges on deposit accounts          1,123      1,126        718
              Merchant transaction income                  5,519      5,331      5,354
              Other fee income                             1,562      1,291        975
              Other operating income                         553        231        211
              Realized gains (losses) on securities, net   1,009        (26)      (354)
              ------------------------------------------------------------------------
                Total Other Income                        11,032      9,186      8,233
              ------------------------------------------------------------------------
OTHER         Salaries and employee benefits               9,048      8,180      7,951
EXPENSES      Occupancy expenses, net                      1,384      1,416      1,387
              Furniture and equipment expenses             1,208      1,245      1,189
              Merchant transaction expenses                4,731      4,636      4,784
              Other operating expenses                     4,727      4,600      3,995
              ------------------------------------------------------------------------
                Total Other Expenses                      21,098     20,077     19,306
              ------------------------------------------------------------------------
              Income before income taxes                   9,009      7,491      6,039
              Applicable income taxes                      2,256      1,869      1,296
              ------------------------------------------------------------------------
NET INCOME      Net Income                              $  6,753   $  5,622   $  4,743
              ========================================================================
PER SHARE       Earnings Per Share                      $   3.14   $   2.62   $   2.21
              ========================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2002 Annual Report 25

<PAGE>

                Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                                                 Other          Total
                                             Common               Retained   Comprehensive   Stockholders'
(in thousands except per share data)         Stock      Surplus   Earnings      Income          Equity
----------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>          <C>             <C>
Balance, December 31, 1999                    21         10,819     35,996       (1,093)         45,743

Comprehensive income:
  Net income, 2000                             -              -      4,743            -           4,743
  Unrealized gains on securities,
    net of reclassification adjustment
    and taxes                                  -              -          -        2,051           2,051
                                                                                                 -------
Comprehensive income                                                                              6,794

Cash dividends declared ($1.15 per share)      -              -     (2,470)           -          (2,470)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 2000                    21         10,819     38,269          958          50,067

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

Cash dividends declared ($1.25 per share)      -              -     (2,685)           -          (2,685)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 2001                  $ 21       $ 10,819   $ 41,206     $  2,602        $ 54,648

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

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

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

26 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                     Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

(in thousands)   Years Ended December 31,                                 2002          2001          2000
                 ------------------------------------------------------------------------------------------
                 <S>                                                 <C>           <C>           <C>
OPERATING        Net Income                                          $   6,753     $   5,622     $   4,743
ACTIVITIES       Adjustments to reconcile net income to net
                   cash provided by operating activities:
                     Depreciation                                        1,240         1,288         1,243
                     Provision for loan losses                             813           954           233
                     Deferred income tax provision (benefit)                95          (213)         (109)
                     Amortization of securities
                       (net of accretion)                                  201            38            55
                     Net realized (gains) losses on securities          (1,009)           26           354
                     Loss (gain) on other real estate                        2           (14)          (22)
                     Loss on disposition of fixed assets                     7             -             8
                     Decrease (increase) in interest receivable            200           391        (1,063)
                     (Increase) decrease in other assets                (2,419)         (299)          463
                     (Decrease) increase in income taxes payable          (252)          208            26
                     (Decrease) increase in interest payable              (260)         (691)          408
                     (Decrease) increase in other liabilities              (34)           78            30
                 ------------------------------------------------------------------------------------------
                     Net cash provided by
                       operating activities                              5,337         7,388         6,369
                 ------------------------------------------------------------------------------------------
INVESTING        Purchase of investment securities
ACTIVITIES         available-for-sale                                  (34,798)      (41,035)      (44,610)
                 Proceeds from sales and maturities of investment
                   securities available-for-sale                        24,797        52,568        37,801
                 Purchase of investment securities to be
                   held-to-maturity                                          -       (13,407)      (10,689)
                 Proceeds from repayments of investment
                   securities to be held-to-maturity                     1,017         1,487           898
                 Net loans repaid (originated)                          33,629       (16,786)      (26,569)
                 Proceeds from other real estate                           339           337           126
                 Proceeds from sale of fixed assets                          5             -             4
                 Investment in premises and equipment                     (389)         (364)         (666)
                 ------------------------------------------------------------------------------------------
                     Net cash provided (used) by
                       investing activities                             24,600       (17,200)      (43,705)
                 ------------------------------------------------------------------------------------------
FINANCING        Net increase in demand and savings deposits            18,906        14,784        28,375
ACTIVITIES       Net (payments) proceeds on time deposits              (10,773)        4,308        (8,268)
                 Increase in repurchase agreements                       1,279         3,054         3,105
                 Net increase (decrease) in short-term borrowings          873       (11,486)       10,616
                 Cash dividends paid                                    (2,899)       (2,685)       (2,470)
                 ------------------------------------------------------------------------------------------
                     Net cash provided by
                       financing activities                              7,386         7,975        31,358
                 ------------------------------------------------------------------------------------------
                     Net increase (decrease) in cash
                       and cash equivalents                             37,323        (1,837)       (5,978)

                 Cash and cash equivalents at January 1                 17,296        19,133        25,111
                 ------------------------------------------------------------------------------------------
                 Cash and cash equivalents at December 31            $  54,619     $  17,296     $  19,133
                 ==========================================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2002 Annual Report 27

<PAGE>

                     General Notes To Financial Statements

1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated in 1997 under the laws of Pennsylvania. It is the parent company of
Penn Security Bank and Trust Company (Bank), a state chartered bank.
     The Company  operates from nine banking  offices under a state bank charter
and provides full banking services,  including trust services, to individual and
corporate  customers  primarily  in  Northeastern  Pennsylvania.  The  Company's
primary   deposit   products  are  savings  and  demand  deposit   accounts  and
certificates  of  deposit.   Its  primary  lending  products  are  real  estate,
commercial and consumer loans.
     The Company's  revenues are  attributable to a single  reportable  segment,
therefore segment information is not presented.
     The accounting  policies of the Company conform with accounting  principles
generally  accepted in the United  States of America and with general  practices
within the banking industry.

BASIS OF PRESENTATION

The Financial Statements of the Company have been consolidated with those of its
wholly-owned subsidiary,  Penn Security Bank and Trust Company,  eliminating all
intercompany items and transactions.
     The Statements are presented on the accrual basis of accounting.
     All  information  is presented  in  thousands of dollars,  except per share
data.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.
     Material estimates that are particularly  susceptible to significant change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. In connection  with the  determination  of the allowances
for losses on loans and foreclosed real estate,  management obtains  independent
appraisals for significant properties.

EMERGING ACCOUNTING STANDARDS

The  Financial  Accounting  Standards  Board has issued  various new  accounting
standards as of December 31, 2002, which are applicable in future periods.
     Management  does  not  anticipate  that  the  adoption  of any  of the  new
standards will have a significant  effect on the Company's earnings or financial
position.

INVESTMENT SECURITIES

Investments  in securities are classified in two categories and accounted for as
follows:
     Securities  Held-to-Maturity.  Bonds, notes, debentures and mortgage-backed
securities for which the Company has the positive  intent and ability to hold to
maturity  are  reported at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts  computed on the straight-line  basis, which approximates
the interest method, over the remaining period to maturity.
     Securities Available-for-Sale.  Bonds, notes, debentures and certain equity
securities  not  classified  as securities to be held to maturity are carried at
fair value with unrealized  holding gains and losses,  net of tax, reported as a
net amount in a separate component of stockholders' equity until realized.
     Gains  and  losses  on  the  sale  of  securities   available-for-sale  are
determined  using the  specific  identification  method  and are  reported  as a
separate component of other income in the Statements of Income.

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

Loans are  stated  at the  principal  amount  outstanding,  net of any  unearned
income,  deferred  loan fees and the  allowance  for loan  losses.  Interest  is
accrued daily on the outstanding balances.
     Loans are  generally  placed on a  non-accrual  status  when  principal  or
interest is past due 90 days or when payment in full is not anticipated.  When a
loan is placed on non-accrual  status,  all interest  previously accrued but not
collected  is charged  against  current  income.  Loans are  returned to accrual
status when past due interest is collected  and the  collection  of principal is
probable.
     The  provision  for loan  losses  is based on past  loan  loss  experience,
management's  evaluation  of the  potential  loss in the current loan  portfolio
under current  economic  conditions  and such other factors as, in  management's
best  judgement,  deserve  current  recognition in estimating  loan losses.  The
annual  provision  for loan losses  charged to operating  expense is that amount
which is  sufficient  to bring the balance of the  allowance  for possible  loan
losses to an adequate level to absorb anticipated losses.

PREMISES AND EQUIPMENT

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

LONG-LIVED ASSETS

The Company  reviews the  carrying  value of  long-lived  assets for  impairment
whenever events or changes in  circumstances  indicate that carrying  amounts of
the assets might not be  recoverable,  as  prescribed  in Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).

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.

28 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

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

PENSION EXPENSE

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

POSTRETIREMENT BENEFITS EXPENSE

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

ADVERTISING EXPENSES

Advertising costs are expensed as incurred.  Advertising  expenses for the years
ended  December  31,  2002,  2001 and  2000,  amounted  to $650,  $497 and $466,
respectively.

INCOME TAXES

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

CASH FLOWS

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

The Company paid  interest and income taxes during the years ended  December 31,
2002, 2001 and 2000 as follows:

                           2002         2001        2000
---------------------------------------------------------
Income taxes paid      $ 2,636      $  1,909     $  1,379
Interest paid          $ 8,271      $ 13,215     $ 13,290

Non-cash  transactions  during the years ended December 31, 2002, 2001 and 2000,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $257, $265 and $272, respectively.

TRUST ASSETS AND INCOME

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

EARNINGS PER SHARE

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

RECLASSIFICATIONS

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2002
presentation.

2  CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                                    2002         2001
-----------------------------------------------------------------
Cash items in process of collection         $    127     $    293
Non-interest bearing balances                  8,708        9,672
Cash on hand                                   2,285        3,061
-----------------------------------------------------------------
  Total                                     $ 11,120     $ 13,026
=================================================================

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

3  INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 2002
and 2001 are as follows:

                              AVAILABLE-FOR-SALE

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

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2001                          Cost       Gains        Losses       Value
--------------------------------------------------------------------------
U.S. Treasury securities   $  35,014   $    1,086   $       31    $ 36,069
U.S. Agency securities        55,368        2,775            -      58,143
States & political
  subdivisions                     -            -            -           -
--------------------------------------------------------------------------
  Total Debt Securities       90,382        3,861           31      94,212
Equity securities              2,180          113            -       2,293
--------------------------------------------------------------------------
  Total Available-
    for-Sale               $  92,562   $    3,974   $       31    $ 96,505
==========================================================================

Equity securities at December 31, 2002 and 2001,  consisted primarily of Federal
Home Loan Bank stock, which is a required  investment in order to participate in
an available line of credit  program.  The stock is stated at par value as there
is no readily determinable fair value.

                  Penseco Financial Services Corporation / 2002 Annual Report 29

<PAGE>

3  INVESTMENT SECURITIES (continued)

A summary of transactions involving  available-for-sale debt securities in 2002,
2001 and 2000 are as follows:

December 31,                    2002        2001        2000
------------------------------------------------------------
Proceeds from sales         $ 13,832    $ 28,594    $ 18,952
Gross realized gains           1,009          53           2
Gross realized losses              -          79         356


                                Held-to-Maturity

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

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
2001                          Cost       Gains        Losses       Value
--------------------------------------------------------------------------
U.S. Agency Obligations:
  Mortgage-backed
    securities             $   2,377   $        -   $       45    $  2,332
States & political
  subdivisions                29,741          799          255      30,285
--------------------------------------------------------------------------
  Total Held-to-Maturity   $  32,118   $      799   $      300    $ 32,617
==========================================================================

Investment  securities  with  amortized  costs and fair  values of  $88,034  and
$92,907 at December 31, 2002 and $76,419 and $79,091 at December 31, 2001,  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, 2002
by contractual  maturity,  are shown in the following table. Expected maturities
will differ from contractual  maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

                                  Available-for-Sale         Held-to-Maturity
--------------------------------------------------------------------------------
                                Amortized      Fair       Amortized      Fair
                                   Cost        Value         Cost        Value
--------------------------------------------------------------------------------
Due in one year or less:
  U.S. Treasury securities      $  15,008    $  15,223    $       -    $      -
  U.S. Agency securities            9,961       10,266            -           -
After one year through
  five years:
  U.S. Treasury securities         20,090       21,233            -           -
  U.S. Agency securities           37,718       40,340            -           -
After ten years:
  States & political
    subdivisions                   19,431       19,665       29,629      31,578
--------------------------------------------------------------------------------
  Subtotal                        102,208      106,727       29,629      31,578
Mortgage-backed securities              -            -        1,420       1,408
--------------------------------------------------------------------------------
  Total Debt Securities         $ 102,208    $ 106,727    $  31,049    $ 32,986
================================================================================

4  LOANS

Major classifications of loans are as follows:

December 31,                                      2002        2001
------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development          $   5,031    $   9,124
  Secured by farmland                                -          395
  Secured by 1-4 family residential
    properties:
    Revolving, open-end loans                   15,818        8,410
    Secured by first liens                     135,602      159,748
    Secured by junior liens                     20,921       29,269
  Secured by multi-family properties               635          808
  Secured by non-farm, non-residential
    properties                                  44,907       47,856
Commercial and industrial loans
    to U.S. addressees                          30,077       30,001
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                  2,320        2,377
  Other (installment and
    student loans, etc.)                        26,942       29,169
Obligations of states &
  political subdivisions                         6,239        5,678
All other loans                                    364          973
------------------------------------------------------------------
  Gross Loans                                  288,856      323,808
Less: Unearned income on loans                       -           -
------------------------------------------------------------------
  Loans, Net of Unearned Income              $ 288,856    $ 323,808
==================================================================

Loans on which the accrual of interest has been discontinued or reduced amounted
to $2,245, $1,917 and $1,210 at December 31, 2002, 2001 and 2000,  respectively.
If interest on those loans had been  accrued,  such income would have been $171,
$152 and $138 for 2002,  2001 and 2000,  respectively.  Interest income on those
loans,  which is recorded only when  received,  amounted to $77, $86 and $86 for
2002, 2001 and 2000, respectively. Also, at December 31, 2002 and 2001, the Bank
had loans totalling $394 and $326, respectively,  which were past due 90 days or
more and still  accruing  interest  (credit  card,  home  equity and  guaranteed
student loans).

5  ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,                   2002       2001       2000
----------------------------------------------------------------------
Balance at beginning of year            $ 3,600    $ 3,100    $ 2,950
Provision charged to operations             813        954        233
Recoveries credited to allowance             35         29         56
----------------------------------------------------------------------
                                          4,448      4,083      3,239
Losses charged to allowance              (1,101)      (483)      (139)
----------------------------------------------------------------------
  Balance at End of Year                $ 3,347    $ 3,600    $ 3,100
======================================================================

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

Years Ended December 31,        Book Provision           Tax Deduction
------------------------        --------------           -------------
        2002                        $  813                  $ 1,066
        2001                        $  954                  $   454
        2000                        $  233                  $    52

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $948,  $948  and  $948 at  December  31,  2002,  2001  and  2000,
respectively.

30 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

6  BANK PREMISES AND EQUIPMENT

December 31,                                2002       2001
-----------------------------------------------------------
Land                                    $  2,919   $  2,919
Buildings and improvements                14,519     14,473
Furniture and equipment                   11,539     11,208
-----------------------------------------------------------
                                          28,977     28,600
Less: Accumulated depreciation            19,057     17,817
-----------------------------------------------------------
  Net Bank Premises and Equipment       $  9,920   $ 10,783
===========================================================

Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation expense amounted to $1,240 in
2002, $1,288 in 2001 and $1,243 in 2000.
     Occupancy  expenses were reduced by rental income received in the amount of
$63,  $61  and  $60 in the  years  ended  December  31,  2002,  2001  and  2000,
respectively.

7  OTHER REAL ESTATE OWNED

Real estate  acquired  through  foreclosure  is recorded at the lower of cost or
market  at the time of  acquisition.  Any  subsequent  write-downs  are  charged
against operating expenses.  The other real estate owned as of December 31, 2002
and 2001 was $59 and $143,  respectively,  supported by  appraisals  of the real
estate involved.

8  LOAN SERVICING

The Company  services  $27,694 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  $299 at December 31,
2002. The balance of the servicing rights was $227 at December  31,2002,  net of
amortization.
     The Company  recognized an asset of $236 for mortgage  servicing  rights in
2002.  Amortization  expense of $9 was recorded for the year ended  December 31,
2002.
     There was no allowance for impairment recorded at December 31, 2002.

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

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


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

2002         100%        $ 3,550     $ 3,535       None        $     -
2001         100%        $ 3,650     $ 3,635       None        $     -
2000         100%        $ 3,750     $ 3,735       None        $     -

10 DEPOSITS

December 31,                                 2002        2001
-------------------------------------------------------------
Demand - Non-interest bearing           $  78,560   $  70,812
Demand - Interest bearing                  31,363      27,498
Savings                                    73,786      67,613
Money markets                              89,462      88,342
Time - Over $100,000                       33,686      37,606
Time - Other                              107,807     114,660
-------------------------------------------------------------
  Total                                 $ 414,664   $ 406,531
=============================================================

Scheduled maturities of time deposits are as follows:

        2002                  $   91,776
        2003                      15,863
        2004                       7,356
        2005                       6,813
        2006                      17,234
        2007 and thereafter        2,451
        --------------------------------
          Total               $  141,493
        ================================

11 OTHER BORROWED FUNDS

At December 31, 2002 and 2001, other borrowed funds consisted of demand notes to
the U.S. Treasury, Repurchase agreements and Federal funds purchased.
     Short-term borrowings generally have original maturity dates of thirty days
or less.
     Investment  securities  with amortized costs and fair values of $27,133 and
$29,008 at December 31, 2002 and $22,056 and $23,367 at December 31, 2001,  were
pledged to secure repurchase agreements.

Years Ended December 31,                    2002            2001
----------------------------------------------------------------
Amount outstanding at year end          $ 20,309        $ 18,157
Average interest rate at year end          1.57%           1.81%
Maximum amount outstanding at
  any month end                         $ 24,649        $ 49,313
Average amount outstanding              $ 20,792        $ 32,364
Weighted average interest rate
  during the year:
    Federal funds purchased                 .53%           2.55%
    Repurchase agreements                  1.00%           3.28%
    Demand notes to U.S. Treasury          1.00%           3.67%

The Company has an available  credit  facility with the Federal  Reserve Bank in
the amount of $10,000,  secured by pledged  securities  with amortized costs and
fair values of $10,010  and $10,150 at December  31, 2002 and $9,998 and $10,095
at December 31, 2001 and with  interest  rates of .75% and 1.25% at December 31,
2002 and December 31, 2001, respectively. There is no stated expiration date for
the credit facility as long as the Company  maintains the pledged  securities at
the Federal  Reserve Bank.  There was no outstanding  balance as of December 31,
2002 and 2001, respectively.
     The Company has the availability of a $5,000  overnight  Federal funds line
of credit with First Union Bank. There was no balance outstanding as of December
31, 2002 and 2001, respectively.
     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$189,060  with the Federal  Home Loan Bank of  Pittsburgh  (FHLB).  There was no
balance outstanding or assets pledged as of December 31, 2002 (see note 21).

                  Penseco Financial Services Corporation / 2002 Annual Report 31

<PAGE>

12 EMPLOYEE BENEFIT PLANS

The Company  provides an Employee  Stock  Ownership  Plan  (ESOP),  a Retirement
Profit  Sharing  Plan,  an  Employees'  Pension  Plan,  as well  as an  unfunded
supplemental  executive  pension plan and a Postretirement  Life Insurance Plan,
all non-contributory, covering all eligible employees.
     Under the Employee Stock Ownership Plan (ESOP),  amounts voted by the Board
of Directors  are paid into the ESOP and each  employee is credited with a share
in proportion to their annual  compensation.  All  contributions to the ESOP are
invested in or will be invested  primarily in Company stock.  Distribution  of a
participant's  ESOP account  occurs upon  retirement,  death or  termination  in
accordance with the plan provisions.
     At  December  31, 2002 and 2001,  the ESOP held  88,962 and 85,337  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 $140,
$140 and $110 to the plan during the years ended  December  31,  2002,  2001 and
2000, respectively.
     Under the  Retirement  Profit  Sharing Plan,  amounts voted by the Board of
Directors  are paid into a fund and each  employee is  credited  with a share in
proportion to their annual compensation.  Upon retirement, death or termination,
each  employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions.  The Company did
not  contribute to the plan during the years ended  December 31, 2002,  2001 and
2000, respectively.
     Under the Pension Plan,  amounts computed on an actuarial basis are paid by
the Company into a trust fund.  Provision is made for fixed benefits payable for
life  upon  retirement  at  the  age of 65,  based  on  length  of  service  and
compensation  levels as defined in the plan.  Plan  assets of the trust fund are
invested and  administered  by the Trust  Department  of Penn  Security Bank and
Trust Company.
     The unfunded supplemental  executive pension plan provides certain officers
with  additional  retirement  benefits  to replace  benefits  lost due to limits
imposed on qualified plans by Federal tax law.
     The postretirement life insurance plan is an unfunded,  non-vesting defined
benefit plan. The plan is non-contributory  and provides for a reducing level of
term life insurance coverage following retirement.
     For the unfunded plans above,  amounts calculated on an actuarial basis are
recorded as a liability.

In determining the benefit obligation the following assumptions were made:

                            Pension Benefits       Other Benefits
                          --------------------    ----------------
December 31,                  2002       2001        2002    2001
------------------------------------------------------------------
Weighted - average
  assumptions:
    Discount rate         6.25%-6.50%    6.50%      6.25%    6.50%
    Expected return on
      plan assets             9.00%      9.00%          -        -
    Rate of compensation
      increase                4.50%      4.50%      4.50%    4.50%

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

                            Pension Benefits      Other Benefits
                           ------------------    -----------------
December 31,                  2002     2001        2002     2001
------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation,
      beginning             $ 9,059  $ 7,940    $    186   $  167
    Service cost                370      310           5        5
    Interest cost               588      540          15       11
    Amendments                  111        -           -        -
    Actuarial gain (loss)        26      563          51       10
    Benefits paid              (299)    (294)         (7)      (7)
------------------------------------------------------------------
  Benefit obligation,
    ending                    9,855    9,059         250      186
------------------------------------------------------------------
Change in plan assets:
    Fair value of plan
      assets, beginning       8,100    8,247           -        -
    Actual return on plan
      assets                   (219)      86           -        -
    Employer contribution       222       61           -        -
    Benefits paid              (299)    (294)          -        -
------------------------------------------------------------------
  Fair value of plan
    assets, ending            7,804    8,100           -        -
------------------------------------------------------------------
Funded status                (2,051)    (959)       (250)    (186)
Unrecognized net transition
    asset                         -        -           -        -
Unrecognized net actuarial
    loss (gain)               2,845    1,853         (34)     (88)
Unrecognized prior service
    cost                         56      (55)         64       72
------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                    $   850  $   839    $   (220)  $ (202)
==================================================================

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

                                               Pension Benefits
                                              ------------------
Years Ended December 31,                  2002       2001       2000
---------------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                        $  370     $  310     $  295
    Interest cost                          588        540        509
    Expected return on plan assets        (726)      (732)      (705)
    Amortization of transition asset         -        (66)       (66)
    Amortization of prior service cost    (104)         -          -
    Amortization of unrecognized
      net (gain) loss                       82          -        (12)
---------------------------------------------------------------------
      Net periodic pension cost         $  210     $   52     $   21
=====================================================================

                                                Other Benefits
                                              ------------------
Years Ended December 31,                  2002       2001       2000
---------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                        $    5     $    5     $    5
    Interest cost                           15         11         11
    Amortization of prior service cost       7          7          8
    Amortization of unrecognized
      net loss                              (1)        (5)        (7)
---------------------------------------------------------------------
      Net periodic other benefit cost   $   26     $   18     $   17
=====================================================================

The projected benefit obligation,  accumulated benefit obligation and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $98,  $98 and $0,  respectively  at December 31, 2001
and $185, $174 and $0, respectively at December 31, 2001.

32 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

13 INCOME TAXES

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

Years Ended December 31,       2002       2001       2000
----------------------------------------------------------
Currently payable           $ 2,161    $ 2,082    $ 1,405
Deferred provision (benefit)     95       (213)      (109)
----------------------------------------------------------
  Total                     $ 2,256    $ 1,869    $ 1,296
==========================================================

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

Years Ended December 31,              2002       2001       2000
-----------------------------------------------------------------
Tax at statutory rate              $ 3,063    $ 2,547    $ 2,053
Reduction for non-taxable interest    (828)      (746)      (748)
Other additions (reductions)            21         68         (9)
-----------------------------------------------------------------
  Applicable Income Taxes          $ 2,256    $ 1,869    $ 1,296
================================================================

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

Years Ended December 31,              2002       2001       2000
-----------------------------------------------------------------
Accretion of discount on bonds     $    53    $    53    $    34
Accelerated depreciation               (36)       (96)       (85)
Supplemental benefit plan                4         (9)        (4)
Allowance for loan losses               86       (180)       (51)
Prepaid pension cost                   (12)        19         (3)
-----------------------------------------------------------------
  Total                            $    95    $  (213)   $  (109)
=================================================================

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

December 31,                                     2002       2001
-----------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                   $   815    $   901
  Depreciation                                    406        370
  Supplemental Benefit Plan                        31         35
-----------------------------------------------------------------
    Total Deferred Tax Assets                   1,252      1,306
=================================================================
Deferred tax liabilities:
  Unrealized securities gains                   1,584      1,340
  Prepaid pension costs                           343        355
  Accretion                                       148        95
-----------------------------------------------------------------
    Total Deferred Tax Liabilities              2,075      1,790
-----------------------------------------------------------------
    Net Deferred Tax (Liabilities) Assets     $  (823)   $  (484)
=================================================================

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.

14 ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income of $3,075, $2,602 and $958 at December
31, 2002, 2001 and 2000, respectively consisted entirely of unrealized gains or
losses on available-for-sale securities, net of tax.
     A reconciliation of other comprehensive income for the years ended December
31, 2002 and 2001 is as follows:

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

2001
------------------------------------------------------------------------------
Unrealized gains on
  available-for-sale securities:
    Unrealized gains arising during
      the year                            $ 2,465     $   (838)      $ 1,627
    Less:  Reclassification adjustment
      for losses realized in income           (26)           9           (17)
------------------------------------------------------------------------------
    Net unrealized gains                  $ 2,491     $   (847)      $ 1,644
==============================================================================

15 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, 2002 and 2001 are as follows:

                                       2002          2001
---------------------------------------------------------
Commitments to extend credit:
  Fixed rate                       $ 12,273      $ 17,490
  Variable rate                    $ 66,257      $ 45,033

Standby letters of credit          $ 10,586      $  3,311

     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally  have  expiration  dates  of one  year or  less or  other
termination  clauses  and  may  require  payment  of a fee.  Since  many  of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment amounts do not necessarily represent future cash requirements.
     Standby letters of credit are conditional  commitments  issued to guarantee
the  performance  of a customer to a third  party.  The credit risk  involved in
issuing  letters of credit is essentially the same as that involved in extending
loan facilities to customers.
     Various actions and proceedings are presently  pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising  from such  actions  would  not have a  material  adverse  effect on the
financial position of the Company.

                  Penseco Financial Services Corporation / 2002 Annual Report 33

<PAGE>

16 FAIR VALUE DISCLOSURE

GENERAL

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

VALUATION METHODS AND ASSUMPTIONS

Estimated fair values have been  determined  using the best  available  data, an
estimation methodology suitable for each category of financial instruments.  For
those loans and  deposits  with  floating  interest  rates it is  presumed  that
estimated fair values generally approximate the carrying amount balances.
     Financial  instruments  actively  traded in a  secondary  market  have been
valued using quoted available market prices.  Those with stated  maturities have
been valued  using a present  value  discounted  cash flow with a discount  rate
approximating   current  market  for  similar  assets  and  liabilities.   Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount  payable  on demand and the  carrying  amount  balance.  The net loan
portfolio  has been  valued  using a present  value  discounted  cash flow.  The
discount rate used in these  calculations  is the current loan rate adjusted for
non-interest  operating  costs,  credit loss and assumed  prepayment  risk.  Off
balance sheet carrying amounts and fair value of letters of credit represent the
deferred income fees arising from those unrecognized financial instruments.
     Changes in  assumptions  or  estimation  methodologies  may have a material
effect on these estimated fair values.
     All assets and liabilities which are not considered  financial  instruments
have not been valued  differently  than has been customary with  historical cost
accounting.

<TABLE>
<CAPTION>

                                             December 31, 2002          December 31, 2001
--------------------------------------------------------------------------------------------
                                           Carrying       Fair        Carrying      Fair
                                            Amount        Value        Amount       Value
--------------------------------------------------------------------------------------------
<S>                                       <C>           <C>          <C>          <C>
Financial Assets:
  Cash and due from banks                 $  11,120     $  11,120    $  13,026    $  13,026
  Interest bearing balances with banks       10,424        10,424        4,270        4,270
  Federal funds sold                         33,075        33,075            -            -
--------------------------------------------------------------------------------------------
    Cash and cash equivalents                54,619        54,619       17,296       17,296
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities               36,456        36,456       36,069       36,069
      U.S. Agency obligations                50,606        50,606       58,143       58,143
      States & political subdivisions        19,665        19,665            -            -
      Federal Home Loan Bank stock              946           946        1,911        1,911
      Other securities                          410           410          382          382
    Held-to-maturity:
      U.S. Agency obligations                 1,420         1,408        2,377        2,332
      States & political subdivisions        29,629        31,578       29,741       30,285
--------------------------------------------------------------------------------------------
        Total investment securities         139,132       141,069      128,623      129,122
  Loans, net of unearned income:
    Real estate mortgages                   222,914       225,138      255,610      258,864
    Commercial                               30,077        30,077       30,001       30,001
    Consumer and other                       35,865        36,107       38,197       38,551
    Less:  Allowance for loan losses          3,347                      3,600
--------------------------------------------------------------------------------------------
      Loans, net                            285,509       291,322      320,208      327,416
--------------------------------------------------------------------------------------------
      Total Financial Assets                479,260     $ 487,010      466,127    $ 473,834
Other assets                                 17,696                     16,424
--------------------------------------------------------------------------------------------
      Total Assets                        $ 496,956                  $ 482,551
============================================================================================
Financial Liabilities:
  Demand - Non-interest bearing           $  78,560     $  78,560    $  70,812    $  70,812
  Demand - Interest bearing                  31,363        31,363       27,498       27,498
  Savings                                    73,786        73,786       67,613       67,613
  Money markets                              89,462        89,462       88,342       88,342
  Time                                      141,493       144,981      152,266      155,170
--------------------------------------------------------------------------------------------
      Total Deposits                        414,664       418,152      406,531      409,435
  Repurchase agreements                      19,419        19,419       18,140       18,140
  Short-term borrowings                         890           890           17           17
--------------------------------------------------------------------------------------------
      Total Financial Liabilities           434,973     $ 438,461      424,688    $ 427,592
Other Liabilities                             3,008                      3,215
Stockholders' Equity                         58,975                     54,648
--------------------------------------------------------------------------------------------
      Total Liabilities and
      Stockholders' Equity                $ 496,956                  $ 482,551
============================================================================================
Standby Letters of Credit                 $    (106)    $    (106)   $     (33)   $     (33)
</TABLE>

34 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

17 OPERATING LEASES

The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several  locations  which are being used as remote  banking
facilities.  Rental  expense was $80 in 2002,  $81 in 2001 and $81 in 2000.  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, 2002
are as follows:

                            Mount   Meadow    ATM
                           Pocono   Avenue   Sites    Total
-----------------------------------------------------------
2003                        $  48   $   19   $  12    $  79
2004                           48       19       4       71
2005                           48       19       4       71
2006                           48       13       -       61
2007                           48        -       -       48
2008 to 2011                  160        -       -      160
-----------------------------------------------------------
  Total minimum
    payments required       $ 400   $   70   $  20    $ 490
===========================================================

18 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

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

Years Ended December 31,       2002         2001
-------------------------------------------------
Beginning Balance          $  6,664     $  5,959
Additions                       748        2,997
Collections                  (2,929)      (2,292)
-------------------------------------------------
  Ending Balance           $  4,483     $  6,664
=================================================

In addition to the loan  amounts  shown above,  during  2002,  the Bank issued a
standby  letter of credit for the  account  of a related  party in the amount of
$6,353.

19 REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the Federal banking  agencies.  Failure to meet minimum capital
requirements   can   initiate   certain   mandatory--and   possibly   additional
discretionary--actions  by regulators  that, if undertaken,  could have a direct
material effect on the Company and the Bank's Consolidated Financial Statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the  Company  and  the  Bank  must  meet  specific  capital
guidelines that involve quantitative measures of their assets, liabilities,  and
certain  off-balance  sheet  items as  calculated  under  regulatory  accounting
practices.  The Company and the Bank's capital amounts and  classifications  are
also subject to qualitative judgements by the regulators about components,  risk
weightings and other factors.
     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the Capital  Adequacy table on the following  page) of Tier I and Total
Capital  to  risk-weighted  assets  and of  Tier I  Capital  to  average  assets
(Leverage  ratio).  The table also presents the Company's actual capital amounts
and ratios.  The Bank's  actual  capital  amounts  and ratios are  substantially
identical to the Company's.  Management believes,  as of December 31, 2002, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject.
     As of December  31,  2002,  the most recent  notification  from the Federal
Deposit  Insurance   Corporation   (FDIC)   categorized  the  Company  as  "well
capitalized" under the regulatory  framework for prompt corrective action. To be
categorized  as "well  capitalized",  the Company must  maintain  minimum Tier I
Capital,  Total Capital and Leverage ratios as set forth in the Capital Adequacy
table. There are no conditions or events since that notification that management
believes have changed the Company's categorization by the FDIC.
     The Company and Bank are also subject to minimum capital levels which could
limit the payment of  dividends,  although the Company and Bank  currently  have
capital levels which are in excess of minimum capital level ratios required.
     The Pennsylvania Banking Code restricts capital funds available for payment
of dividends to the Retained Earnings of the Bank. Accordingly,  at December 31,
2002, the balances in the Capital Stock and Surplus accounts  totalling  $10,840
are unavailable for dividends.
     In addition,  the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's  affiliates.  These transactions include
extensions  of  credit,  purchases  of or  investments  in stock  issued  by the
affiliate,  purchases of assets  subject to certain  exceptions,  acceptance  of
securities  issued by an affiliate as collateral for loans,  and the issuance of
guarantees,  acceptances,  and letters of credit on behalf of affiliates.  These
restrictions  prevent the  Company's  affiliates  from  borrowing  from the Bank
unless the loans are secured by obligations of designated amounts.  Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's Capital Stock and Surplus,  and the aggregate
of such  transactions with all affiliates is limited to 20 percent of the Bank's
Capital Stock and Surplus.  The Federal Reserve System has interpreted  "Capital
Stock and Surplus" to include undivided profits.

                  Penseco Financial Services Corporation / 2002 Annual Report 35

<PAGE>

19 REGULATORY MATTERS (continued)

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

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

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

<TABLE>
<CAPTION>

December 31, 2001              Amount   Ratio        Amount    Ratio          Amount    Ratio
----------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>         <C>         <C>         <C>
Total Capital
  (to Risk Weighted Assets)   $ 55,646  18.22%    > $ 24,428  > 8.0%      > $ 30,535  > 10.0%
                                                  -           -           -           -
Tier I Capital
  (to Risk Weighted Assets)   $ 52,046  17.04%    > $ 12,214  > 4.0%      > $ 18,321  >  6.0%
                                                  -           -           -           -
Tier I Capital
  (to Average Assets)         $ 52,046  10.95%    >        *  >   *       > $ 23,759  >  5.0%
                                                  -           -           -           -
</TABLE>

* 3.0%  ($14,255),  4.0%  ($19,007)  or 5.0%  ($23,759)  depending on the bank's
CAMELS Rating and other regulatory risk factors.

20 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:

BALANCE SHEETS

December 31,                                      2002         2001
-------------------------------------------------------------------
Cash                                          $      7     $      6
Investment in bank subsidiary                   58,626       54,319
Equity Investments                                 390          362
-------------------------------------------------------------------
Total Assets                                  $ 59,023     $ 54,687
===================================================================
Total Liabilities                             $     48     $     39
Total Stockholders' Equity                      58,975       54,648
-------------------------------------------------------------------
Total Liabilities and Stockholders' Equity    $ 59,023     $ 54,687
===================================================================

STATEMENTS OF INCOME

Years Ended December 31,                    2002         2001        2000
-------------------------------------------------------------------------
Dividends from bank subsidiary           $ 2,899      $ 2,892     $ 2,520
Dividends on investment securities             9            5           -
-------------------------------------------------------------------------
  Total Income                             2,908        2,897       2,520
Other non-interest expense                     8            7           -
-------------------------------------------------------------------------
Net income before undistributed
  earnings of bank subsidiary              2,900        2,890       2,520
Undistributed earnings of bank
  subsidiary                               3,853        2,732       2,223
-------------------------------------------------------------------------
Net Income                               $ 6,753      $ 5,622     $ 4,743
=========================================================================

36 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

20 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION) (continued)

STATEMENTS OF CASH FLOWS

Years Ended December 31,                           2002       2001       2000
------------------------------------------------------------------------------
Operating Activities:
Net Income                                      $ 6,753    $ 5,622    $ 4,743
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Equity in undistributed net
      income of bank subsidiary                  (3,853)    (2,732)    (2,223)
------------------------------------------------------------------------------
    Net cash provided by operating activities     2,900      2,890      2,520
------------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment                         -       (199)       (50)
------------------------------------------------------------------------------
    Net cash (used) provided by
      investing activities                            -       (199)       (50)
------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                              (2,899)    (2,685)    (2,470)
------------------------------------------------------------------------------
    Net cash used by financing activities        (2,899)    (2,685)    (2,470)
------------------------------------------------------------------------------
    Net increase in cash and cash equivalents         1          6          -
Cash and cash equivalents at January 1                6          -          -
------------------------------------------------------------------------------
Cash and cash equivalents at December 31        $     7    $     6    $     -
==============================================================================

21 SUBSEQUENT EVENT

Subsequent to the Balance Sheet Date,  the Bank  purchased a FHLMC (Freddie Mac)
pool of new twenty year residential  mortgages,  with a 5 1/2% coupon and a face
value of $100,000. The Bank financed the purchase by borrowing $100,000 from the
Federal Home Loan Bank with maturities ranging from 5 to 20 years.  Calculations
indicate a 100 basis point  spread in the 1st year  declining to 81 basis points
after the 10th year and every year thereafter. These calculated spreads may vary
depending on various interest rate scenarios which affect prepayment speeds.
     The investment  resulted in increases in Total Assets and Total Liabilities
of approximately 20.7% and 22.8% from December 31, 2002, respectively.
     The Bank has estimated that the  transaction  will result in an increase in
net interest income of approximately $800 for the current fiscal year.

                  Penseco Financial Services Corporation / 2002 Annual Report 37

<PAGE>


McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants

                                                               February 5, 2003,
                                                              except for Note 21
                                                            as to which the date
                                                            is February 19, 2003


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

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

     We have audited the  accompanying  consolidated  balance  sheets of Penseco
Financial Services  Corporation and its wholly-owned  subsidiary,  Penn Security
Bank and  Trust  Company  as of  December  31,  2002 and 2001,  and the  related
consolidated statements of income,  stockholders' equity and cash flows for each
of the years in the three year period ended December 31, 2002.  These  financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of  Penseco
Financial Services  Corporation and subsidiary as of December 31, 2001 and 2000,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  2001,  in  conformity
with accounting principles generally accepted in the United States of America.


                                         /s/ McGrail, Merkel, Quinn & Associates


38 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

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

There  were no  changes  in or  disagreements  with  accountants  on  matters of
accounting principles or practices or financial statement disclosures in 2002.


                                    PART III
                                    --------


ITEM 10 Directors and Executive Officers of the Registrant

The  information  on  Directors  of  the  Company  on  pages  4,  5 and 6 in the
definitive  proxy  statement   relating  to  the  Company's  Annual  Meeting  of
stockholders,  to be held May 6,  2003,  is  incorporated  herein  by  reference
thereto.

The information on Executive  Officers on pages 6 and 7 in the definitive  proxy
statement  relating to the Company's Annual Meeting of stockholders,  to be held
May 6, 2003, is incorporated herein by reference thereto.


ITEM 11 Executive Compensation

The information  contained under the heading "Executive  Compensation" on page 6
in the definitive  proxy statement  relating to the Company's  Annual Meeting of
stockholders,  to be held May 6,  2003,  is  incorporated  herein  by  reference
thereto.


ITEM 12 Security Ownership of Certain Beneficial Owners and Management

The  information  contained  under the heading  "Voting  Securities  & Principal
Holders Thereof" on pages 2 and 3 in the definitive proxy statement  relating to
the  Company's  Annual  Meeting  of  stockholders,  to be held May 6,  2003,  is
incorporated herein by reference thereto.


ITEM 13 Certain Relationships and Related Transactions

The  information  contained in Note 18 under Item 8 on page 35 under the heading
"General  Notes to Financial  Statements" in the Company's 2002 Annual Report to
Shareholders is incorporated herein by reference thereto.


ITEM 14 Controls and Procedures

Based on the Company's  principal  executive  officer,  Otto P.  Robinson,  Jr.,
President  and the  Company's  principal  financial  officer,  Patrick  Scanlon,
Controller,  evaluations of the Company's  Disclosure Controls and Procedures as
of February 19, 2003 (evaluation  date),  they have concluded that the Company's
disclosure controls are effective,  reasonably ensure that material  information
relating to the Company and its consolidated  subsidiaries is made known to them
by others within those  entities,  particularly  during the period in which this
report is being  prepared,  and identify  significant  deficiencies  or material
weaknesses  in internal  controls  which could  adversely  affect the  Company's
ability to record, process, summarize and report financial data.

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

Based on information  available to them,  they are not aware of any  significant
changes made in internal  controls or in other factors that could  significantly
affect those  controls  subsequent  to February 19, 2003  (evaluation  date) and
prior to the date of their certifications.

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

                  Penseco Financial Services Corporation / 2002 Annual Report 39

<PAGE>

                                    PART IV
                                    -------


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

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

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

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

     (3)  Exhibits

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

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

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

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

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

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

(b)       No current report on  Form 8-K was filed for the fourth quarter of the
          fiscal year ended December 31, 2002.

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

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

40 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on February 25, 2003.


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


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


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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on February 25, 2003.


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


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


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


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


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


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

                  Penseco Financial Services Corporation / 2002 Annual Report 41

<PAGE>

                                 CERTIFICATIONS

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

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

2.  Based on my  knowledge,  this  annual  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 annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  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 annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed  such  disclosure  controls and  procedures  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 annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date:  February 25, 2003

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



I, Patrick Scanlon, certify that:

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

2.  Based on my  knowledge,  this  annual  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 annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  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 annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed  such  disclosure  controls and  procedures  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 annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date:  February 25, 2003

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

42 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>
                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>

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

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

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

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

   9              Voting trust agreement                               None

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

  11              Statement re:  Computation of per share earnings     None

  12              Statements re:  Computation of ratios                None

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

  16              Letter re:  Change in certifying accountant          None

  18              Letter re:  Change in accounting principles          None

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

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

  23              Consents of experts and counsel                      None

  24              Power of attorney                                    None

  99              Additional Exhibits                                  None
</TABLE>

                  Penseco Financial Services Corporation / 2002 Annual Report 43

<PAGE>

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

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

Richard E. Grimm
Executive Vice-President and Treasurer

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

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

Andrew A. Kettel, Jr.
Senior Vice-President

Christe A. Casciano
Vice-President, Director of Marketing

Audrey F. Markowski
Vice-President

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

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

Lynn Peters Thiel
Vice-President and Compliance Officer

James Tobin
Vice-President, Charge Card Manager

John H. Warnken
Vice-President, Operations

Robert P. Heim
Director of Internal Audit

Patrick Scanlon
Controller

P. Frank Kozik
Secretary


ASSISTANT VICE-PRESIDENTS

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

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

ACCOUNTING OFFICER
Luree M. Waltz

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

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT CONTROLLER
Susan M. Bray
  and Assistant Treasurer

ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

ASSISTANT TRUST OFFICER
Dominick P. Gianuzzi
  and Assistant Secretary

BRANCH OPERATIONS OFFICERS
Patricia A. Bruno
Stephen A. Hoffman

BUSINESS DEVELOPMENT OFFICER
Mary Carol Cicco

COMPUTER OPERATIONS OFFICER
Charles Penn

CREDIT REVIEW OFFICER
Mark M. Bennett
  and Assistant Secretary

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo

LOAN ADMINISTRATION OFFICERS
Susan D. Blascak
Carol J. Grunza

LOAN OFFICER
Denise Belton

MERCHANT OFFICER
Jill Ross

OPERATIONS OFFICER
Patricia Pliske

TAX OFFICER
Robert W. McDonald

TRUST OPERATIONS OFFICER
Carol Trezzi

TRUST INVESTMENT OFFICER
Katherine M. Oven

44 Penseco Financial Services Corporation / 2002 Annual Report

<PAGE>

                              (INSIDE BACK COVER)

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

PENSECO FINANCIAL SERVICES CORPORATION ANDPENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

Edwin J. Butler
Retired Bank Officer

Richard E. Grimm
Executive Vice-President and Treasurer

Russell C. Hazelton
Retired Captain, Trans World Airlines

D. William Hume
Retired Bank Officer

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

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

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

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

Emily S. Perry
Retired Insurance Account Executive & Community Volunteer

Sandra C. Phillips
Penn State Master Gardener
  Community Volunteer

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

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

PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

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

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

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

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

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

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

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

                              www.pennsecurity.com