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

OTHER SERVICES

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

BRANCH LOCATIONS (with ATMs)

Abington
1100 Northern Boulevard
Clarks Summit, PA
(570) 587-4898

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

East Stroudsburg
Route 209 & Route 447
East Stroudsburg, PA
(570) 420-0432

Gouldsboro
Main & Second Streets
Gouldsboro, PA
(570) 842-6473

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

Central City
150 North Washington Avenue
Scranton, PA
(570) 346-7741

Mount Pocono
Route 611 & Route 940
Mount Pocono, PA
(570) 839-8732

North Pocono
Main & Academy Streets
Moscow, PA
(570) 842-7626

South Scranton
526 Cedar Avenue
Scranton, PA
(570) 343-1151

Other ATM locations

Acorn Market
Route 209
Marshall's Creek, PA

Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA

Meadow Ave. & Hemlock St.
Scranton, PA

Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA

Red Barn Village
Newton Ransom Blvd
Newton, PA

On the Cover

The cover for our 2000 Annual Report  portrays the flow of  information  and the
movement    of   funds    electronically    by    means    of   the    Internet.
Technology-sophisticated banks, such as Penn Security, are not restricted by the
physical  location  of their  offices;  nor are they  limited  in their  service
offerings to "traditional" banking products.

     This year's cover symbolizes that we at Penn Security, with a wide array of
leading edge products and services,  along with  electronic  connectivity to our
customers  nationwide,  via our new website,  are well  positioned to expand our
horizons.

<PAGE>

                              Financial Highlights
In thousands, except
per share data

                              2000          1999          1998
--------------------------------------------------------------
Earnings per share      $     2.21    $     2.17    $     1.99
Dividends per share     $     1.15    $     1.10    $     1.05
Total Capital           $   50,067    $   45,743    $   44,961
Total Deposits          $  387,439    $  367,332    $  377,526
Total Assets            $  467,230    $  428,614    $  436,099

                                    Contents

Customer Services ........................................... Inside Front Cover
President's Letter ........................................................... 2
Board of Directors ........................................................... 3
Promotions and Appointments .................................................. 4
Community Events ............................................................. 5
Investment Services .......................................................... 6

                                   Form 10-K

Part 1, Item 1  Business ..................................................... 8
        Item 2  Properties ................................................... 9
        Item 3  Legal Proceedings ............................................ 9
        Item 4  Submission of Matters to a Vote of Security Holders .......... 9
Part 2, Item 5  Market for Registrant's Common Equity and Related
                  Stockholder Matters ....................................... 10
        Item 6  Selected Financial Data 11
        Item 7  Management Discussion and Analysis of Financial Condition
                  and Results of Operations ................................. 12
        Item 7A Quantitative and Qualitative Disclosures About Market Risk .. 20
Item 8  Financial Statements and Supplementary Data ......................... 22
        Consolidated Balance Sheets ......................................... 22
        Consolidated Statements of Income ................................... 23
        Consolidated Statements of Changes in Stockholders' Equity .......... 24
        Consolidated Statements of Cash Flows ............................... 25
        General Notes to Financial Statements ............................... 26
        Independent Auditor's Report ........................................ 35
        Item 9  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure................................... 36
Part 3, Item 10 Directors and Executive Officers of the Registrant .......... 36
        Item 11 Executive Compensation ...................................... 36
        Item 12 Security Ownership of Certain Beneficial Owners
                  and Management............................................. 36
        Item 13 Certain Relationships and Related Transactions .............. 36
Part 4, Item 14 Exhibits, Financial Statement Schedules and Reports
                  on Form 8-K................................................ 37
Signatures .................................................................. 38
Index to Exhibits ........................................................... 39
Company Officers ............................................................ 40
Company Board Members ........................................ Inside Back Cover

                  Penseco Financial Services Corporation / 2000 Annual Report  1
<PAGE>

President's Letter

Dear Shareholder

     I am pleased  to report to you that 2000 was  another  successful  year for
Penseco Financial  Services  Corporation.  Earnings increased to $2.21 per share
for 2000 from $2.17 per share for 1999.  Dividends  increased to $1.15 per share
for 2000 from $1.10 per share for 1999.  Total Assets  increased to $467 million
at year end 2000 from $429 million at year end 1999. Total Deposits increased to
$387  million  at year end 2000 from  $367  million  at year end  1999.  Capital
increased to $50.1 million at year end 2000 from $45.7 million at year end 1999.
Net  income  for the year 2000 was  negatively  affected  by our sale of shorter
term, low rate securities and  reinvestment in longer term, high rate securities
as the rates were peaking last year, resulting in after-tax securities losses of
$.11 per share.
     During the year 2000, the Federal Reserve (FED) concentrated on reigning in
the  overheating  economy.  Of  particular  concern to the FED was the  national
election where  additional  spending and tax cut promises  presaged a shift to a
more  stimulative  Federal  fiscal  policy.  Apparently,  from  recent  economic
statistical  reports,  as I write this letter,  the FED has succeeded in slowing
the economy which has and should  continue to lead to lower  interest rates this
year,  leaving some room for the tax cuts and spending increases promised during
the election.  Thus, the modest  repositioning of our investment  portfolio last
year should serve us well this year.
     Our  declaration to become a Financial  Holding Company was approved by the
Federal Reserve Board in March,  2000. This designation  carries with it broader
powers than we would have if we were just an ordinary bank holding company. Only
bank  holding  companies  who are well  capitalized  and well  managed  and have
achieved  at least a  satisfactory  rating  for  community  reinvestment  can so
qualify.  The list of activities which financial holding companies are permitted
to  engage  in grows  monthly - faster  than one can ever  take  advantage  of -
nevertheless,  one never knows what  opportunity  will beckon at any  particular
time, so it is good to be positioned to take  advantage of  opportunity  when it
presents itself.
     With the Y2K issue behind us, and the redirection of our technology forces,
a number of new products were instituted.  In January, we introduced a low cost,
entirely electronic account called EBT for those customers receiving  electronic
entitlement  benefits. We also introduced a new tiered money market account with
three different  interest rate tiers.  Although there has been little demand for
the EBT  accounts,  the tiered  money  market  accounts  have  proven to be very
popular. Also proving popular, have been callable certificates of deposits which
were introduced late in 1999. These certificates generally pay a higher interest
rate than  non-callable  certificates  of deposit  but  provide  for the Bank an
optional date, on or after which,  they can be called.  This type of certificate
of deposit aids the Bank in controlling its interest rate sensitivity.
     In April, we opened our new Investment Services,  through an agreement with
Fiserv Investor  Services,  Inc., a fully licensed broker dealer  established by
Fiserv, Inc., a large company processing data for thousands of banks nationwide.
Dual employees of the Bank and the broker dealer provide for sales and purchases
of investments including stocks, bonds, mutual funds and annuities. Mr. Louis J.
Rizzo and Mr. Mark J.  Zakoski  joined the Bank as our first two fully  licensed
investment  representatives.  Mr. Rizzo and Mr.  Zakoski each bring in excess of
eight years  experience in the sale of financial and investment  products,  each
having served with a major financial services  organization prior to joining our
Investment Services.  Also joining our investment team was Linda B. Gable who is
licensed to accept and place investment orders for our customers. Responsibility
for  the   investment   services  is  vested  in  Peter  F.  Moylan,   Executive
Vice-President and head of our non-deposit  services.  In the future, we plan to
establish a fully licensed broker dealer subsidiary of our holding company.
     In May, Penn  Security went live with its web site -  www.pennsecurity.com.
This site is both  informational and transactional  making available through the
Internet all of the services which our  home/office  banking  system offers.  In
addition,  the site links to a joint  Penn  Security/Fiserv  Investor  Services,
Inc.'s web site,  permitting our customers access to on-line brokerage  services
at very low transaction costs.  Through the investment services site,  customers
can view their investment account,  buy and sell stocks, bonds and mutual funds,
review  transaction  histories and keep track of the cost bases of their various
investments.
     In making our home/office banking system available on the Internet, we also
enhanced the system to make it more  user-friendly.  In  addition,  in August we
enabled customers, through the on-line banking system, to transfer funds between
their  brokerage  accounts and bank accounts at Penn  Security,  thus giving our
customers  complete  control of their liquid  assets.  In addition,  transaction
files may be downloaded for those customers using Quicken and Microsoft Money to
automatically  reconcile  their  bank  statement  or for other  uses of the data
contained therein.
     In September,  the Bank replaced its aging IBM document processing machines
with new document  processing  machines which utilize  electronic  images of the
documents rather than microfilm for archival and retrieval functions. We hope to
be able to make these  images  available to our  customers  through the Internet
shortly.
     In the fourth quarter,  the Bank upgraded its network with state of the art
equipment and increased line speeds to our branches.  Unfortunately, the process
took longer than  anticipated  because of the  Verizon  employee  strike and the
reorganization of Verizon divisions  pursuant to its merger with GTE. Although a
few  glitches  remain,  on the whole,  the network is  operating  very well with
excellent  response  time for users and greater  effectiveness  and control than
before.  Through this  network,  check images and deposit  items can be directly
accessed and printed at our branches.  We are also working on imaging all of our
computer reports for retrieval purposes,  which will also be available bank-wide
through this network.
     Data privacy, data integrity, data security and data retrieval are foremost
on our mind as well as the minds of our customers. Most of our data is processed
in-house on one of the world's most secure computers, an IBM AS400. Data is also
stored off-site in a secure  location and yearly we perform a disaster  recovery
test to ensure  that we can  recover  all of our  customers'  data.  We maintain
sophisticated  firewalls to protect our data from external attack.  We have been
operating our home/office  banking system for over 18 years and have never had a
security problem. We

2  Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

recently  mailed  privacy  policy notices to all of our customers (all financial
institutions  must do so by July 1,  2001).  Judging  from the  responses,  data
privacy  is a "hot  button".  We do not share any  customer  data with any third
party,  unless we have a joint  product  which we market with them or where they
market our products for us or where a third party processes data for us. In all
instances,  any third  party  with whom we have  this  kind of  relationship  is
contractually  bound to protect the data and they may use it only for the stated
purposes and may not disclose it to other third  parties.
     In April, William J. Calpin, Jr., joined the Bank as Senior Vice-President,
Trust Services.  Mr. Calpin is well known in Northeastern  Pennsylvania  for his
expertise  in trust  services  and his many  years of  experience  in the  trust
services  division  at a major  financial  institution  in our market  area.  He
replaces our former head of the trust department,  Robert F. Duguay, who retired
in May of this year after many years of dedicated service.
     In May, Nancy Burns,  our Abington Branch Manager for many years,  retired.
Mr. Carl M. Baruffaldi was named Abington Branch Manager to replace her, Jeffrey
Solimine  was named Green Ridge  Branch  Manager to replace  Carl and Karyn Gaus
Vashlishan was named Mount Pocono Branch Manager.
     In October,  Lynn M. Peters  Thiel  joined the Bank as  Vice-President  and
Compliance  Officer.  Mrs.  Thiel was formerly a  compliance  officer at another
local financial  institution.  The compliance  function at the Bank continues to
increase in  importance  and  workload as the Bank moves into new  products  and
services, such as investment services and insurance.
     At the end of the year the  following  promotions  were  made:  Christe  A.
Casciano,  Vice-President  and Director of  Marketing;  Jennifer S.  Wohlgemuth,
Assistant Vice-President;  Lisa A. Kearney,  Assistant  Vice-President;  Lori A.
Dzwieleski, Assistant Branch Manager of the Gouldsboro Office; Barbara Garofoli,
Assistant Branch Manager of the East Scranton Office;  Susan A. Kopp,  Assistant
Branch  Manager of the Mount  Pocono  Office;  and  Stephen A.  Hoffman,  Branch
Operations   Officer.  We  congratulate  these  fine  employees  on  their  many
achievements.  We are indeed  fortunate to have such a dedicated and hardworking
staff.
     This year,  three  local banks were merged or are in the process of merging
with bigger organizations headquartered out of state. As this process continues,
we  believe it  strengthens  our  franchise  as a locally  owned and  controlled
financial services organization.
     We have  indicated  before that we are interested in providing a wide range
of insurance  products to our  customers and we continue to pursue that goal.
     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  portion  of this page of the 2000  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 / 2000 Annual Report  3

<PAGE>

This page of the 2000 Annual Report to  Shareholders  contains nine pictures.  A
description of each picture follows, starting at the top, from left to right:

                           Promotions & Appointments

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

Christe A. Casciano
Vice-President, Director of Marketing

Lynn M. Peters Thiel
Vice-President and Compliance Officer

Carl M. Baruffaldi
Assistant Vice-President
Branch Manager - Abington Office

Jeffrey Solimine
Assistant Vice-President
Branch Manager - Green Ridge Office

Karyn Gaus Vashlishan
Assistant Vice-President
Branch Manager - Mount Pocono Office

Lisa A. Kearney
Assistant Vice-President

Jennifer S. Wohlgemuth
Assistant Vice-President

Lori A. Dzwieleski
Assistant Cashier

4  Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

This top portion of this page of the 2000 Annual Report to Shareholders contains
three pictures. A description of each picture follows, starting at the top, from
left to right:

                           Promotions & Appointments

Barbara Garofoli
Assistant Cashier

Susan A. Kopp
Assistant Cashier

Stephen A. Hoffman
Branch Operations Officer


                                Community Events

As a community bank, Penn Security  employees not only have a thorough knowledge
of the banking  industry,  but a concern and a commitment  for the  community as
well.  Below is a sampling  of the  community  events  during 2000 in which Penn
Security and their employees participated.

This  bottom  portion  of this page of the 2000  Annual  Report to  Shareholders
contains  three  pictures.  A  description  of each  picture  follows,  starting
clockwise at the top left:

Part of the crowd of business  professionals  who participated in the Chamber of
Commerce  Business  Card  Exchange  sponsored  by Penn  Security  Bank and Trust
Company during the holiday season.

This past summer, our East Stroudsburg Office participated in the annual Balloon
Festival at Shawnee on the Delaware.

In the photo  above,  Douglas R. Duguay  (left),  Mary Carol Cicco  (center) and
Peter F. Moylan  (right) are shown during one of the many  nationwide  bookstore
shows in which Penn Security Bank participated.

                  Penseco Financial Services Corporation / 2000 Annual Report  5

<PAGE>

This page of the 2000 Annual Report to  Shareholders  contains six  pictures.  A
description of each picture follows, starting at the top, from left to right:

                              INVESTMENT SERVICES

Pictured  above are the  employees  of our joint  venture  with Fiserv  Investor
Services,  Inc. They are from left to right as follows:  Linda B. Gable, Otto P.
Robinson, Jr., Peter F. Moylan, Mark J. Zakoski and Louis J. Rizzo.

Investment  Services  Pictured above are the employees of our joint venture with
Fiserv Investor Services,  Inc. They are from left to right as follows: Linda B.
Gable,  Otto P.  Robinson,  Jr.,  Peter F. Moylan,  Mark J. Zakoski and Louis J.
Rizzo.

Louis J. Rizzo
Registered Representative

Mark J. Zakoski
Registered Representative

Linda B. Gable
Assistant Representative
Order Processing

6  Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

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


                                   FORM 10-K

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


                  For the Fiscal Year Ended December 31, 2000

                        Commission File Number 000-23777



                     PENSECO FINANCIAL SERVICES CORPORATION



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

                          Securities Registered Under
                            Section 12(g) of the Act

                    Common Stock, Par Value $ .01 per share

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

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

The aggregate market value of the Company's voting stock held by  non-affiliates
of the registrant on March 1, 2001,  based on the average of the closing bid and
asked prices of such stock on that date equals  Approximately  $49,404,000.  The
number  of  shares  of  common  stock  outstanding  as of March 1,  2001  equals
2,148,000.

Documents Incorporated by Reference

Portions  of  the   Corporation's   2000  Annual  Report  to  Stockholders   are
incorporated by reference in Parts I and II.

Portions of the  Corporation's  definitive proxy statement  relating to the 2001
Annual Meeting of Stockholders are incorporated by reference in Part III.

                  Penseco Financial Services Corporation / 2000 Annual Report  7

<PAGE>

                     PENSECO FINANCIAL SERVICES CORPORATION

                                     PART I

ITEM 1 Business

GENERAL

PENSECO FINANCIAL SERVICES CORPORATION,  (the "Company"), which is headquartered
in Scranton,  Pennsylvania, was formed under the general corporation laws of the
State of Pennsylvania in 1997 and is registered as a financial  holding company.
The  Company  became  a  holding  company  upon  the  acquisition  of all of the
outstanding shares of Penn Security Bank and Trust Company (the "Bank"), a state
chartered  bank, on December 31, 1997.  The Company is subject to supervision by
the Federal Reserve Board. The Bank, as a state chartered financial institution,
is subject to supervision by the Federal Deposit  Insurance  Corporation and the
Pennsylvania Department of Banking.
     The Company's  principal  banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania,  containing trust, investor services, marketing,
audit,  credit card,  human  resources,  executive,  data processing and central
bookkeeping offices. There are eight additional offices.
     Through it's banking subsidiary, the Company generates interest income from
it's outstanding loans receivable and it's investment portfolio. Other income is
generated  primarily  from  merchant  transaction  fees,  trust fees and service
charges on deposit  accounts.  The Company's  primary costs are interest paid on
deposits  and  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 other areas such as  convenience of location,
types of services, service costs and banking hours.

EMPLOYEES

As of March 1, 2001, the Company  employed 199 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.

8  Penseco Financial Services Corporation / 2000 Annual Report

<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.

                  Penseco Financial Services Corporation / 2000 Annual Report  9

<PAGE>

                                    PART II

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

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

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

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

    Baird, Patrick & Company, Inc.               Legg Mason Wood Walker, Inc.
    Ferris, Baker, Watts, Inc.                   Monroe Securities, Inc.
    F.J. Morrissey & Company, Inc.               Ryan, Beck & Company, Inc.
    Hopper Soliday & Company, Inc.               Sandler, O'Neill & Partners, LP
    Janney Montgomery Scott, Inc.

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

                                Dividends Paid
2000              High    Low     Per Share
----------------------------------------------
First Quarter     $ 26   $ 21      $  .22
Second Quarter      24     22         .22
Third Quarter       24     20         .22
Fourth Quarter      21     20         .49
                                   ------
                                   $ 1.15
                                   ======


                                Dividends Paid
1999              High    Low     Per Share
----------------------------------------------
First Quarter     $ 43   $ 40      $  .21
Second Quarter      41     34         .21
Third Quarter       36     28         .21
Fourth Quarter      30     26         .47
                                   ------
                                   $ 1.10
                                   ======


DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,470                     2000
             2,363                     1999
             2,255                     1998
             2,256                     1997
             2,148                     1996


As of March 1 , 2001 there were approximately  1,026 stockholders of the Company
based  on  the  number  of  recordholders.  Reference  should  be  made  to  the
information  about the Company's  dividend  policy and regulatory  guidelines on
pages 20 and 33.

TRANSFER AGENT

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

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

                               First    Second     Third    Fourth
2000                         Quarter   Quarter   Quarter   Quarter
------------------------------------------------------------------
Net Interest Income          $ 4,158   $ 4,323   $ 4,467   $ 4,397
Provision for Loan Losses         40        32       148        13
Other Income                   2,308     1,180     2,724     2,021
Other Expenses                 5,046     4,337     5,241     4,682
Net Income                     1,069       929     1,429     1,316
Earnings Per Share           $   .50   $   .43   $   .67   $   .61


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

10 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

ITEM 6 Selected Financial Data

(in thousands, except per share data)

RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>

                                       2000         1999         1998         1997          1996
------------------------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>           <C>
Interest Income                  $   31,043   $   28,320   $   29,975   $   30,099    $   27,893
Interest Expense                     13,698       11,213       13,179       12,385        11,201
------------------------------------------------------------------------------------------------
Net Interest Income                  17,345       17,107       16,796       17,714        16,692
Provision for Loan Losses               233           89          595          316           334
------------------------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                        17,112       17,018       16,201       17,398        16,358
Other Income                          8,233        7,746        6,838        6,285         5,952
Other Expenses                       19,306       18,312       16,986       16,884        15,733
Income Tax                            1,296        1,781        1,772        2,074         1,975
------------------------------------------------------------------------------------------------
Net Income                       $    4,743   $    4,671   $    4,281   $    4,725    $    4,602
================================================================================================

BALANCE SHEET DATA:
Assets                           $  467,230   $  428,614   $  436,099   $  427,577    $  398,035
Investment Securities            $  125,808   $  106,511   $  118,762   $  125,048    $  125,263
Net Loans                        $  304,641   $  278,577   $  280,389   $  269,446    $  237,915
Deposits                         $  387,439   $  367,332   $  377,526   $  374,488    $  352,026
Stockholders' Equity
                                 $   50,067   $   45,743   $   44,961   $   42,924    $   40,585
PER SHARE DATA: (1)
Earnings per Share               $     2.21   $     2.17   $     1.99   $     2.20    $     2.14
Dividends per Share              $     1.15   $     1.10   $     1.05   $     1.05    $     1.00
Book Value per Share             $    23.31   $    21.30   $    20.93   $    19.98    $    18.89
Common Shares Outstanding         2,148,000    2,148,000    2,148,000    2,148,000     2,148,000

FINANCIAL RATIOS:
Net Interest Margin                   4.08%        4.22%        4.12%        4.51%         4.51%
Return on Average Assets              1.06%        1.08%         .99%        1.14%         1.17%
Return on Average Equity              9.96%       10.12%        9.54%       11.22%        11.54%
Average Equity to Average Assets     10.60%       10.70%       10.38%       10.16%        10.14%
Dividend Payout Ratio                52.04%       50.69%       52.76%       47.73%        46.67%

</TABLE>

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

                Penseco Financial Services Corporation / 2000 Annual Report   11

<PAGE>

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

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

SUMMARY

Net  earnings for 2000  totalled  $4,743  million,  an increase of 1.5% from the
$4,671  million  earned in 1999,  which in turn was an increase of 9.1% from the
$4,281  million  earned in 1998.  Net  earnings  per share  were  $2.21 in 2000,
compared with $2.17 in 1999 and $1.99 in 1998.  Net earnings for 2000  increased
from 1999  results due to an  increase in the net  interest  margin.  Also,  fee
income increased,  offset by increases in operating costs. Net earnings for 1999
increased  from 1998  results  due to an increase  in the net  interest  margin,
coupled with a lower  provision  for loan losses.  Also,  fee income  increased,
offset by increases in operating costs.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  4,743                     2000
             4,671                     1999
             4,281                     1998
             4.725                     1997
             4.602                     1996

The  Company's  return on average  assets was 1.06% in 2000 compared to 1.08% in
1999 and .99% in 1998.  Return on average equity was 9.96%,  10.12% and 9.54% in
2000, 1999 and 1998, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
             1.06%                     2000
             1.08%                     1999
              .99%                     1998
             1.14%                     1997
             1.17%                     1996


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
             9.96%                     2000
            10.12%                     1999
             9.54%                     1998
            11.22%                     1997
            11.54%                     1996

12 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

RESULTS OF OPERATIONS


Net Interest Income

The principal component of the Company's earnings is net interest income,  which
is the difference  between interest and fees earned on  interest-earning  assets
and interest paid on deposits and other borrowings.
     Net interest income was $17.3 million in 2000,  compared with $17.1 million
in 1999,  an  increase of 1.2%.  The  increase  in net  interest  income in 2000
resulted  from  increases in loan  income,  along with  increases in  securities
income,  offset by higher money market,  time deposit and  short-term  borrowing
costs.
     Net interest income was $17.1 million in 1999,  compared with $16.8 million
in 1998,  an  increase of 1.8%.  The  increase  in net  interest  income in 1999
resulted from the Company  concentrating on maintaining core deposits along with
increasing  non-interest-bearing  deposits  which helped in reducing the cost of
funds.
     Net  interest   income,   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, 2000 was 4.1% compared with
4.2% for the year ended  December 31, 1999, and 4.1% for the year ended December
31, 1998.

NET INTEREST INCOME (in millions)        YEAR
---------------------------------------------
       $ 17,345                          2000
         17,107                          1999
         16,796                          1998
         17,714                          1997
         16,692                          1996


Interest  income in 2000 totalled  $31.0  million,  compared to $28.3 million in
1999, increasing 9.5% from the prior year. The yield on average interest-earning
assets  was 7.3% in 2000,  compared  to 7.0% in 1999.  Average  interest-earning
assets increased in 2000 to $424.9 million from $405.0 million in 1999.  Average
loans, which are the Company's highest yielding earning assets,  increased $14.3
million in 2000, while investment  securities and other earning assets increased
on average by $5.7  million.  Average  loans  represented  70.0% of 2000 average
interest-earning assets, compared to 69.9% in 1999.
     Interest expense also increased in 2000 to $13.7 million from $11.2 million
in 1999,  an increase of $2.5  million or 22.3%.  This  increase  resulted  from
higher money market,  time deposit and short-term  borrowing  costs. The average
rate paid on interest-bearing liabilities during 2000 was 4.0%, compared to 3.4%
an increase of 17.6% in 1999.
     Interest  income in 1999 totalled $28.3 million,  compared to $30.0 million
in 1998, decreasing 5.7% from the prior year.
     The yield on average  interest-earning assets was 7.0% in 1999, compared to
7.4% in  1998.  Average  interest-earning  assets  decreased  in 1999 to  $405.0
million from $407.8  million in 1998.  Average loans  decreased  $1.0 million in
1999, while investment  securities and other earning assets decreased on average
by  $1.9   million.   Average   loans   represented   69.9%   of  1999   average
interest-earning assets, compared to 69.7% in 1998.
     Interest  expense  decreased in 1999 to $11.2 million from $13.2 million in
1998, a decrease of $2 million or 15.2%.  This decrease resulted from lower time
deposit volume and rate reductions on other deposit  products.  The average rate
paid on  interest-bearing  liabilities during 1999 was 3.4%, compared to 4.0% in
1998.
     The most  significant  impact on net  interest  income  between  periods is
derived  from the  interaction  of changes in the volume of and rates  earned or
paid on interest-earning assets and interest-bearing  liabilities. The volume of
earning   dollars  in  loans  and   investments,   compared  to  the  volume  of
interest-bearing  liabilities  represented by deposits and borrowings,  combined
with the spread, produces the changes in net interest income between periods.

                  Penseco Financial Services Corporation / 2000 Annual Report 13

<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 2000,  1999 and
1998.

<TABLE>
<CAPTION>

                                                    2000                           1999                           1998
--------------------------------------------------------------------------------------------------------------------------------
                                         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           $  60,684  $  3,465   5.71%    $  75,346  $  4,329   5.75%    $  99,405  $  6,024   6.06%
    U.S. Agency obligations               20,011     1,338   6.69         5,000       286   5.72         1,250        71   5.68
    States & political subdivisions       15,522       572   5.58        23,434       836   5.41         2,683        89   5.03
    Federal Home Loan Bank
      stock                                1,798       127   7.06         1,796       119   6.63           619        43   6.95
    Other                                     20         1   5.00            20         1   5.00            20         1   5.00
  Held-to-maturity:
    U.S. Agency obligations                4,407       259   5.88         4,647       279   6.00         8,228       505   6.14
    States & political subdivisions       13,122       735   8.49           640        34   8.05             -         -      -
Loans, net of unearned income:
  Real estate mortgages                  227,819    18,249   8.01       221,001    17,236   7.80       221,601    17,642   7.96
  Commercial                              19,613     1,845   9.41        21,164     1,818   8.59        18,508     1,562   8.44
  Consumer and other                      49,930     3,717   7.44        40,923     2,819   6.89        43,931     3,405   7.75
Federal funds sold                         6,729       414   6.15         7,035       369   5.25         9,994       521   5.21
Interest on balances with banks            5,253       321   6.11         3,977       194   4.88         1,565       112   7.16
--------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income                  424,908  $ 31,043   7.31%      404,983  $ 28,320   6.99%      407,804  $ 29,975   7.35%
--------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                   11,514                         11,188                         10,642
Bank premises and equipment               12,104                         12,588                         10,532
Accrued interest receivable                2,628                          2,992                          3,544
Other assets                               1,125                          2,186                          2,398
Less: Allowance for loan losses            3,004                          2,894                          2,711
--------------------------------------------------------------------------------------------------------------------------------
Total Assets                           $ 449,275                      $ 431,043                      $ 432,209
================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand-Interest bearing              $  23,380  $    250   1.07%    $  23,643  $    252   1.07%    $  23,371  $    347   1.48%
  Savings                                 65,927       983   1.49        71,084     1,061   1.49        71,001     1,409   1.98
  Money markets                           75,959     2,927   3.85        59,066     1,585   2.68        63,489     1,818   2.86
  Time - Over $100                        38,407     2,262   5.89        43,397     2,172   5.00        39,769     2,165   5.44
  Time - Other                           115,345     6,236   5.41       115,764     5,633   4.87       126,737     7,035   5.55
Federal funds purchased                       22         1   4.55            78         4   5.13           265        11   4.15
Repurchase agreements                     15,101       786   5.20        12,169       482   3.96         8,051       364   4.52
Short-term borrowings                      4,522       253   5.59           481        24   4.99           638        30   4.70
--------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense                 338,663  $ 13,698   4.04%      325,682  $ 11,213   3.44%      333,321  $ 13,179   3.95%
--------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing             61,162                         57,339                         51,159
All other liabilities                      1,813                          1,888                          2,868
Stockholders' equity                      47,637                         46,134                         44,861
--------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity                 $ 449,275                      $ 431,043                      $ 432,209
================================================================================================================================
Interest Spread                                              3.27%                          3.55%                          3.40%
--------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                               $ 17,345                       $ 17,107                       $ 16,796
================================================================================================================================

Financial Ratios

  Net interest margin                                        4.08%                          4.22%                          4.12%
  Return on average assets                                   1.06%                          1.08%                           .99%
  Return on average equity                                   9.96%                         10.12%                          9.54%
  Average equity to average assets                          10.60%                         10.70%                         10.38%
  Dividend payout ratio                                     52.04%                         50.69%                         52.76%
</TABLE>

14 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

<TABLE>
<CAPTION>

                                                       Dollar                           Change
                                                       Amount   Change in   Change in   in Rate-
              2000 compared to 1999                 of Change      Volume        Rate    Volume
              ----------------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>         <C>
EARNING       Investment securities:
ASSETS          Available-for-sale:
                  U.S. Treasury securities          $   (864)   $   (843)   $    (30)   $     9
                  U.S. Agency obligations              1,052         859          48        145
                  States & political subdivisions       (264)       (282)         26         (8)
              Federal Home Loan Bank stock                 8           -           8          -
              Held-to-maturity:
                U.S. Agency obligations                  (20)        (14)         (6)         -
                States & political subdivisions          701         663           2         36
              Loans, net of unearned income:
                Real estate mortgages                  1,013         532         464         17
                Commercial                                27        (133)        174        (14)
                Consumer and other                       898         621         225         52
              Federal funds sold                          45         (16)         63         (2)
              Interest bearing balances with banks       127          62          49         16
              ----------------------------------------------------------------------------------
                Total Interest Income                  2,723       1,449       1,023        251
              ----------------------------------------------------------------------------------
INTEREST      Deposits:
BEARING         Demand - Interest bearing                 (2)         (2)          -          -
LIABILITIES     Savings                                  (78)        (78)          -          -
                Money markets                          1,342         453         691        198
                Time - Over $100                          90        (249)        386        (47)
                Time - Other                             603         (20)        625         (2)
              Federal funds purchased                     (3)         (3)          -          -
              Repurchase agreements                      304         116         151         37
              Short-term borrowings                      229         202           3         24
              ----------------------------------------------------------------------------------
                Total Interest Expense                 2,485         419       1,856        210
              ----------------------------------------------------------------------------------
                Net Interest Income                 $    238    $  1,030    $   (833)   $    41
              ==================================================================================

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

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

</TABLE>

                  Penseco Financial Services Corporation / 2000 Annual Report 15
<PAGE>

PROVISION FOR LOAN LOSSES

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

OTHER INCOME

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

Years Ended December 31,                 2000        1999        1998
---------------------------------------------------------------------
Trust department income              $  1,329    $  1,047    $  1,001
Service charges on deposit accounts       718         695         657
Merchant transaction income             5,354       5,166       4,500
Other fee income                          975         704         539
Other operating income                    211         134         141
Realized losses on securities, net       (354)          -           -
---------------------------------------------------------------------
  Total Other Income                 $  8,233    $  7,746    $  6,838
=====================================================================

Total other income  increased $487 or 6.3% during 2000 to $8,233 from $7,746 for
1999.  Contributing  increases  came from trust fee income of $282 or 26.9%,  of
which $107 is  attributable  to a one-time  change from a quarterly  charging of
fees to a monthly  charging of fees for many of our trust  customers  during the
third  quarter.  Also,  merchant  transaction  income  increased $188 or 3.6% to
$5,354 from $5,166,  along with  increases in other fee income of $271 or 38.5%,
of which $173 is due to our brokerage  division,  which  continues to exceed our
expectations.  The loss on the sales of securities occurred mainly in the second
quarter of 2000,  which included a $333 loss on the sale of ten million  dollars
of short-term municipal securities.  The sale and subsequent  re-investment into
longer term, higher yielding  municipal  securities  benefits current and future
periods.
     Total  other  income  increased  $908 or 13.3%  during  1999 to $7,746 from
$6,838 for 1998.  There was a significant  increase in our merchant  transaction
income of $666 or 14.8% due to an increase in our  customer  base and  increased
business with our existing customers.  Other fee income increased $165 or 30.6%.

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,                 2000        1999        1998
---------------------------------------------------------------------
Salaries and employee benefits       $  7,951    $  7,528    $  7,331
Occupancy expenses, net                 1,387       1,334       1,274
Furniture and equipment expenses        1,189       1,227         908
Merchant transaction expenses           4,784       4,471       3,764
Other operating expenses                3,995       3,752       3,709
---------------------------------------------------------------------
  Total Other Expenses               $ 19,306    $ 18,312    $ 16,986
=====================================================================

Other expenses increased $994 or 5.4% for 2000 to $19,306 from $18,312 for 1999.
Salaries and benefits increased $423 or 5.6% to $7,951 for 2000, from $7,528 for
1999 due to higher  health care  coverage  provided by the company its employees
and  further  staff  additions  for  our  brokerage  division,  which  commenced
operations in April of 2000.  Merchant  transaction  expenses  increased $313 or
7.0%, due to authorization interchange expenses passed on by MasterCard and Visa
International.  Also, other operating  expenses increased $243 or 6.5% to $3,995
from $3,752 due to  increases  in  advertising  costs  associated  with our loan
growth, insurance costs and outside consulting services which are non-recurring.
     Occupancy   expenses  and  furniture  and  equipment   expenses   increased
significantly  during  the  year  of 1999  due to a new  branch  office  in East
Stroudsburg,  along with the replacement of our former office in the Green Ridge
section of Scranton.  The Company  incurred  additional  expense in its merchant
transaction business of $707 or 18.8% in 1999, due to additional growth.

INCOME TAXES

Federal  income  tax  expense  amounted  to  $1,296 in 2000  compared  to $1,781
recorded in 1999.  Largely this  decrease  resulted  from  increases in tax free
income  recorded during 2000. The Company's  effective  income tax rate for 2000
was 21.5% compared to 27.6% for 1999. In 1999,  income tax expense  increased $9
from $1,772 in 1998.  The effective  income tax rate for 1999 was 27.6% compared
to 29.3% for 1998.
     For further  discussion  pertaining to Federal income taxes, see Note 12 to
the Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets  increased $38.6 million or 9.0% during 2000 and amounted to $467.2
million at December  31, 2000  compared to $428.6  million at December 31, 1999.
For the year ended  December  31, 1999 total  assets  decreased  $7.5 million to
$428.6 million or a 1.7% decrease over $436.1 million at December 31, 1998.

ASSETS (in millions)             YEAR
-------------------------------------
       $ 467,230                 2000
         428,614                 1999
         436,099                 1998
         427,577                 1997
         398,035                 1996

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,                                 2000        1999        1998
-------------------------------------------------------------------------
U.S.Treasury securities                 $  54,662   $  66,459   $  81,916
U.S. Agency obligations                    39,654       9,643      11,402
States & political subdivisions            29,624      28,591      23,634
Other securities                            1,868       1,818       1,810
-------------------------------------------------------------------------
  Total Investment Securities           $ 125,808   $ 106,511   $ 118,762
=========================================================================

16 Penseco Financial Services Corporation / 2000 Annual Report
<PAGE>

LOAN PORTFOLIO

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

<TABLE>
<CAPTION>
December 31,                           2000        1999        1998        1997        1996
-------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>         <C>
Real estate - construction
  and land development            $   9,321   $   3,241   $   4,152   $   3,731   $   3,770
Real estate mortgages               234,212     216,574     221,879     213,128     184,577
Commercial                           21,566      18,995      18,169      17,173      13,476
Credit card and related plans         2,267       2,203       2,286       2,293       2,298
Installment                          30,290      28,693      28,538      26,811      26,667
Obligations of states &
  political subdivisions             10,085      11,821       8,195       8,910       9,427
-------------------------------------------------------------------------------------------
  Loans, net of unearned income     307,741     281,527     283,219     272,046     240,215
Less: Allowance for loan losses       3,100       2,950       2,830       2,600       2,300
-------------------------------------------------------------------------------------------
  Loans, net                      $ 304,641   $ 278,577   $ 280,389   $ 269,446   $ 237,915
===========================================================================================
</TABLE>

LOANS

Total net loans  increased  $26.0 million to $304.6 million at December 31, 2000
from $278.6  million at December 31, 1999, an increase of 9.3%.  The increase is
due to growth in the Company's  real estate,  commercial  and  installment  loan
portfolios.

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


NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 304,641                       2000
         278,577                       1999
         280,389                       1998
         269,446                       1997
         237,915                       1996


LOAN QUALITY

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

                  Penseco Financial Services Corporation / 2000 Annual Report 17

<PAGE>

NON-PERFORMING ASSETS

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

<TABLE>
<CAPTION>

December 31,                                     2000       1999       1998       1997       1996
-------------------------------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>        <C>        <C>
Non-accrual loans                             $ 1,210    $   836    $   929    $ 1,031    $   866
Loans past due 90 days or more and accruing:
  Guaranteed student loans                        313        476        348        343        342
  Credit card and home equity loans                23          -         27         98         93
-------------------------------------------------------------------------------------------------
  Total non-performing loans                    1,546      1,312      1,304      1,472      1,301
Other real estate owned                           201         33        111        339        610
-------------------------------------------------------------------------------------------------
  Total non-performing assets                 $ 1,747    $ 1,345    $ 1,415    $ 1,811    $ 1,911
=================================================================================================
</TABLE>

Loans are generally placed on a nonaccrual  status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on nonaccrual status,  all interest  previously accrued but not collected
is charged  against  current  income.  Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
     Loans on which the accrual of  interest  has been  discontinued  or reduced
amounted  to  $1,210,  $836 and  $929 at  December  31,  2000,  1999  and  1998,
respectively.  If interest on those loans had been  accrued,  such income  would
have been $138,  $140 and $108 for 2000, 1999 and 1998,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $86,
$22 and $30 for 2000, 1999 and 1998,  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, 2000,  there are no significant  loans as to which management
has serious doubt about their collectibility.
     At December  31,  2000,  1999 and 1998,  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,                   2000       1999       1998       1997       1996
-------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>
Balance at beginning of year            $ 2,950    $ 2,830    $ 2,600    $ 2,300    $ 2,100
Charge-offs:
  Real estate mortgages                      37         82         69         38         87
  Commercial and all others                  51         13        252          -          -
  Credit card and related plans              27         65         37         52         64
  Installment loans                          24         26         25         32         32
-------------------------------------------------------------------------------------------
Total charge-offs                           139        186        383        122        183
-------------------------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                      30          -          1         79         22
  Commercial and all others                   -        195          -          1          2
  Credit card and related plans               9         10          9         17         16
  Installment loans                          17         12          8          9          9
-------------------------------------------------------------------------------------------
Total recoveries                             56        217         18        106         49
-------------------------------------------------------------------------------------------
Net charge-offs (recoveries)                 83        (31)       365         16        134
-------------------------------------------------------------------------------------------
Provision charged to operations             233         89        595        316        334
-------------------------------------------------------------------------------------------
  Balance at End of Year                $ 3,100    $ 2,950    $ 2,830    $ 2,600    $ 2,300
===========================================================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding              0.03%    (0.01)%      0.13%   0.01%   0.06%
===========================================================================================
</TABLE>

18 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>

December 31,                       2000             1999             1998             1997             1996
-----------------------------------------------------------------------------------------------------------------
                                 Amount     %1    Amount     %1    Amount     %1    Amount     %1    Amount     %1
-----------------------------------------------------------------------------------------------------------------
<S>                             <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Real estate mortgages           $ 1,500   79%    $ 1,500   78%    $ 1,550   80%    $ 1,350   71%    $ 1,125   71%
Commercial and all others         1,100   10         950   10         830    9         850   19         875   22
Credit card and related plans       150    1         150    1         150    1         150    1         150    1
Personal installment loans          350   10         350   11         300   10         250    9         150    6
-----------------------------------------------------------------------------------------------------------------
  Total                         $ 3,100  100%    $ 2,950  100%    $ 2,830  100%    $ 2,600  100%    $ 2,300  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 $20.1 million to $387.4 million at December 31,
2000 from $367.3  million at December  31,  1999,  an increase of 5.5%.  Company
deposits  decreased  $10.2  million to $367.3  million at December 31, 1999 from
$377.5  million at  December  31,  1998,  a decrease  of 2.7%.  The  increase in
deposits in 2000 is the result of the Company  introducing new deposit  products
along with increasing its non-interest bearing deposits. The decline in deposits
in 1999 is the result of the Company concentrating on maintaining core deposits,
along with increasing its non-interest bearing deposits,  which helped to reduce
the cost of funds.

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

    Three months or less                     $ 12,559
    Over three months through six months        6,938
    Over six months through twelve months       6,653
    Over twelve months                          7,178
                                             --------
    Total                                    $ 33,328
                                             ========


DEPOSITS (in millions)            YEAR
--------------------------------------
       $ 387,439                  2000
         367,332                  1999
         377,526                  1998
         374,488                  1997
         352,026                  1996


ASSET/LIABILITY MANAGEMENT

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

LIQUIDITY

The objective of liquidity  management is to maintain a balance  between sources
and uses of funds in such a way that  the cash  requirements  of  customers  for
loans and deposit withdrawals are met in the most economical manner.  Management
monitors its liquidity position  continuously in relation to trends of loans and
deposits for  short-term  as well as long-term  requirements.  Liquid assets are
monitored  on a daily  basis to  assure  maximum  utilization.  Management  also
manages its liquidity  requirements  by maintaining an adequate level of readily
marketable assets and access to short-term funding sources.
     The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's  substantial U.S. Treasury bond
portfolio,  additional  deposits,  earnings,  overnight  loans to and from other
companies  (Federal  Funds) and lines of credit at the Federal  Reserve Bank and
the Federal Home Loan Bank. The designation of securities as  "Held-To-Maturity"
lessens the ability of banks to sell securities so classified,  except in regard
to  certain  changes  in  circumstances  or  other  events  that  are  isolated,
nonrecurring and unusual.

                  Penseco Financial Services Corporation / 2000 Annual Report 19

<PAGE>

CAPITAL RESOURCES

A strong  capital  position is important to the continued  profitability  of the
Company and promotes  depositor and investor  confidence.  The Company's capital
provides a basis for future growth and  expansion  and also provides  additional
protection against  unexpected losses.
     Additional  sources of capital would come from  retained  earnings from the
operations  of the  Company  and  from  the  sale of  additional  common  stock.
Management has no plans to offer additional common stock at this time.
     The  Company's  total  risk-based  capital ratio was 18.32% at December 31,
2000. 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
----------------------------------------------
        $ 50,067                          2000
          45,743                          1999
          44,961                          1998
          42,924                          1997
          40,585                          1996


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

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.

20 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>

                                                                                                     Non-Rate                   Fair
                                        2001        2002       2003      2004      2005  Thereafter  Sensitive      Total      Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>       <C>       <C>       <C>         <C>        <C>        <C>
ASSETS
Fixed interest rate securities:

  U.S. Treasury securities        $   23,992   $  15,167   $  5,039  $  5,141  $  5,323  $       -   $       -  $  54,662  $  54,662
    Yield                              5.59%       6.10%      4.65%     6.01%     6.79%          -           -      5.80%
  U.S. Agency obligations                  -           -     15,152     4,941    15,656          -           -     35,749     35,749
    Yield                                  -           -      6.56%     7.07%     6.78%          -           -      6.73%
  States & political subdivisions          -           -      4,164     7,199       404     17,857           -     29,624     30,353
    Yield                                  -           -      5.44%     5.53%     5.60%      8.04%           -      7.03%
Variable interest rate securities:
  U.S. Agency obligations                960         960        960       960        65          -           -      3,905      3,780
    Yield                              5.88%       5.88%      5.88%     5.88%     5.88%          -           -      5.88%
  Federal Home Loan Bank stock             -           -          -         -         -      1,798           -      1,798      1,798
    Yield                                  -           -          -         -         -      7.06%           -      7.06%
  Other                                    -           -          -         -         -         70           -         70         70
    Yield                                  -           -          -         -         -      5.00%           -      5.00%
Fixed interest rate loans:
  Real estate mortgages               12,497      11,898     12,335    12,750    12,062    111,138           -    172,680    166,813
    Yield                              7.73%       7.72%      7.69%     7.64%     7.69%      7.66%           -      7.67%
  Consumer and other                   3,656       4,009      1,409     1,284     1,215      2,527           -     14,100     13,597
    Yield                              6.59%       5.84%      7.58%     7.47%     7.34%      6.72%           -      6.64%
Variable interest rate loans:
  Real estate mortgages               17,292       6,294      5,761     5,683     6,286     29,537           -     70,853     70,851
    Yield                              9.50%       9.64%      9.72%     9.74%     9.87%      9.45%           -      9.56%
  Commercial                          21,566           -          -         -         -          -           -     21,566     21,566
    Yield                              9.41%           -          -         -         -          -           -      9.41%
  Consumer and other                   6,980       4,855      4,566     4,308     4,596      3,237           -     28,542     28,694
    Yield                              8.59%       8.11%      7.78%     7.31%     7.29%      7.10%           -      7.81%
Less: Allowance for loan losses          624         273        243       242       243      1,475           -      3,100
Interest bearing deposits
  with banks                             358           -          -         -         -          -           -        358        358
    Yield                              6.11%           -          -         -         -          -           -      6.11%
Federal funds sold                         -           -          -         -         -          -           -          -
    Yield                                  -           -          -         -         -          -           -          -
Cash and due from banks                    -           -          -         -         -     18,775      18,775     18,775
Other assets                               -           -          -         -         -          -      17,648     17,648
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                      $   86,677   $  42,910   $ 49,143  $ 42,024  $ 45,364  $ 164,689   $  36,423  $ 467,230  $ 447,066
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
  Demand - Interest bearing       $        -   $  24,075   $      -  $      -  $      -  $       -   $       -  $  24,075  $  24,075
    Yield                                  -       1.07%          -         -         -          -           -      1.07%
  Savings                                  -      63,552          -         -         -          -           -     63,552     63,552
    Yield                                  -       1.49%          -         -         -          -           -      1.49%
  Money markets                       87,670           -          -         -         -          -           -     87,670     87,670
    Yield                              3.85%           -          -         -         -          -           -      3.85%
  Time - Other                        14,397           -          -         -         -          -           -     14,397     14,397
    Yield                              6.10%           -          -         -         -          -           -      6.10%
  Fixed interest rate deposits:
  Time - Over $100,000                26,150       4,933      1,320       145       205        575           -     33,328     33,739
    Yield                              6.25%       6.61%      6.87%     6.61%     7.15%      7.02%           -      6.35%
  Time - Other                        73,583      19,077      3,775     1,096     1,286      1,416           -    100,233    100,382
    Yield                              5.63%       6.32%      6.64%     5.63%     6.58%      6.91%           -      5.83%
Demand - Non-interest bearing              -           -          -         -         -          -      64,184     64,184     64,184
Repurchase agreements                 15,086           -          -         -         -          -           -     15,086     15,086
    Yield                              5.20%           -          -         -         -          -           -      5.20%
Short-term borrowings                 11,503           -          -         -         -          -           -     11,503     11,503
    Yield                              5.59%           -          -         -         -          -           -      5.59%
Other liabilities                          -           -          -         -         -          -       3,135      3,135
Stockholders' equity                       -           -          -         -         -          -      50,067     50,067
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity              $  228,389   $ 111,637   $  5,095  $  1,241  $  1,491  $   1,991   $ 117,386  $ 467,230  $ 414,588
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change   $ (141,712)  $ (68,727)  $ 44,048  $ 40,783  $ 43,873  $ 162,698   $ (80,963) $       -
====================================================================================================================================

</TABLE>

                  Penseco Financial Services Corporation / 2000 Annual Report 21

<PAGE>

ITEM 8 Financial Statements and Supplementary Data

                          Consolidated Balance Sheets

(in thousands, except per share data)

               December 31,                                    2000        1999
               -----------------------------------------------------------------
ASSETS         Cash and due from banks                    $  18,775   $  10,275
               Interest bearing balances with banks             358       3,961
               Federal funds sold                                 -      10,875
               -----------------------------------------------------------------
                 Cash and Cash Equivalents                   19,133      25,111
               Investment securities:
                 Available-for-sale, at fair value          105,572      96,029
                 Held-to-maturity (fair value of
                   $20,840 and $10,178, respectively)        20,236      10,482
               -----------------------------------------------------------------
                 Total Investment Securities                125,808     106,511
               Loans, net of unearned income                307,741     281,527
                 Less: Allowance for loan losses              3,100       2,950
               -----------------------------------------------------------------
                 Loans, Net                                 304,641     278,577
               Bank premises and equipment                   11,707      12,296
               Other real estate owned                          201          33
               Accrued interest receivable                    3,990       2,927
               Other assets                                   1,750       3,159
               -----------------------------------------------------------------
                 Total Assets                             $ 467,230   $ 428,614
               =================================================================

LIABILITIES    Deposits:
                 Non-interest bearing                     $  64,184   $  58,230
                 Interest bearing                           323,255     309,102
               -----------------------------------------------------------------
                 Total Deposits                             387,439     367,332
               Other borrowed funds:
               Repurchase agreements                         15,086      11,981
               Short-term borrowings                         11,503         887
               Accrued interest payable                       2,268       1,860
               Other liabilities                                867         811
               -----------------------------------------------------------------
                 Total Liabilities                          417,163     382,871
               -----------------------------------------------------------------

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                             38,269      35,996
               Accumulated other comprehensive income           958      (1,093)
               -----------------------------------------------------------------
                 Total Stockholders' Equity                  50,067      45,743
               -----------------------------------------------------------------
                 Total Liabilities and
                 Stockholders' Equity                     $ 467,230   $ 428,614
               =================================================================

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

22 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

                       Consolidated Statements of Income

(in thousands, except per share data)

<TABLE>
<CAPTION>

               Years Ended December 31,                     2000       1999       1998
               -----------------------------------------------------------------------
<S>                                                     <C>        <C>        <C>
INTEREST       Interest and fees on loans               $ 23,811   $ 21,873   $ 22,609
INCOME         Interest and dividends on investments:
                 U.S. Treasury securities and U.S.
                   Agency obligations                      5,062      4,894      6,600
                 States & political subdivisions           1,307        870         89
                 Other securities                            128        120         44
               Interest on Federal funds sold                414        369        521
               Interest on balances with banks               321        194        112
               -----------------------------------------------------------------------
                 Total Interest Income                    31,043     28,320     29,975
               -----------------------------------------------------------------------
INTEREST       Interest on time deposits
EXPENSE          of $100,000 or more                       2,262      2,172      2,165
               Interest on other deposits                 10,396      8,531     10,609
               Interest on other borrowed funds            1,040        510        405
               -----------------------------------------------------------------------
                 Total Interest Expense                   13,698     11,213     13,179
               -----------------------------------------------------------------------
                 Net Interest Income                      17,345     17,107     16,796
               Provision for loan losses                     233         89        595
               -----------------------------------------------------------------------
                 Net Interest Income After Provision
                   for Loan Losses                        17,112     17,018     16,201
               -----------------------------------------------------------------------
OTHER          Trust department income                     1,329      1,047      1,001
INCOME         Service charges on deposit accounts           718        695        657
               Merchant transaction income                 5,354      5,166      4,500
               Other fee income                              975        704        539
               Other operating income                        211        134        141
               Realized losses on securities, net           (354)         -          -
               -----------------------------------------------------------------------
                 Total Other Income                        8,233      7,746      6,838
               -----------------------------------------------------------------------
OTHER          Salaries and employee benefits              7,951      7,528      7,331
EXPENSES       Occupancy expenses, net                     1,387      1,334      1,274
               Furniture and equipment expenses            1,189      1,227        908
               Merchant transaction expenses               4,784      4,471      3,764
               Other operating expenses                    3,995      3,752      3,709
               -----------------------------------------------------------------------
                 Total Other Expenses                     19,306     18,312     16,986
               -----------------------------------------------------------------------
               Income before income taxes                  6,039      6,452      6,053
               Applicable income taxes                     1,296      1,781      1,772
               -----------------------------------------------------------------------
NET INCOME       Net Income                             $  4,743   $  4,671   $  4,281
               =======================================================================
PER SHARE        Earnings Per Share                     $   2.21   $   2.17   $   1.99
               =======================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2000 Annual Report 23

<PAGE>

           Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2000, 1999 and 1998

<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, 1997                  $   21   $ 10,819   $ 31,662    $    422          $ 42,924

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

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

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

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

Cash dividends declared ($1.10 per share)        -          -     (2,363)          -            (2,363)
--------------------------------------------------------------------------------------------------------

Balance, December 31, 1999                      21     10,819     35,996      (1,093)           45,743

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
========================================================================================================
</TABLE>

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

24 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

                     Consolidated Statements of Cash Flows

(in thousands)

<TABLE>
<CAPTION>

             Years Ended December 31,                               2000       1999       1998
             ---------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>
OPERATING    Net Income                                         $  4,743   $  4,671   $  4,281
ACTIVITIES   Adjustments to reconcile net income to net
               cash provided by operating activities:
                 Depreciation                                      1,243      1,176      1,005
                 Provision for loan losses                           233         89        595
                 Deferred income tax benefit                        (109)      (165)      (284)
                 Amortization of securities
                   (net of accretion)                                 55        336        232
                 Net realized losses on securities                   354          -          -
                 (Gain) loss on other real estate                    (22)        28         41
                 Loss on disposition of fixed assets                   8          -          -
                 (Increase) decrease in interest receivable       (1,063)       307        661
                 Decrease (increase) in other assets                 463         37       (475)
                 Increase (decrease) in income taxes payable          26        253       (182)
                 Increase (decrease) in interest payable             408       (179)      (485)
                 Increase (decrease) in other liabilities             30        (56)       102
             ---------------------------------------------------------------------------------
                 Net cash provided by
                   operating activities                            6,369      6,497      5,491
             ---------------------------------------------------------------------------------
INVESTING    Purchase of investment securities
ACTIVITIES     available-for-sale                                (44,610)   (48,307)   (53,579)
             Proceeds from sales and maturities of investment
               securities available-for-sale                      37,801     62,015     56,000
             Purchase of investment securities to be
               held-to-maturity                                  (10,689)    (5,639)         -
             Proceeds from repayments of investment
               securities to be held-to-maturity                     898      1,535      3,650
             Net loans (originated) repaid                       (26,569)     1,612    (11,664)
             Proceeds from other real estate                         126        161        313
             Proceeds from sale of fixed assets                        4          -          -
             Investment in premises and equipment                   (666)      (841)    (4,990)
             ---------------------------------------------------------------------------------
                 Net cash (used) provided by
                   investing activities                          (43,705)    10,536    (10,270)
             ---------------------------------------------------------------------------------
FINANCING    Net increase in demand and savings deposits          28,375        851      6,236
ACTIVITIES   Net payments on time deposits                        (8,268)   (11,045)    (3,198)
             Increase in repurchase agreements                     3,105      1,022      5,037
             Net increase (decrease) in short-term borrowings     10,616        887       (893)
             Cash dividends paid                                  (2,470)    (2,363)    (2,255)
             ---------------------------------------------------------------------------------
                 Net cash provided (used) by
                   financing activities                           31,358    (10,648)     4,927
             ---------------------------------------------------------------------------------
                 Net (decrease) increase in cash
                   and cash equivalents                           (5,978)     6,385        148
             ---------------------------------------------------------------------------------
             Cash and cash equivalents at January 1               25,111     18,726     18,578
             ---------------------------------------------------------------------------------
             Cash and cash equivalents at December 31           $ 19,133   $ 25,111   $ 18,726
             =================================================================================
</TABLE>

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

                  Penseco Financial Services Corporation / 2000 Annual Report 25

<PAGE>

                     General Notes To Financial Statements

1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

BASIS OF PRESENTATION

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

USE OF ESTIMATES

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

EMERGING ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
is required to be adopted in years  beginning after June 15, 2000. The Statement
permits  early  adoption as of the  beginning  of any fiscal  quarter  after its
issuance.  The Company expects to adopt the new Statement  effective  January 1,
2001.
     Management  does not anticipate that the adoption of the new Statement will
have a significant effect on the Company's earnings or financial position.

INVESTMENT SECURITIES

Investments  in securities are classified in two categories and accounted for as
follows:
     Securities  Held-to-Maturity.  Bonds, notes, debentures and mortgage-backed
securities for which the Company has the positive  intent and ability to hold to
maturity  are  reported at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts  computed on the  straight-line  basis over the period to
maturity, which approximates the interest method.
     Securities Available-for-Sale.  Bonds, notes, debentures and certain equity
securities  not  classified  as securities to be held to maturity are carried at
fair value with unrealized  holding gains and losses,  net of tax, reported as a
net amount in a separate component of stockholders' equity until realized.
     Gains  and  losses  on  the  sale  of  securities   available-for-sale  are
determined  using the  specific  identification  method  and are  reported  as a
separate component of other income in the Statements of Income.
     The  Company  has  no  derivative  financial  instruments  required  to  be
disclosed under Statement of Financial Accounting Standards No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of Financial  Instruments"
(SFAS 119).

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

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

PREMISES AND EQUIPMENT

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

LONG-LIVED ASSETS

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

PENSION EXPENSE

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

26 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

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

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,  2000,  1999 and  1998,  amounted  to $466,  $387 and $442,
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,
2000, 1999 and 1998 as follows:

                       2000       1999       1998
-------------------------------------------------
Income taxes paid  $  1,379   $  1,694   $  2,238
Interest paid      $ 13,290   $ 11,392   $ 13,664

Non-cash  transactions  during the years ended December 31, 2000, 1999 and 1998,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $272, $111 and $126, respectively.

TRUST ASSETS AND INCOME

Assets held by the Company in a fiduciary or agency  capacity for its  customers
are not included in the Financial  Statements since such items are not assets of
the Company.  Trust  income is reported on the cash basis and is not  materially
different than if it were reported on the accrual basis.

EARNINGS PER SHARE

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

RECLASSIFICATIONS

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2000
presentation.

2  CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                              2000      1999
--------------------------------------------------------
Cash items in process of collection   $     37  $      5
Non-interest bearing balances           13,263     4,961
Cash on hand                             5,475     5,309
--------------------------------------------------------
  Total                               $ 18,775  $ 10,275
========================================================

3  INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 2000
and 1999 are as follows:

                               Available-for-Sale

                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
2000                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Treasury
  securities         $  54,133      $   614      $    85   $  54,662
U.S. Agency
  securities            34,666        1,120           37      35,749
States & political
  subdivisions          13,455            -          162      13,293
--------------------------------------------------------------------
  Total Debt
    Securities         102,254        1,734          284     103,704
Equity securities        1,868            -            -       1,868
--------------------------------------------------------------------
  Total Available -
    for-Sale         $ 104,122      $ 1,734      $   284   $ 105,572
====================================================================


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

Equity securities at December 31, 2000 and 1999,  consisted primarily of Federal
Home Loan Bank stock, which is a required  investment in order to participate in
an available line of credit  program.  The stock is stated at par value as there
is no readily determinable fair value.

A summary of transactions involving  available-for-sale debt securities in 2000,
1999 and 1998 are as follows:

December 31,                 2000      1999      1998
-----------------------------------------------------
Proceeds from sales      $ 18,952   $     -   $     -
Gross realized gains            2         -         -
Gross realized losses         356         -         -

                  Penseco Financial Services Corporation / 2000 Annual Report 27

<PAGE>

3 INVESTMENT SECURITIES(continued)

                                Held-to-Maturity

                                      Gross        Gross
                     Amortized   Unrealized   Unrealized        Fair
2000                      Cost        Gains       Losses       Value
--------------------------------------------------------------------
U.S. Agency
  Obligations:
    Mortgage-backed
      securities     $   3,905      $     -      $   125   $   3,780
States & political
  subdivisions          16,331          729            -      17,060
--------------------------------------------------------------------
  Total Held-to-
    Maturity         $  20,236      $   729      $   125   $  20,840
====================================================================


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


Investment  securities  with  amortized  costs and fair  values of  $74,820  and
$77,872 at December 31, 2000 and $50,446 and $49,130 at December 31, 1999,  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, 2000
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             $  24,007   $  23,992    $       -   $      -
  States & political
    subdivisions                   -           -            -          -
After one year through
  five years:
  U.S. Treasury
    securities                30,126      30,670            -          -
  U.S. Agency
    securities                34,666      35,749            -          -
  States & political
    subdivisions              11,914      11,767            -          -
After five years
  through ten years:
  States & political
    subdivisions               1,257       1,246            -          -
After ten years:
  States & political
    subdivisions                 284         280       16,331     17,060
-------------------------------------------------------------------------
    Subtotal                 102,254     103,704       16,331     17,060
Mortgage-backed
  securities                       -           -        3,905      3,780
------------------------------------------------------------------------
Total Debt Securities      $ 102,254   $ 103,704    $  20,236   $ 20,840
========================================================================

4 LOANS

Major  classifications  of loans are as  follows:

December  31,                                     2000         1999
-------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development          $   9,321    $   3,241
  Secured by farmland                              508          526
  Secured by 1-4 family residential
    properties:
    Revolving, open-end loans                    6,146        7,312
    Secured by first liens                     146,422      123,955
    Secured by junior liens                     33,791       32,347
  Secured by multi-family properties               843          896
  Secured by non-farm, non-residential
     properties                                 46,502       51,538
Commercial and industrial loans
    to U.S. addressees                          21,566       18,995
Loans to individuals for household, family
  and other personal expenditures:
  Credit card and related plans                  2,267        2,203
  Other (installment and
    student loans, etc.)                        29,725       28,615
Obligations of states &
  political subdivisions                        10,085       11,821
All other loans                                    565           78
-------------------------------------------------------------------
  Gross Loans                                  307,741      281,527
Less: Unearned income on loans                       -            -
-------------------------------------------------------------------
  Loans, Net of Unearned Income              $ 307,741    $ 281,527
===================================================================

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,210, $836 and $929 at December 31, 2000, 1999 and 1998,  respectively.  If
interest on those loans had been accrued, such income would have been $138, $140
and $108 for 2000, 1999 and 1998, respectively.  Interest income on those loans,
which is recorded  only when  received,  amounted to $86,  $22 and $30 for 2000,
1999 and 1998,  respectively.  Also, at December 31, 2000 and 1999, the Bank had
loans totalling $336 and $476, 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,              2000            1999            1998
---------------------------------------------------------------------------
Balance at beginning of year       $ 2,950         $ 2,830         $ 2,600
Provision charged to operations        233              89             595
Recoveries credited to allowance        56             217              18
---------------------------------------------------------------------------
                                     3,239           3,136           3,213
Losses charged to allowance           (139)           (186)           (383)
---------------------------------------------------------------------------
  Balance at End of Year           $ 3,100         $ 2,950         $ 2,830
===========================================================================

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
------------------------        --------------          -------------
        2000                       $   233                 $   52
        1999                       $    89                 $    0
        1998                       $   595                 $  365

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes  was  $948,  $979  and  $948 at  December  31,  2000,  1999  and  1998,
respectively.

28 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

6 BANK PREMISES AND EQUIPMENT

December 31,                           2000       1999
------------------------------------------------------
Land                               $  2,919   $  2,929
Buildings and improvements           14,379     14,371
Furniture and equipment              10,938     10,282
------------------------------------------------------
                                     28,236     27,582
Less: Accumulated depreciation       16,529     15,286
------------------------------------------------------
  Net Bank Premises
    and Equipment                  $ 11,707   $ 12,296
======================================================

Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation expense amounted to $1,243 in
2000,  $1,176 in 1999 and $1,005 in 1998.
     Occupancy  expenses were reduced by rental income received in the amount of
$60,  $59  and  $58 in the  years  ended  December  31,  2000,  1999  and  1998,
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, 2000
and 1999 was $201 and $33,  respectively,  supported by  appraisals  of the real
estate involved.

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

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

                               Equity in
       Percent                underlying                   Bank's
      of voting    Total     net assets at   Amount     proportionate
        stock    investment     balance        of      part of loss for
        owned     and loan    sheet date    dividends     the period
-----------------------------------------------------------------------
2000    100%      $ 3,750       $ 3,735       None         $    -
1999    100%      $ 3,850       $ 3,835       None         $    -
1998    100%      $ 3,950       $ 3,936       None         $    -

9  DEPOSITS

December 31,                       2000            1999
-------------------------------------------------------
Demand - Non-interest
  bearing                     $  64,184       $  58,230
Demand - Interest bearing        24,075          23,558
Savings                          63,552          68,824
Money markets                    87,670          60,494
Time - Over $100,000             33,328          44,297
Time - Other                    114,630         111,929
-------------------------------------------------------
  Total                       $ 387,439       $ 367,332
=======================================================

9  DEPOSITS (continued)

Scheduled maturities of time deposits are as follows:
        2001                 $ 114,130
        2002                    24,010
        2003                     5,095
        2004                     1,241
        2005                     1,491
        2006 and thereafter      1,991
-------------------------------------------------------
          Total              $ 147,958
=======================================================

10 OTHER BORROWED FUNDS

At December 31, 2000 and 1999, 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 $22,038 and
$22,498 at December 31, 2000 and $12,097 and $11,816 at December 31, 1999,  were
pledged to secure repurchase agreements.

Years Ended December 31,                2000        1999
--------------------------------------------------------
Amount outstanding at year end      $ 26,589    $ 12,868
Average interest rate at year end      6.03%       4.39%
Maximum amount outstanding at
  any month end                     $ 30,280    $ 14,509
Average amount outstanding          $ 19,490    $ 12,728
Weighted average interest rate
  during the year:
    Federal funds purchased            4.55%       5.13%
    Repurchase agreements              5.20%       3.96%
Demand notes to U.S. Treasury          5.59%       4.99%

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 $10,092  and $10,039 at December  31, 2000 and $10,130 and $9,833
at December  31,  1999,  with an interest  rate of 6.0% and 5.0% at December 31,
2000 and December 31, 1999, 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,
2000 and  1999,  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, 2000 and 1999, respectively.
     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$176,555  with the Federal  Home Loan Bank of  Pittsburgh  (FHLB).  There was no
balance outstanding or assets pledged as of December 31, 2000.

                  Penseco Financial Services Corporation / 2000 Annual Report 29

<PAGE>

11 EMPLOYEE BENEFIT PLANS

The Company  provides an Employee  Stock  Ownership  Plan  (ESOP),  a Retirement
Profit  Sharing  Plan,  an  Employees'  Pension Plan and a  Postretirement  Life
Insurance  Plan,  all  non-contributory,  covering all eligible  employees.
     The Company also maintains an unfunded supplemental executive pension plan,
that provides  certain officers with additional  retirement  benefits to replace
benefits lost due to limits imposed on qualified plans by Federal tax law.
     Under the Employee Stock Ownership Plan (ESOP),  amounts voted by the Board
of Directors  are paid into the ESOP and each  employee is credited with a share
in proportion to their annual  compensation.  All  contributions to the ESOP are
invested in or will be invested  primarily in Company stock.  Distribution  of a
participant's  ESOP account  occurs upon  retirement,  death or  termination  in
accordance with the plan provisions.
     At  December  31, 2000 and 1999,  the ESOP held  87,369 and 86,511  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 $110,
$90 and $0 to the plan during the years ended December 31, 2000,  1999 and 1998,
respectively.
     Under the  Retirement  Profit  Sharing Plan,  amounts voted by the Board of
Directors  are paid into a fund and each  employee is  credited  with a share in
proportion to their annual compensation.  Upon retirement, death or termination,
each  employee is paid the total amount of their credits in the fund in one of a
number of optional  ways in  accordance  with the plan  provisions.  The Company
contributed $0, $0 and $20 to the plan during the years ended December 31, 2000,
1999 and 1998,  respectively.
     Under the Pension Plan,  amounts computed on an actuarial basis are paid by
the Company into a trust fund.  Provision is made for fixed benefits payable for
life  upon  retirement  at  the  age of 65,  based  on  length  of  service  and
compensation  levels as defined in the plan.  Plan  assets of the trust fund are
invested and  administered  by the Trust  Department  of Penn  Security Bank and
Trust  Company.
     The postretirement life insurance plan is an unfunded,  non-vesting defined
benefit plan. The plan is non-contributory  and provides for a reducing level of
term life insurance coverage following retirement.

In determining the benefit obligation the following assumptions were made:

                                       Pension Benefits          Other Benefits
                                       ----------------------------------------
December 31,                            2000       1999           2000      1999
--------------------------------------------------------------------------------
Weighted - average
  assumptions:
    Discount rate                      7.00%      6.50%          7.00%     6.50%
    Expected return on
      plan assets                      9.00%      9.00%             -          -
    Rate of compensation
      increase                         4.50%      4.50%             -          -


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

                               Pension Benefits        Other Benefits
                               ----------------        --------------
December 31,                     2000       1999        2000     1999
---------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation,
       beginning               $ 7,387   $ 7,488      $  140   $   52
    Service cost                   295       310           -        4
    Interest cost                  509       475           -        9
    Actuarial gain (loss)            8      (653)          -       78
    Benefits paid                 (279)     (233)          -       (3)
---------------------------------------------------------------------
  Benefit obligation,
    ending                       7,920     7,387         140      140
---------------------------------------------------------------------
Change in plan assets:
    Fair value of plan
      assets, beginning          7,955     7,627           -        -
    Actual return on plan
      assets                       570       560           -        -
    Employer contribution            -         1           -       14
    Benefits paid                 (278)     (233)          -      (14)
---------------------------------------------------------------------
  Fair value of plan
    assets, ending               8,247     7,955           -        -
---------------------------------------------------------------------
Funded status                      327       568        (140)    (140)
Unrecognized net transition
    asset                          (66)     (132)          -        -
Unrecognized net actuarial
    loss (gain)                    614       459           -     (126)
Unrecognized prior service
    cost                           (46)      (45)          -       86
---------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                       $   829   $   850      $ (140)  $ (180)
=====================================================================

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

                                             Pension Benefits
                                             ----------------
Years Ended December 31,                2000       1999       1998
------------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                      $  295     $  310     $  295
    Interest cost                        509        475        444
    Expected return on plan assets      (705)      (676)      (615)
    Amortization of transition
      asset                              (66)       (66)       (66)
    Amortization of unrecognized
      net (gain) loss                    (12)        12         26
------------------------------------------------------------------
      Net periodic pension cost       $   21     $   55     $   84
==================================================================

                                             Other Benefits
                                             --------------
Years Ended December 31,                2000       1999       1998
------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                      $    5     $    5     $    2
    Interest cost                         11          9          3
    Amortization of prior service
      cost                                 8          7          1
    Amortization of unrecognized
      net loss                            (7)        (7)        (9)
------------------------------------------------------------------
      Net periodic other benefit cost $   17     $   14     $   (3)
==================================================================

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 $140, $130 and $0,  respectively at December 31, 2000
and $145, $111 and $0, respectively at December 31, 1999.

30 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

12 INCOME TAXES

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

Years Ended December 31,             2000      1999       1999
---------------------------------------------------------------
Currently payable                 $ 1,405   $ 1,946    $ 2,056
Deferred benefit                     (109)     (165)      (284)
---------------------------------------------------------------
  Total                           $ 1,296   $ 1,781    $ 1,772
===============================================================

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,             2000      1999       1998
---------------------------------------------------------------
Tax at statutory rate             $ 2,053   $ 2,194    $ 2,058
Reduction for non-taxable
  interest                           (748)     (471)      (269)
Other (reductions)
  additions                            (9)       58        (17)
---------------------------------------------------------------
  Applicable Income Taxes         $ 1,296   $ 1,781    $ 1,772
===============================================================

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

Years Ended December 31,             2000      1999       1998
---------------------------------------------------------------
Accretion of discount on bonds    $    34   $   (57)   $  (147)
Accelerated depreciation              (85)      (59)       (32)
Supplemental benefit plan              (4)       (7)        (7)
Allowance for loan losses             (51)      (30)       (78)
Prepaid pension cost                   (3)      (12)       (20)
---------------------------------------------------------------
  Total                           $  (109)  $  (165)   $  (284)
===============================================================

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

December 31,                                   2000       1999
--------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                 $   721    $   670
  Depreciation                                  274        189
  Supplemental Benefit Plan                      26         22
  Unrealized securities losses                    -        563
--------------------------------------------------------------
    Total Deferred Tax Assets                 1,021      1,444
--------------------------------------------------------------
Deferred tax liabilities:
  Unrealized securities gains                   493          -
  Prepaid pension costs                         336        340
  Accretion                                      42          8
--------------------------------------------------------------
    Total Deferred Tax Liabilities              871        348
--------------------------------------------------------------
    Net Deferred Tax Asset                  $   150    $ 1,096
==============================================================

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

13 ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other  comprehensive  income of $958,  ($1,093) and $433 at December
31, 2000, 1999 and 1998,  respectively consisted entirely of unrealized gains or
losses on available-for-sale  securities,  net of tax.

     A reconciliation of other comprehensive  income for the year ended December
31, 2000 is as follows:

                                                          Tax
                                           Before-Tax  (Expense)   Net-of-Tax
                                             Amount      Benefit     Amount
--------------------------------------------------------------------------------
Unrealized gains on
  available-for-sale securities:
    Unrealized gains arising during
      the year                              $ 2,753     $   (936)   $ 1,817
    Less:  Reclassification adjustment
      for losses realized in income            (354)         120       (234)
--------------------------------------------------------------------------------
    Net unrealized gains                      3,107       (1,056)     2,051
--------------------------------------------------------------------------------
      Other comprehensive income            $ 3,107     $ (1,056)   $ 2,051
================================================================================

14 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, 2000 and 1999 are as follows:


                                             2000          1999
----------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                             $ 19,100      $ 16,703
  Variable rate                          $ 37,075      $ 37,261
Standby letters of credit                $  2,077      $  1,130


     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
     Standby letters of credit are conditional  commitments  issued to guarantee
the  performance  of a customer to a third  party.  The credit risk  involved in
issuing  letters of credit is essentially the same as that involved in extending
loan  facilities to customers.
     Various actions and proceedings are presently  pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising  from such  actions  would  not have a  material  adverse  effect on the
financial position of the Company.
     The Company  may,  from time to time,  maintain  bank  balances  with other
financial  institutions  in excess of $100,000 each.  Management is not aware of
any evidence that would indicate that such deposits are at risk.

                  Penseco Financial Services Corporation / 2000 Annual Report 31

<PAGE>

15 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, 2000         December 31, 1999
---------------------------------------------------------------------------------------
                                           Carrying     Fair         Carrying     Fair
                                            Amount     Value          Amount     Value
---------------------------------------------------------------------------------------
<S>                                       <C>        <C>            <C>        <C>
Financial Assets:
  Cash and due from banks                 $  18,775  $  18,775      $  10,275  $  10,275
  Interest bearing balances with banks          358        358          3,961      3,961
  Federal funds sold                              -          -         10,875     10,875
---------------------------------------------------------------------------------------
    Cash and cash equivalents                19,133     19,133         25,111     25,111
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities               54,662     54,662         66,459     66,459
      U.S. Agency obligations                35,749     35,749          4,800      4,800
      States & political subdivisions        13,293     13,293         22,952     22,952
      Federal Home Loan Bank stock            1,798      1,798          1,798      1,798
      Other securities                           70         70             20         20
    Held-to-maturity:
      U.S. Agency obligations                 3,905      3,780          4,843      4,691
      States & political subdivisions        16,331     17,060          5,639      5,487
---------------------------------------------------------------------------------------
        Total investment securities         125,808    126,412        106,511    106,207
  Loans, net of unearned income:
    Real estate mortgages                   243,533    237,664        219,815    213,273
    Commercial                               21,566     21,566         18,995     18,995
    Consumer and other                       42,642     42,291         42,717     42,656
    Less:  Allowance for loan losses          3,100                     2,950
---------------------------------------------------------------------------------------
      Loans, net                            304,641    301,521        278,577    274,924
---------------------------------------------------------------------------------------
      Total Financial Assets                449,582  $ 447,066        410,199  $ 406,242
Other assets                                 17,648                    18,415
---------------------------------------------------------------------------------------
Total Assets                              $ 467,230                 $ 428,614
=======================================================================================

Financial Liabilities:
  Demand - Non-interest bearing           $  64,184  $  64,184      $  58,230  $  58,230
  Demand - Interest bearing                  24,075     24,075         23,558     23,558
  Savings                                    63,552     63,552         68,824     68,824
  Money markets                              87,670     87,670         60,494     60,494
  Time                                      147,958    148,518        156,226    156,691
---------------------------------------------------------------------------------------
    Total Deposits                          387,439    387,999        367,332    367,797
  Repurchase agreements                      15,086     15,086         11,981     11,981
  Short-term borrowings                      11,503     11,503            887        887
---------------------------------------------------------------------------------------
    Total Financial Liabilities             414,028  $ 414,588        380,200  $ 380,665
Other Liabilities                             3,135                     2,671
Stockholders' Equity                         50,067                    45,743
---------------------------------------------------------------------------------------
    Total Liabilities and
    Stockholders' Equity                  $ 467,230                 $ 428,614
=======================================================================================

Standby Letters of Credit                 $     (21) $     (21)     $     (11) $     (11)
</TABLE>

32 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

16 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 $81 in 2000,  $80 in 1999 and $71 in 1998.  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, 2000
are as follows:

                         Mount   Meadow   ATM
                         Pocono  Avenue  Sites  Total
-----------------------------------------------------
2001                     $   47  $   12  $  12  $  71
2002                         47       -      6     53
2003                         47       -      -     47
2004                         47       -      -     47
2005                         47       -      -     47
2006 to 2012                250       -      -    250
-----------------------------------------------------
  Total minimum
    payments required    $  485  $   12  $  18  $ 515
=====================================================

17 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,     2000       1999
---------------------------------------------
Beginning Balance        $  4,921   $  4,008
Additions                   2,914      3,892
Collections                (1,876)    (2,979)
---------------------------------------------
  Ending Balance         $  5,959   $  4,921
=============================================

18 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, 2000, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject.
     As of December  31,  2000,  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,
2000, 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 / 2000 Annual Report 33

<PAGE>

18 REGULATORY MATTERS (continued)

<TABLE>
<CAPTION>
                      Actual                              Regulatory Requirements
----------------------------------------------   ---------------------------------------
                                                      For Capital           To Be
                                                  Adequacy Purposes   "Well Capitalized"
December 31, 2000               Amount   Ratio      Amount    Ratio      Amount    Ratio
----------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>          <C>     <C>         <C>
Total Capital
  (to Risk Weighted Assets)   $ 52,209  18.32%  > $ 22,796  >  8.0% >  $ 28,494  > 10.0%

Tier I Capital
  (to Risk Weighted Assets)   $ 49,109  17.23%  > $ 11,398  >  4.0% >  $ 17,096  >  6.0%

Tier I Capital
  (to Average Assets)         $ 49,109  10.93%  >        *  >    *  >  $ 22,464  >  5.0%

* 3.0%  ($13,478),  4.0%  ($17,971)  or 5.0%  ($22,464)  depending on the bank's
CAMELS Rating and other regulatory risk factors.


December 31, 1999               Amount   Ratio      Amount    Ratio      Amount    Ratio
----------------------------------------------------------------------------------------
Total Capital
  (to Risk Weighted Assets)   $ 49,786  18.96%  > $ 21,006  >  8.0% >  $ 26,259  > 10.0%

Tier I Capital
  (to Risk Weighted Assets)   $ 46,836  17.84%  > $ 10,503  >  4.0% >  $ 15,755  >  6.0%

Tier I Capital
  (to Average Assets)         $ 46,836  10.87%  >        *  >    *  >  $ 21,553  >  5.0%

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

</TABLE>

19 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:

BALANCE SHEETS

December 31,                      2000      1999
------------------------------------------------
Investment in subsidiary      $ 50,017  $ 45,743
Equity Investments                  50         -
------------------------------------------------
  Total Assets                $ 50,067  $ 45,743
================================================
  Total Stockholders' Equity  $ 50,067  $ 45,743
================================================

STATEMENTS OF INCOME

Years Ended December 31,          2000      1999      1998
----------------------------------------------------------
Earnings of subsidiary:
  Dividends received           $ 2,520   $ 2,363   $ 2,255
  Undistributed net income
    of subsidiary                2,223     2,308     2,026
----------------------------------------------------------
  Net Income                   $ 4,743   $ 4,671   $ 4,281
==========================================================

STATEMENTS OF CASH FLOWS

Years Ended December 31,                      2000        1999       1998
--------------------------------------------------------------------------
Operating Activities:
Net Income                                 $  4,743   $  4,671   $  4,281
Adjustments to reconcile net income
  to net cash provided by
    operating activities:
      Equity in undistributed net
        income of subsidiary                 (2,223)    (2,308)    (2,026)
--------------------------------------------------------------------------
      Net cash provided by
        operating activities                  2,520      2,363      2,255
--------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment                   (50)         -          -
--------------------------------------------------------------------------
      Net cash (used) provided by
        investing activities                    (50)         -          -
--------------------------------------------------------------------------
Financing Activities:
Cash dividends paid                          (2,470)    (2,363)    (2,255)
--------------------------------------------------------------------------
      Net cash used by
        financing activities                 (2,470)    (2,363)    (2,255)
--------------------------------------------------------------------------
      Net increase in cash and
        cash equivalents                          -          -          -
Cash and cash equivalents at January 1            -          -          -
--------------------------------------------------------------------------
Cash and cash equivalents at December 31   $      -   $      -   $      -
==========================================================================

34 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants

                                                               February 21, 2001



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,  2000 and 1999,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the years in the three year period  ended  December  31, 2000.
These  financial   statements  are  the   responsibility  of  the  Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of  Penseco
Financial Services  Corporation and subsidiary as of December 31, 2000 and 1999,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  2000,  in  conformity
with generally accepted accounting principles.



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



                  Penseco Financial Services Corporation / 2000 Annual Report 35

<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 2000.

                                    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 1, 2001, 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 1, 2001, 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 1,  2001,  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 1,  2001,  is
incorporated herein by reference thereto.

ITEM 13  Certain Relationships and Related Transactions

The  information  contained in Note 17 under Item 8 on page 33 under the heading
"General  Notes to Financial  Statements" in the Company's 2000 Annual Report to
Shareholders is incorporated herein by reference thereto.

36 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

                                    PART IV

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

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

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

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

     (3)  Exhibits

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

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

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

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

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

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

                27      Financial Data Schedule

(b)       No current report on Form 8-K was filed for the fourth quarter of 2000
          of the fiscal year ended December 31, 2000.


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


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

                  Penseco Financial Services Corporation / 2000 Annual Report 37

<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 7, 2001.

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


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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on March 7, 2001.


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


38 Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>


Exhibit Number
Referred to
Item 601 of                                                 Prior Filing or Exhibit
Regulation S-K          DESCRIPTION OF EXHIBIT                 Page Number Herein
--------------------------------------------------------------------------------------------
   <S>            <C>                                       <C>

    2             Plan of acquisition, reorganization,      None
                  arrangement, liquidation or succession

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

                  (ii)  By-Laws                             Incorporated herein by reference
                                                            to 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        None
                  security holders, including indentures

    9             Voting trust agreement                    None

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

   11             Statement re:  Computation of per         None
                  share earnings

   12             Statements re:  Computation of ratios     None

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

   16             Letter re:  Change in certifying          None
                  accountant

   18             Letter re:  Change in accounting          None
                  principles

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

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

   23             Consents of experts and counsel           None

   24             Power of attorney                         None

   27             Financial Data Schedule                   None

   99             Additional Exhibits                       None

</TABLE>

                  Penseco Financial Services Corporation / 2000 Annual Report 39

<PAGE>

                                Company Officers

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

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

Thomas E. Clewell
Vice-President and Assistant Trust Officer

Audrey F. Markowski
Vice-President

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

Lynn M. 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

Henry V. Janoski
Chief Investment Officer, Trust Services

Patrick Scanlon
Controller

Susan M. Bray
Assistant Controller and Assistant Treasurer

Gerard P. Vasil
Manager, Data Processing

P. Frank Kozik
Secretary

Mark M. Bennett
Credit Review Officer and Assistant Secretary


PENN SECURITY BANK AND TRUST COMPANY OFFICERS

ASSISTANT VICE-PRESIDENTS
Carl M. Baruffaldi
Denise M. Cebular
Carol Curtis McMullen
  Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Karyn Gaus Vashlishan
Lisa A. Kearney
Ann M. Kennedy
Eleanor Kruk
Caroline Mickelson
Aleta Sebastianelli
  and Assistant Secretary

ASSISTANT VICE-PRESIDENTS (continued)
Jeffrey Solimine
Jennifer S. Wohlgemuth
Linda Wolf
  and Training Officer
Beth S. Wolff
Deborah A. Wright

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

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT DIRECTOR OF Internal Audit
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

BRANCH OPERATIONS OFFICER
Stephen A. Hoffman

COMPUTER OPERATIONS OFFICER
Charles Penn

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo

FINANCIAL REPORTING OFFICER
John R. Anderson III

HUMAN RESOURCES OFFICER
Sharon Rosar

LOAN ADMINISTRATION OFFICER
Susan D. Blascak

LOAN OFFICERS
Denise Belton
Frank Gardner

OPERATIONS OFFICER
Patricia Pliske

TAX OFFICER
Robert W. McDonald

TRUST OPERATIONS OFFICER
Carol Trezzi

40  Penseco Financial Services Corporation / 2000 Annual Report

<PAGE>

                                   BACK COVER

                             Company Board Members

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

Edwin J. Butler
Retired Bank Officer

Richard E. Grimm
Executive Vice-President 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
Mary Citro
Robert J. Dillman, Ph.D.
Attorney Kirby Upright
Jeffrey Weichel

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

MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
Attorney Brian Golden
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