<PAGE>

                                   EXHIBIT 13



















                     PENSECO FINANCIAL SERVICES CORPORATION






                               1997 ANNUAL REPORT
















<PAGE>


INVESTOR INFORMATION


MARKET PRICES OF STOCK AND DIVIDENDS PAID

The Company's  capital stock is traded  "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
1997                   High         Low      Per share
-----------------------------------------------------
First Quarter          $ 23        $ 22       $ 0.20
Second Quarter           23          23         0.20
Third Quarter            25          23         0.20
Fourth Quarter           29          25         0.45
                                             --------
                                              $ 1.05
                                             ========

                                            Dividends
                                             Paid
    1996              High         Low       Per share
-----------------------------------------------------
First Quarter         $ 22         $ 22      $ 0.187
Second Quarter          22           22        0.187
Third Quarter           22           22        0.187
Fourth Quarter          22           22        0.439
                                            ---------
                                             $ 1.000
                                            =========

DIVIDENDS PAID (in millions)           YEAR
---------------------------------------------
           $ 2,256                     1997
             2,148                     1996
             2,014                     1995
             1,745                     1994
             1,745                     1993



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 717-346-7741.


STOCKHOLDERS' INQUIRIES

Stockholders  may obtain,  without charge, a copy of the Company's Annual Report
on Form 10-K by writing to:

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

Copies of this  Annual  Report are also  available  to the  public;  said Annual
Report is the Company's annual disclosure statement as required under Section 13
or 15(d) of the  Securities  Exchange  Act of 1934,  and may be  obtained at any
branch location of the Company or by contacting the  Controller's  office at the
above address.


MARKET MAKERS

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

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

<PAGE>


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


                          First    Second   Third    Fourth
          1997            Quarter  Quarter  Quarter  Quarter
--------------------------------------------------------------
Net Interest Income       $ 4,235  $ 4,263  $ 4,382  $ 4,834
Provision for Loan Losses     130       46       63       77
Other Income                1,745    1,196    1,959    1,385
Other Expenses              4,171    3,892    4,278    4,543
Net Income                $ 1,172  $ 1,079  $ 1,376  $ 1,098
Earnings Per Share        $  0.55  $  0.50  $  0.64  $  0.51


                          First    Second   Third    Fourth
          1996            Quarter  Quarter  Quarter  Quarter
--------------------------------------------------------------
Net Interest Income       $ 4,111  $  3,987 $ 4,307  $ 4,287
Provision for Loan Losses     122       133      64       15
Other Income                1,747     1,143   1,840    1,222
Other Expenses              4,024     3,639   4,111    3,959
Net Income                $ 1,188  $    975 $ 1,377  $ 1,062
Earnings Per Share        $  0.55  $   0.46 $  0.64  $  0.49















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                              FINANCIAL HIGHLIGHTS


-------------------------------------------------------------
In thousands, except
per share data              1997         1996       1995
-------------------------------------------------------------

Earnings per share        $    2.20   $    2.14   $    2.07
Dividends per share       $    1.05   $    1.00   $   0.937
Total Capital             $  42,924   $  40,585   $  39,239
Total Deposits            $ 374,488   $ 352,026   $ 336,386
Total Assets              $ 427,577   $ 398,035   $ 378,968
-------------------------------------------------------------







                                    CONTENTS

Investor Information..........................Inside Front Cover
President's Letter.............................................2
Board of Directors / Events of 1997............................4
Promotions and Appointments....................................9
Selected Financial Data.......................................10
Business of the Company.......................................11
Management Discussion and Analysis............................11
Consolidated Balance Sheets...................................23
Consolidated Statements of Income.............................24
Consolidated Statements of Changes in
      Stockholders' Equity....................................25
Consolidated Statements of Cash Flows.........................26
General Notes to Financial Statements.........................27
Independent Auditor's Report..................................38
Officers and Directors........................................39




ON THE COVER

This year's Annual Report cover  highlights the Visa Processor  Service  Quality
Performance  Awards  which  Penn  Security  has  received  every  year since the
inception  of the Awards by Visa.  This  program  recognizes  the top  financial
institutions,   categorized  by  size,  who  consistently  achieve  the  highest
performance  standards in processing  merchant  credit card  transactions.  Penn
Security's  1997  Award  appears  in the  center of the  photo,  reflecting  our
achievement of first place among over 5,000 banks in our size classification.

<PAGE>


President's Letter

Dear Shareholder:

          In my first letter to you as President of Penseco  Financial  Services
Corporation, I am pleased to report that the Company, while investing heavily in
new  technology  and upgrading  and  expansion of its premises,  had a good year
financially.  Earnings  per  share  increased  to $2.20  per share for 1997 when
compared  with $2.14 per share for 1996 (after  adjusting  for the 4 for 1 share
exchange ratio in the conversion to the holding  company  structure).  Dividends
increased to $1.05 per share in 1997 from $1.00 per share for the year  earlier.
Deposits  increased to $374 million from $352 million the year  earlier.  Assets
increased  to $428  million  from $398  million  for the year  earlier and total
capital increased to $43 million from $41 million the year earlier.
             As the world  approached  the beginning of the 21st century and the
end of the last, Penseco Financial  Services  Corporation was created to provide
additional powers and flexibility in delivering financial services in the future
to selected  markets  which could not be readily  accomplished  by our principal
subsidiary,  Penn  Security  Bank and Trust  Company,  alone.  People  today are
looking  for more  than  payment  mechanisms  and  interest  bearing  investment
vehicles from their financial services provider.  They are looking for a broader
range of investment  vehicles to invest their excess funds. They are looking for
investment  advice.  They are looking  for tax advice.  They are looking for the
convenience of having all of their  financial  information in one place - in one
statement immediately  accessible - with people whom they know and can trust. It
is really  the  marketplace  that is  driving  the  confluence  of the  banking,
securities and insurance industries.
              The formation of the holding company was over-whelmingly  approved
by the  shareholders  at the special  meeting held  December 16, 1997,  the vote
being  485,312  shares  approving  and 1,668 shares  opposed.  In  addition,  no
shareholder  elected to exercise any  dissenting  shareholder  rights.  The Bank
received   approval  from  the  Federal  Deposit  Insurance   Corporation,   the
Pennsylvania  Department  of Banking  and the  Federal  Reserve  Board  prior to
year-end and the  conversion  to the holding  company  structure  was  effective
December 31, 1997.  As a  consequence  of the holding  company  conversion,  our
Bank's annual report is more detailed and lengthy in the  Management  Discussion
and Analysis section than before.
              During the year, we opened our new Central City office  drive-thru
and expanded customer parking. This aided greatly when the sidewalk entrances to
the Bank were closed due to the  replacement of the sidewalks.  The Central City
renovations are nearly complete with  refurbishing of the older parking area, as
well as some corrections to the work already accomplished, still remaining.
              During the year, the Bank began  construction  of the  replacement
for our Green Ridge  office.  The new  structure  will  include  ample  customer
parking, three drive-up lanes including a drive-up ATM, and full lobby services.
We expect completion of this new office in June of 1998.
              We are also ready to break ground for our new Eagle Valley Corners
office  in  East  Stroudsburg,  after  a long  struggle  with  the  Pennsylvania
Department  of  Transportation  over  road  access.  The  traffic  count at that
location is one of the highest in the entire Pocono  Mountain  Region and we are
very excited about this new location.
              At the end of the year,  the Bank  purchased  software  for teller
terminals,  utilizing  a small PC  networked  to the Bank's  mainframe  for each
teller and receipt printer.  The Bank's Central City office will be the first to
use this new system, which will, in addition to ordinary teller functions,  have
the capability to display signatures, images of checks, and ultimately images of
our  customers.  This new teller  system will cost less than a quarter of what a
far less functional and inefficient teller system would have cost








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 just three years ago.
              At the end of the year,  the Bank also took  delivery on the first
of a series of new item processing  machines.  These machines are very versatile
and capture images of the documents, as well as the information encoded on them.
They are  capable of  reading a number of fonts  using  both  Optical  Character
Recognition  (OCR) and Magnetic Ink  Character  Recognition  (MICR)  technology.
These  machines  should be in service by the second  quarter of 1998.  They will
give us the  capability of doing lock box services for  companies  utilizing OCR
documents.  The document copies will be available on-line to both Bank employees
and customers alike.
              The Bank's new ATM system is functioning well and the Bank intends
this year to  replace all of its older  IBM  3624  machines  with  the  new  NCR
machines.
              At the end of the year, the bank was notified that it was selected
to partner with Kutztown  University to  incorporate  banking  services into its
Campus ID card. We have been pursuing such a relationship  for some time and are
anticipating that its successful  implementation will lead to rapid expansion of
our college and university relationships.
              As part of the Kutztown University program, we intend to sell U.S.
postage stamps at ATM's, transfer funds between banks initiated through ATMs and
move our home/office banking system to the Internet.
              As the new millennium  approaches,  most businesses are faced with
the problem commonly referred to as the "Y2K" problem.  This problem arises from
the need,  when  computers  were first  introduced,  to conserve  space in their
memories.  To do so two  digit  years  were  used  which  will  cause  problems,
particularly when one subtracts dates. The year "00" (meaning 2000) would appear
to be earlier than year "99" (meaning 1999).
              We have analyzed  this as it impacts  Penseco  Financial  Services
Corporation.  Most of our computer  systems have been written after 1980 and use
four digit years.  Those systems which we suspect of having problems either have
been or are in the process of being fixed.  We anticipate  extensive  testing of
all of our systems  beginning in July of this year with completion of testing by
the end of 1998. We do not anticipate any  significant  additional  costs as the
work will be accomplished by our normal computer systems and programming staff.
              This year,  Christe A. Casciano  was  named  Business  Development
Officer,  Kristen A. McGoff,  was  named  Branch Operations Officer &  Assistant
Cashier,  Sharon Rosar was  named Human Resources  Officer,  Robert J. Saslo was
named Director of P.C. Systems and Linda Wolf was named Teller Training Officer.
              These people are to be congratulated on their achievements.  It is
basically  our  people  who give our  Company  its  strength  and we are  indeed
fortunate to have such a capable and hard working staff.
              Now that our holding  company is in place, we have been discussing
with various entities our entry into the securities,  mutual funds and insurance
markets.  Possibilities  range  from  leasing  space  to dual  employees,  joint
ventures or outright purchase of these entities.  We will be reaching a decision
in this area  shortly  and by the time the  century  changes,  a  consumer  or a
business person should be able to take care of all of his or her financial needs
through Penseco Financial Services Corporation.
              In  looking  to the  future,  we see  our  Bank's  strong  capital
position,  good  earnings,  technological  resources,  our  positioning  in  the
marketplace  with regard to niche national  markets,  as well as our traditional
geographic market, all providing excellent  foundation for continued success. In
this endeavor,  you can help us by recommending  us to your family,  friends and
business acquaintances. This is your institution - let it serve you.



Sincerely yours,


/s/ Otto P. Robinson Jr.

Otto P. Robinson, Jr.
President




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This page of the 1997 Annual Report to Shareholders  contains two pictures.  The
captions and a description of each picture follows:


(1)  "Board of Directors": Pictured in the Board of Directors are seated left to
     right: Russell C. Hazelton,  P. Frank Kozik,  Secretary;  Attorney Otto. P.
     Robinson,  Jr., President;  Richard E. Grimm, Executive  Vice-President and
     Treasurer; and Edwin J. Butler. Standing left to right: Sandra C. Phillips,
     James G. Keisling, Robert W. Naismith, Ph.D., James B. Nicholas, D. William
     Hume, Senior Vice-President; and Emily S. Perry.

(2)  "Events 1997": Each year, the Company fields a team for the annual Susan B.
     Komen  Foundation  "Race  for the  Cure",  which  is held  to  support  the
     Foundation  in its fight  against  breast  cancer.  Pictured  here are some
     members of the Company team for this year's race.

















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<PAGE>


This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:


"Events of 1997":  As the year  ended,  there was a great deal of progress to be
seen at our newly remolded Central City in downtown Scranton.  These photos show
a view of the new teller area in the Bank's lobby and the new drive-up facility,
which includes an ATM, on the North Washington Avenue side of the building.  The
remodeling effort continues in other areas of our Central City Office.






















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<PAGE>


This page of the 1997 Annual Report to Shareholders contains four pictures.  The
captions and a description of each picture follows:


"Events of 1997"

(1)  The Company took a leadership  position in bringing to the attention of the
     public,  some of the  details of the new  Taxpayer  Relief Act of 1997.  We
     offered two evening  seminars in the fourth quarter of the year, which were
     open to the public, to explain some of the changes pertaining to Individual
     Retirement  Accounts,  and  arranged  for speakers on the subject from Penn
     Security  as well as from the legal  and  accounting  professions.  In this
     photo, Robert T. Kelly, Jr., Esq., CPA, a partner in the law firm of Myers,
     Brier & Kelly,  LLP, made a point in his  presentation  during the Scranton
     IRA Seminar.  Other speakers looking on were from left to right:  Robert F.
     Duguay, Senior  Vice-President and Trust Officer;  Francis J. Merkel, CPA a
     partner  in the  local  accounting  firm  of  McGrail,  Merkel,  Quinn  and
     Associates; and the Company's President, Attorney Otto P. Robinson, Jr.

(2)  This photo shows a part of the  audience  during the  Scranton  IRA seminar
     which was held at the  Radisson  at  Lackawanna  Station  Hotel in downtown
     Scranton.

(3)  The Pocono IRA Seminar was held at Pocono Manor  Resort and Golf Club,  and
     was an evening  seminar  that was open to the public.  The speakers at this
     seminar in this photo were,  from left to right:  Robert F. Duguay,  Senior
     Vice-President and Trust Officer;  Kirby G. Upright, Esq., a partner in the
     Stroudsburg law firm of Hanna, Young, Upright & Catina, LLP; Gary J. Hazen,
     CPA, a partner in the Stroudsburg accounting firm of John J. Riley, Inc; D.
     William Hume, Senior Vice-President;  and the Company's President, Attorney
     Otto P. Robinson, Jr.

(4)  This photo shows a part of the audience during the Pocono IRA Seminar which
     was held at Pocono Manor Resort and Golf Club near Mount Pocono.










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<PAGE>


This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:


"Events of 1997"

(1)  As a service to financial and estate  planning  professionals,  the Company
     played host to the noted estate planning and tax attorney,  Roy M. Adams, a
     partner in the law firm of Kirkland & Ellis in New York City,  who spoke on
     the topic  "Cutting Edge Tax  Techniques"  at the Country Club of Scranton.
     Invited guests included judges, attorneys, accountants, and estate planning
     professionals.

(2)  A group of professionals  listen attentively to Attorney Adams as he speaks
     to the over one hundred professionals who were at the meeting.

(3)  Pictured  here  are,  from  left  to  right,   Robert  F.  Duguay,   Senior
     Vice-President  and  Trust  Officer,  Attorney  Adams,  and  the  Company's
     President, Attorney Otto P. Robinson, Jr.

















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<PAGE>


This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:


"Events of 1997"

(1)  Molly Walsh from our Charge Card Department organized a fund raising effort
     among employees to help children from John Adams School in Scranton have an
     extra  special Merry  Christmas.  Each child  received a pair of gloves,  a
     gift, and a lollipop. Charge Card Department employees,  pictured here with
     some of the children from the John Adams School,  are from left to right in
     the second row, Eileen Yanchak, Jennifer Wohlgemuth and Molly Walsh.

(2)  Jennifer Wohlgemuth from our Charge Card Department is shown standing among
     some of the  children  from  the  John  Adams  School  during  the  Company
     sponsored Christmas Party.

(3)  Who likes donuts? This young lady from the John Adams School, that's who!














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This page of the 1997 Annual Report to Shareholders contains five pictures.  The
captions and a description  of each picture  follows,  starting at the top, from
left to right:


"Promotions & Appointments"

(1)   Christe A. Casciano:  Business Development Officer

(2)   Kristen A. McGoff:  Branch Operations Officer & Assistant Cashier

(3)   Sharon Rosar:  Human Resources Officer

(4)   Robert J. Saslo:  Director of P.C. Systems

(5)   Linda A. Wolf:  Teller Training Officer














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<PAGE>


                             SELECTED FINANCIAL DATA

(in thousands, except per share data)
RESULTS OF OPERATIONS:
                                    1997         1996         1995
------------------------------------------------------------------------
Interest Income                  $  30,099    $  27,893    $  27,474
Interest Expense                    12,385       11,201       11,218
------------------------------------------------------------------------
Net Interest Income                 17,714       16,692       16,256

Provision for Loan Losses              316          334          321
------------------------------------------------------------------------
Net Interest Income after
     Provision for Loan Losses      17,398       16,358       15,935
Other Income                         6,285        5,952        6,202
Other Expense                       16,884       15,733       15,672
Income Tax                           2,074        1,975        2,009

------------------------------------------------------------------------
Net Income                       $   4,725    $   4,602    $   4,456
------------------------------------------------------------------------

BALANCE SHEET DATA:

Assets                           $ 427,577    $ 398,035    $ 378,968
Investment Securities            $ 125,048    $ 125,263    $ 146,246
Net Loans                        $ 269,446    $ 237,915    $ 207,708
Deposits                         $ 374,488    $ 352,026    $ 336,386
Stockholders' Equity             $  42,924    $  40,585    $  39,239

PER SHARE DATA: *

Earnings per Share               $    2.20    $    2.14    $    2.07
Dividends per Share              $    1.05    $    1.00    $   0.937
Book Value per Share             $   19.98    $   18.89    $   18.27
Common Shares Outstanding        2,148,000    2,148,000    2,148,000

FINANCIAL RATIOS:

Net Interest Margin                  4.51%        4.51%        4.57%
Return on Average Assets             1.14%        1.17%        1.19%
Return on Average Equity            11.22%       11.54%       11.86%
Average Equity to Average Assets    10.16%       10.14%       10.01%
Dividend Payout Ratio               47.73%       46.67%       45.18%





                                       1994          1993
------------------------------------------------------------
Interest Income                     $  23,907     $  23,479
Interest Expense                        8,832         8,290
------------------------------------------------------------
Net Interest Income                    15,075        15,189

Provision for Loan Losses                 337           118
------------------------------------------------------------
Net Interest Income after
     Provision for Loan Losses         14,738        15,071
Other Income                            6,249         5,908
Other Expense                          15,935        15,135
Income Tax                              1,414         1,883

------------------------------------------------------------
Net Income                          $   3,638     $   3,961
------------------------------------------------------------

BALANCE SHEET DATA:

Assets                              $ 363,317     $ 345,981
Investment Securities               $ 160,585     $ 138,948
Net Loans                           $ 178,605     $ 183,385
Deposits                            $ 326,482     $ 310,509
Stockholders' Equity                $  32,927     $  33,244

PER SHARE DATA: *

Earnings per Share                  $    1.69     $    1.84
Dividends per Share                 $   0.812     $   0.812
Book Value per Share                $   15.33     $   15.48
Common Shares Outstanding           2,148,000     2,148,000

FINANCIAL RATIOS:

Net Interest Margin                     4.51%         4.58%
Return on Average Assets                1.02%         1.13%
Return on Average Equity               10.76%        12.31%
Average Equity to Average Assets        9.47%         9.14%
Dividend Payout Ratio                  48.01%        44.04%


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




<PAGE>


                             Business of the Company


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

DEPOSIT ACCOUNTS                                 OTHER SERVICES

All Purpose Clubs                       ATM Services
Certificates of Deposit                 Bank Money Orders
Christmas Clubs                         Cashier's Checks
Demand Accounts                         College Campus Card Interface
Individual Retirement Accounts          Credit Card Merchant Draft Capture
Money Market Accounts                   Data Processing Services
NOW Accounts                            Direct Deposit of Recurring Payments
Savings Accounts                        EDI-ACH Service
Time Open Accounts                      Food Stamps
Vacation Clubs                          Foreign Remittance
                                        Home Banking and Videotex Services
LENDING                                 Lockbox Services
                                        Night Depository
Appliance Loans                         Repurchase Agreements
Automobile Loans                        Safe Deposit Boxes
Business Loans                          Travelers Checks
Collateral Loans                        Trust Department Services
Construction Loans                            (a) Executor
Credit Lines                                  (b) Administrator
Educational Loans                             (c) Trustee
Home Equity Loans                             (d) Guardian
Home Repair and Remodeling Loans              (e) Agent
Installment Loans                             (f) Custodian and Trustee for
Mastercard and VISA (Cosmic Card)                   Pension Plans
Mortgage Loans (Residential                   (g) Trustee for Public Bond Issues
     and Commercial)                          (h) Securities Depository Service
Personal Loans                          U.S. Savings Bonds



                       Management Discussion and Analysis
INTRODUCTION

Penseco Financial Services Corporation  (Company), a bank holding company formed
in 1997, is the parent  company of Penn Security Bank and Trust Company  (Bank).
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 through its principal office located at 150 North Washington Avenue,
Scranton,  Pennsylvania,  containing trust, marketing, audit, credit card, human
resources,  executive, data processing and central bookkeeping offices and seven
additional offices located in the South Scranton,  East Scranton and Green Ridge
sections  of  Scranton,  the  Borough of  Moscow,  the Town of  Gouldsboro,  its
Abington  Office  located  in South  Abington  Township,  servicing  the  Clarks
Summit-Abington area and its Mount Pocono Office located in the Borough of Mount
Pocono, servicing the Pocono Mountain area, provides a full range of banking and
trust services to the Lackawanna,  Wayne, Monroe, Pike and Wyoming County areas.
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 Bank is the largest  independent  bank and trust  company  headquartered  in
Lackawanna  County,  holding  approximately  10%  of  the  banking  assets,  and
processes  its data,  as well as some of its  customers'  data,  through its own
processing facility.

              Through its banking  subsidiary,  the Company  generates  interest
income from its outstanding  loans  receivable and 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.


<PAGE>


                       Management Discussion and Analysis

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 1997 totalled  $4.7 million,  an increase of 2.7% from the $4.6
million  earned  in 1996,  which in turn was an  increase  of 3.3% from the $4.5
million earned in 1995. Net earnings per share were $2.20 in 1997, compared with
$2.14 in 1996 and $2.07 in 1995.  Net earnings for 1997 were  improved over 1996
results  primarily due to an increase in net interest income from greater yields
on earning assets and higher levels of average earnings assets. Net earnings for
1996 were improved over 1995 results  primarily due to a higher average  earning
asset base and a lower cost of funds.


NET INCOME (in millions)               YEAR
---------------------------------------------
          $  4.725                     1997
             4.602                     1996
             4.456                     1995
             3.638                     1994
             3.961                     1993



The  Company's  return on average  assets was 1.14% in 1997 compared to 1.17% in
1996 and 1.19% in 1995. Return on equity was 11.22%,  11.54% and 11.86% in 1997,
1996 and 1995, respectively.


RETURN ON AVERAGE ASSETS        YEAR
---------------------------------------
                1.14%           1997
                1.17%           1996
                1.19%           1995
                1.02%           1994
                1.13%           1993



RETURN ON AVERAGE EQUITY      YEAR
---------------------------------------
            11.22%              1997
            11.54%              1996
            11.86%              1995
            10.76%              1994
            12.31%              1993







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<PAGE>


                       Management Discussion and Analysis

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 $17.7  million in 1997,  compared with $16.7 million in
1996,  an increase  of 6.0%.  The  improvement  in net  interest  income in 1997
resulted from an increase in the loan portfolio of the Company.

Net interest  income was $16.7  million in 1996,  compared with $16.3 million in
1995, an increase of 2.7%. The increase in net interest  income in 1996 resulted
from an increase in higher average earning assets.

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, 1997 was 4.51% compared with 4.51% for the year
ended December 31, 1996, and 4.57% for the year ended December 31, 1995.

NET INTEREST INCOME (in millions)        YEAR
------------------------------------------------
       $ 17,714                          1997
         16,692                          1996
         16,256                          1995
         15,075                          1994
         15,189                          1993


Interest  income in 1997 totalled  $30.1  million,  compared to $27.9 million in
1996 an increase of $2.2 million or 7.9%. This increase resulted  primarily from
increased loan volume. The yield on average interest-earning assets was 7.66% in
1997,  compared to 7.54% in 1996. Average  interest-earning  assets increased in
1997 to $392.8 million from $370.0 million in 1996. Average loans, which are the
Company's  highest  yielding  earning  assets,  increased $29.1 million in 1997,
while  investment  securities and other earning  assets  decreased on average by
$6.3 million.  Average loans represented 66.3% of 1997 average  interest-earning
assets, compared to 62.5% in 1996.

Interest  expense also  increased in 1997 to $12.4 million from $11.2 million in
1996, an increase of $1.2 million or 10.6%.  This increase  resulted from higher
time   deposit   volume  and  rate   increases.   The   average   rate  paid  on
interest-bearing liabilities during 1997 was 3.86% compared to 3.72% in 1996.

Interest  income in 1996 totalled  $27.9  million,  compared to $27.5 million in
1995. This improvement resulted from a higher level of average  interest-earning
assets. The increase resulted primarily from an improvement in the average loans
outstanding  of $39.6 million,  off-set by a decrease in the average  securities
portfolio of $20.3  million.  The yield on average  interest-earning  assets was
$7.54%  in 1996,  compared  to 7.72% in 1995.  Average  interest-earning  assets
increased in 1996 to $370.0 million from $356.0  million in 1995.  Average loans
represented 62.5% of 1996 average  interest-earning assets, compared to 53.8% in
1995.

Interest  expense  decreased in 1996 to $11.201  million from $11.218 million in
1995.  The average  rate paid on  interest-bearing  liabilities  during 1996 was
3.72%, compared to 3.88% in 1995.

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.



<PAGE>


                       Management Discussion and Analysis

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 1997,  1996 and
1995.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                             1997                             1996                                1995
ASSETS                           Average    Revenue/    Yield/    Average     Revenue/     Yield/   Average     Revenue/    Yield/
                                 Balance    Expense      Rate     Balance     Expense      Rate     Balance     Expense     Rate
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>          <C>      <C>         <C>          <C>      <C>         <C>         <C>
Investment Securities
     U.S. Treasury securities    $113,559   $  7,092      6.25%   $125,114    $  7,880      6.30%   $121,029    $  7,894     6.52%
     Other                             20          1      5.00%         20           1      5.00%         20           -         -
     U.S. Agency obligations       11,342        712      6.28%      8,401         548      6.52%     32,744       2,061     6.29%
Loans, net of unearned income:
     Real estate mortgages        181,812     13,967      7.68%    161,699      12,531      7.75%    137,788      11,447     8.31%
     Commercial                    22,199      1,915      8.63%     19,252       1,743      9.05%     14,836       1,491    10.05%
     Consumer and other            56,364      6,002     10.65%     50,320       4,886      9.71%     39,001       4,051    10.39%
Federal funds sold                  7,535        410      5.44%      5,191         304      5.86%     10,579         530     5.01%
-----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
     Total Interest Income        392,831   $ 30,099      7.66%    369,997    $ 27,893      7.54%    355,997    $ 27,474     7.72%
-----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks             9,629                            7,985                             7,644
Bank premises and equipment         7,950                            6,275                             6,420
Accrued interest receivable         3,573                            3,603                             3,560
Other assets                        2,988                            7,728                             3,824
Less:  Allowance for loan losses    2,439                            2,230                             2,088
-----------------------------------------------------------------------------------------------------------------------------------
Total Assets                     $414,532                         $393,358                          $375,357
-----------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
     Demand-Interest bearing     $ 23,057   $    349      1.51%   $ 22,312    $    366      1.64%   $ 21,676    $    424     1.96%
     Savings                       72,815      1,447      1.99%     76,898       1,724      2.24%     77,131       1,952     2.53%
     Money markets                 68,437      2,039      2.98%     73,626       2,347      3.19%     77,577       2,786     3.59%
     Time - Over $100              30,697      1,616      5.26%     19,695         975      4.95%     13,825         687     4.97%
     Time - Other                 121,201      6,729      5.55%    107,019       5,736      5.36%     98,035       5,339     5.45%
Federal funds purchased               278         14      5.04%        559          23      4.11%         16           1     5.65%
Repurchase agreements               3,971        161      4.05%        100           4      4.00%
                                                                                                           -           -         -
Short-term borrowings                 558         30      5.38%        497          26      5.23%        546          29     5.31%
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities/
     Total Interest Expense       321,014   $ 12,385      3.86%    300,706    $ 11,201      3.72%    288,806    $ 11,218     3.88%
-----------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing      48,241                           46,885                            44,358
 All other liabilities              3,154                            5,882                             4,604
Stockholders' equity               42,123                           39,885                            37,589
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
     Stockholders' Equity        $414,532                         $393,358                          $375,357
-----------------------------------------------------------------------------------------------------------------------------------
Interest Spread                                           3.80%                             3.82%                            3.84%
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income                         $ 17,714                          $ 16,692                          $ 16,256
-----------------------------------------------------------------------------------------------------------------------------------

FINANCIAL RATIOS
     Net interest margin                                  4.51%                             4.51%                            4.57%
     Return on average assets                             1.14%                             1.17%                            1.19%
     Return on average equity                            11.22%                            11.54%                           11.86%
     Average equity to average                           10.16%                            10.14%                           10.01%
     assets
     Dividend payout ratio                               47.73%                            46.67%                           45.18%

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>



                       Management Discussion and Analysis
<TABLE>
<CAPTION>

DOLLAR AMOUNT OF CHANGE IN
INTEREST INCOME AND INTEREST EXPENSE
                                            Dollar                           Change
                                            Amount     Change in  Change in  in Rate-
             1997 compared to 1996          of Change  Volume      Rate      Volume
             ------------------------------------------------------------------------
<S>          <C>                            <C>       <C>       <C>          <C>
             Investment Securities:
ASSETS           U.S. Treasury securities   $  (788)  $  (728)  $    (75)    $    15
                 Other                            -         -          -           -
                 U.S. Agency obligations        164       192        (20)         (8)
             Loans, net of unearned income:
                 Real estate mortgages        1,436     1,559       (113)        (10)
                 Commercial                     172       267        (81)        (14)
                 Consumer and other           1,116       587        473          56
             Federal funds sold                 106       137        (22)         (9)
             ------------------------------------------------------------------------
             Total Interest Income          $ 2,206  $  2,014   $    162     $    30
             ------------------------------------------------------------------------
INTEREST     Deposits:
BEARING          Demand-Interest bearing    $   (17)  $    12   $    (29)    $     -
LIABILITIES      Savings                       (277)      (91)      (192)          6
                 Money markets                 (308)     (166)      (155)         13
                 Time - Over $100               641       545         63          33
                 Time - Other                   993       760        203          30
             Federal funds purchased             (9)      (12)         5          (2)
             Repurchase agreements              157       160          -          (3)
             Short-term borrowings                4         4          -           -
             ------------------------------------------------------------------------
             Total Interest Expense         $ 1,184  $  1,212   $   (105)    $    77
             ------------------------------------------------------------------------
             Net Interest Income            $ 1,022  $    802   $    267     $   (47)
             ------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

                                            Dollar                           Change
                                            Amount     Change in  Change in  in Rate-
             1996 compared to 1995          of Change  Volume     Rate       Volume
             -------------------------------------------------------------------------
<S>          <C>                            <C>       <C>        <C>        <C>
EARNING      Investment Securities:
ASSETS           U.S. Treasury securities   $   (13)  $   (94)  $     85     $    (4)
                 Other                            -         -          -           -
                 U.S. Agency obligations      1,513)   (1,519)        26         (20)
             Loans, net of unearned income:
                 Real estate mortgages        1,084     2,622     (1,254)       (284)
                 Commercial                     252       516       (196)        (68)
                 Consumer and other             835     1,499       (484)       (180)
             Federal funds sold                (226)     (234)        16          (8)
             -------------------------------------------------------------------------
             Total Interest Income          $   419   $ 2,790   $ (1,807)    $  (564)
             -------------------------------------------------------------------------
INTEREST     Deposits:
BEARING          Demand-Interest bearing    $   (58)  $    20   $    (76)    $    (2)
LIABILITIES      Savings                       (228)      (32)      (201)          5
                 Money markets                 (439)     (156)      (302)         19
                 Time - Over $100               288       439        (93)        (58)
                 Time - Other                   397       727       (296)        (34)
             Federal funds purchased             22        26          -          (4)
             Repurchase agreements                4         -          -           4
             Short-term borrowings               (3)       (2)        (1)          -
             -------------------------------------------------------------------------
             Total Interest Expense         $   (17)  $ 1,022   $   (969)    $   (70)
             -------------------------------------------------------------------------
             Net Interest Income            $   436  $  1,768   $   (838)    $  (494)
             -------------------------------------------------------------------------

</TABLE>


<PAGE>


                       Management Discussion and Analysis

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,                1997            1996            1995
-------------------------------------------------------------------------------
Trust department income               $    858        $    730        $    722
Service charges on deposit accounts        648             664             682
Merchant transaction income              4,083           4,043           4,070
Other fee income                           204             209             219
Other operating income                     492             306             357
Realized gains on securities, net            -               -             152
-------------------------------------------------------------------------------
     Total Other Income               $  6,285        $  5,952        $  6,202
-------------------------------------------------------------------------------


Total other income  increased  $333 during 1997.  Most of the increase came from
new trust business which was up $128 from 1996, a 17.5%  increase.  Also,  there
was a slight  improvement  in our merchant  transaction  income of $40 due to an
increase  in  our  customer  base  and  increased  business  with  our  existing
customers.

Total other income decreased $250 in 1996 from 1995, a 4% decrease,  largely due
to smaller  margins in our merchant  draft  capture  business in 1996 and due to
OREO income and gains on securities transactions realized in 1995.

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,                1997            1996            1995
-------------------------------------------------------------------------------
Salaries and employee benefits        $  7,578        $  6,860        $  6,577
Occupancy expenses, net                  1,278           1,221           1,146
Furniture and equipment expenses           850             806             752
FDIC assessments                            44               2             378
Merchant transaction expenses            3,365           3,412           3,439
Other operating expenses                 3,769           3,432           3,380
-------------------------------------------------------------------------------
     Total Other Expenses             $ 16,884        $ 15,733        $ 15,672
-------------------------------------------------------------------------------


Salaries and employee benefits  increased by $718 or 10.4% in 1997 from 1996 and
$283 or 4.3% in 1996 from 1995.  The Company  employed 202 people on a full-time
equivalent  basis at December 31, 1997,  compared  with 197 at December 31, 1996
and 195 at December 31, 1995. The salary and benefits  expense  increase was due
to  significantly  higher  health care  coverage  provided by the Company to its
employees, merit increases, and staff additions.

Occupancy expenses,  furniture and equipment,  and merchant transaction expenses
were not  significantly  different  during the years 1997, 1996 and 1995.  Other
operating expenses  increased  primarily due to costs associated with foreclosed
properties.  However,  the Company has benefited from a lower FDIC assessment in
1997 and 1996 than in 1995.

INCOME TAXES

Federal  income  tax  expense  amounted  to  $2,074 in 1997  compared  to $1,975
recorded in 1996. The $99 increase in the Company's tax provision was due to the
$222 increase in pre-tax  income.  The Company's  effective  income tax rate for
1997 was 30.5% compared to 30.0% for 1996. In 1996, income tax expense decreased
$34 from $2,009 in 1995 due to an increase in non-taxable  interest income.  The
effective income tax rate for 1996 was 30.0% compared to 31.0% for 1995.

FINANCIAL CONDITION

<PAGE>

Total assets  increased $29.6 million of 7.4% during 1997 and amounted to $427.6
million at December  31, 1997  compared to $398.0  million at December 31, 1996.
Also, for the year ended December 31, 1996 total assets  increased $19.0 million
to $398.0 million or a 5.0% increase over $379.0 million at December 31, 1995.

ASSETS (in millions)             YEAR
---------------------------------------
       $ 427,577                 1997
         398,035                 1996
         378,968                 1995
         363,317                 1994
         345,981                 1993


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 book value by security type for the Company's
investment portfolio.


December 31,                            1997            1996            1995
-------------------------------------------------------------------------------
U.S. Treasury securities             $ 114,922       $ 112,904       $ 137,271
Other securities                            20              20              20
U.S. Agency obligations                 10,106          12,339           8,955
-------------------------------------------------------------------------------
     Total Investment Securities     $ 125,048       $ 125,263       $ 146,246
-------------------------------------------------------------------------------








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<PAGE>


                       Management Discussion and Analysis


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


LOAN PORTFOLIO

As of December 31,                   1997        1996        1995
----------------------------------------------------------------------
Real estate - construction
     and land development          $   3,731   $   3,770   $   4,042
Real estate mortgages                190,658     167,291     146,600
Commercial                            26,841      19,966      16,246
Credit card and related plans          2,293       2,298       2,404
Installment                           39,613      37,463      30,804
Obligations of states
     and political subdivisions        8,910       9,427       9,712
----------------------------------------------------------------------
Loans, net of unearned income        272,046     240,215     209,808
Less:  Allowance for loan losses       2,600       2,300       2,100
----------------------------------------------------------------------
Loans, net                         $ 269,446   $ 237,915   $ 207,708
----------------------------------------------------------------------


As of December 31,                    1994        1993
---------------------------------------------------------
Real estate - construction
     and land development           $   4,174   $   3,219
Real estate mortgages                 128,467     133,470
Commercial                             12,643      15,344
Credit card and related plans           2,520       2,840
Installment                            24,769      21,465
Obligations of states
     and political subdivisions         8,132       9,147
---------------------------------------------------------
Loans, net of unearned income         180,705     185,485
Less:  Allowance for loan losses        2,100       2,100
---------------------------------------------------------
Loans, net                          $ 178,605   $ 183,385
---------------------------------------------------------


LOANS

Total net loans  increased  $31.5 million to $269.4 million at December 31, 1997
from $237.9 million at December 31, 1996, an increase of 13.2%.

Total net loans  increased  $30.2 million to $237.9 million at December 31, 1996
from $207.7 million at December 31, 1995, an increase of 14.5%.

The  increase in both years is due to  continued  growth in the  Company's  real
estate, commercial and installment loan portfolios.

NET LOANS (in millions)                YEAR
---------------------------------------------
       $ 269,446                       1997
         237,915                       1996
         207,708                       1995
         178,605                       1994
         183,385                       1993

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 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 judgement 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  charged-off of
loans (or parts of loans) management has determined to be uncollectible,  net of
actual recoveries on loans previously charges-off.


<PAGE>


                       Management Discussion and Analysis

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:

December 31,                                   1997      1996       1995
--------------------------------------------------------------------------
Non-accrual loans                             $ 1,031   $   866   $   940
Loans past due 90 days or more and accruing:
     Guaranteed student loans                     343       342       166
     Credit card and home equity loans             98        93       133
--------------------------------------------------------------------------
Total non-performing loans                      1,472     1,301     1,239
Other real estate owned                           339       610       306
--------------------------------------------------------------------------
Total non-performing assets                   $ 1,811   $ 1,911   $ 1,545
--------------------------------------------------------------------------

December 31,                                      1994      1993
-----------------------------------------------------------------
Non-accrual loans                               $ 1,435   $ 1,924
Loans past due 90 days or more and accruing:
     Guaranteed student loans                       187       118
     Credit card and home equity loans              101       140
-----------------------------------------------------------------
Total non-performing loans                        1,723     2,182
Other real estate owned                             496       618
-----------------------------------------------------------------
Total non-performing assets                     $ 2,219   $ 2,800
-----------------------------------------------------------------

Loans are generally placed on a non-accrual status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on nonaccrual status, all 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 $1,031, $866 and $940 at December 31, 1997, 1996 and 1995,  respectively.  If
interest on those loans had been  accrued,  such income would have been $89, $66
and $69 for 1997, 1996 and 1995,  respectively.  Interest income on those loans,
which is recorded  only when  received,  amounted to $35,  $45 and $56 for 1997,
1996 and 1995,  respectively.  There are no commitments to lend additional funds
to individuals whose loans are 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  quality,  and
current economic conditions that may affect the borrower's ability to pay. As of
December  31, 1997 there are no  significant  loans as to which  management  has
serious  doubt about their  ability to  continue to perform in  accordance  with
their contractual terms.

At  December  31,  1997,  1996 and  1995,  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  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:


Years Ended December 31,             1997     1996      1995     1994      1993
--------------------------------------------------------------------------------

Balance at beginning  of year       $ 2,300  $ 2,100  $ 2,100  $ 2,100   $ 2,100
Charge-offs:
     Real estate mortgages               38       87      300      341        79
     Commercial (time and demand)
       and all others                     -        -       11        -        14
     Credit card and related plans       52       64       67       55        77
     Installment loans                   32       32        3       12        20
--------------------------------------------------------------------------------
Total charge-offs                       122      183      381      408       190
--------------------------------------------------------------------------------
Recoveries:
     Real estate mortgages               79       22        2        3         -
     Commercial (time and demand)
       and all others                     1        2        1       25         6
     Credit card and related plans       17       16       11       18        19
     Installment loans                    9        9       46       25        47
--------------------------------------------------------------------------------
Total recoveries                        106       49       60       71        72
--------------------------------------------------------------------------------


<PAGE>

Net charge-offs                          16      134      321      337       118
--------------------------------------------------------------------------------
Provision charged to operations         316      334      321      337       118
--------------------------------------------------------------------------------
Balance at End of Year              $ 2,600  $ 2,300  $ 2,100  $ 2,100   $ 2,100
--------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding         0.001%    0.06%    0.17%    0.19%     0.06%
--------------------------------------------------------------------------------



















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<PAGE>


                       Management Discussion and Analysis



The allowance for loan losses is allocated as follows:

                              As of December 31,
                              --------------------------------------------------
                                      1997             1996             1995
                              --------------------------------------------------
                                Amount      %*   Amount      %*   Amount      %*

Real estate mortgages           $ 1,350    71%   $ 1,125    71%   $ 1,100    72%
Commercial (time and demand)
     and all others                 850    19%       875    22%       750    23%
Credit card and related plans       150     1%       150     1%       150     1%
Personal installment loans          250     9%       150     6%       100     4%
                              --------------------------------------------------
Total                           $ 2,600   100%   $ 2,300   100%   $ 2,100   100%
                              --------------------------------------------------

                             ------------------------------------
                                      1994             1993
                             -------------------------------------
                                Amount      %*   Amount       %*

Real estate mortgages           $ 1,100    74%   $ 1,200    74%
Commercial (time and demand)
     and all others                 700    22%       600    21%
Credit card and related plans       200     2%       200     2%
Personal installment loans          100     2%       100     3%
                             -------------------------------------
Total                           $ 2,100   100%   $ 2,100   100%
                             -------------------------------------


* Percent of loans in each category to total loans




DEPOSITS

The primary source of funds to support the Company's growth is its deposit base.
Company deposits  increased $22.5 million to $374.5 million at December 31, 1997
from $352.0 million at December 31, 1996, an increase of 6.4%.  Company deposits
increased  $15.6  million to $352.0  million at  December  31,  1996 from $336.4
million at December 31, 1995, an increase of 4.6%. This growth occurred  despite
the  trend  of  customers  finding  alternate   repositories  for  their  funds,
principally the equity market via mutual funds.  Management is responding to the
competition  for these funds by  offering  competitively  priced or  alternative
banking products.

DEPOSITS (in millions)            YEAR
----------------------------------------
$ 374,488                         1997
  352,026                         1996
  336,386                         1995
  326,482                         1994
  310,509                         1993


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

Three months or less                  $   8,128
Over three months through six months     14,261
Over six months through twelve months     5,728
Over twelve months                       10,035
                                      ----------
Total                                 $  38,152




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.



<PAGE>


                       Management Discussion and Analysis

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  instruments  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 a recently  instituted  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  judgement,  and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.











             (The remainder of this page left intentionally blank.)


<PAGE>


                       Management Discussion and Analysis


MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 1997
<TABLE>

<CAPTION>
                                                                                                       Non-Rate              Fair
                                      1998       1999       2000      2001        2002    Thereafter  Sensitive    Total    Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>       <C>        <C>        <C>        <C>       <C>         <C>        <C>        <C>
ASSETS
Investment Securities:
  Fixed interest rate securities
      U.S. Treasury securities       $ 56,057  $  44,600  $  14,265  $       -  $      -  $        -  $       -  $ 114,922  $114,922
            Yield                       5.95%      6.55%      6.63%          -         -           -          -      6.27%
  Variable interest rate securities
      U.S. Agency obligations           2,400      2,400      2,400      2,400       506           -          -     10,106    10,102
            Yield                       7.00%      7.00%      7.00%      7.00%     7.00%           -          -      7.00%
      Other                                 -          -          -          -         -          20          -         20        20
            Yield                           -          -          -          -         -       5.00%          -      5.00%
Loans, net of unearned income:
  Fixed interest rate loans
      Real estate mortgages             8,400      8,170      8,159      8,269     7,414      61,499          -    101,911   102,279
            Yield                       8.10%      7.97%      7.80%      7.86%     7.82%       7.83%          -      7.87%
      Consumer and other                4,483      4,593      4,759      3,387     5,011         960          -     23,193    23,029
            Yield                       8.59%      8.54%      8.46%      8.47%     8.51%       8.32%          -      8.51%
  Variable interest rate loans
      Real estate mortgages             7,091      7,697     10,417      9,595     8,761      48,917          -     92,478    92,478
            Yield                       8.58%      8.58%      8.78%      8.68%     8.48%       8.37%          -      8.50%
      Commercial                       26,841          -          -          -         -           -          -     26,841    26,841
            Yield                       8.82%          -          -          -         -           -          -      8.82%
      Consumer and other               11,585      3,528      1,480      1,456       978       8,596          -     27,623    27,623
            Yield                       8.76%      8.16%      8.81%      8.92%     9.12%       9.14%          -      8.33%
Less:  Allowance for loan losses          558        229        237        217       212       1,147          -      2,600
Federal funds sold                      7,650          -          -          -         -           -          -      7,650     7,650
            Yield                       5.44%          -          -          -         -           -          -      5.44%
Cash and due from banks                     -          -          -          -         -           -     10,928     10,928    10,928
Other assets                                -          -          -          -         -           -     14,505     14,505
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                         $123,949  $  70,759  $  41,243  $  24,890  $ 22,458  $  118,845  $  25,433  $ 427,577  $415,872
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY

Deposits:
  Variable interest rate deposits
      Demand - Interest bearing      $      -  $  23,826  $       -  $       -  $      -  $        -  $       -  $  23,826  $ 23,826
            Yield                           -      1.51%          -          -         -           -          -      1.51%
      Savings                               -     71,722          -          -         -           -          -     71,722    71,722
            Yield                           -      1.99%          -          -         -           -          -      1.99%
      Money markets                    63,055          -          -          -         -           -          -     63,055    63,055
            Yield                       2.98%          -          -          -         -           -          -      2.98%
      Time - Other                     13,095          -          -          -         -           -          -     13,095    13,095
            Yield                       5.77%          -          -          -         -           -          -      5.77%
  Fixed interest rate deposits
      Time - Over $100,000             28,117      7,329      1,579        927       200           -          -     38,152    38,207
            Yield                       5.82%      6.14%      6.21%      6.50%     5.99%           -          -      5.89%
      Time - Other                     92,796     20,769      2,453        927     1,554          12          -    118,511   118,717
            Yield                       5.56%      6.11%      6.26%      5.83%     5.93%       5.57%          -      5.68%
Demand - Non-interest bearing               -          -          -          -         -           -     46,127     46,127    46,127
Repurchase agreements                   5,922          -          -          -         -           -          -      5,922     5,922
            Yield                       5.00%          -          -          -         -           -      5.00%
Short-term borrowings                     893          -          -          -         -           -          -        893       893
            Yield                       5.25%          -          -          -         -           -          -      5.25%
Other liabilities                           -          -          -          -         -           -      3,350      3,350
Stockholders' equity                        -          -          -          -         -           -     42,924     42,924
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity                               $203,878  $ 123,646  $   4,032  $   1,854  $  1,754  $       12  $  92,401  $ 427,577  $381,564
------------------------------------------------------------------------------------------------------------------------------------
Excess of (liabilities) assets
subject to interest rate change      $(79,929) $(52,887)  $ 37,211   $  23,036  $ 20,704  $  118,833  $(66,968)  $       -
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE>


                       Management Discussion and Analysis


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. 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, non-recurring and unusual.

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 23.55% at December 31, 1997.
The Company's risk based capital ratio is more than double 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 nearly triple the
8.00%  limit which  determines  whether a company is  "adequately  capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital  requirements  without the necessity of increasing its
equity capital.

The Company has purchased  land in the East  Stroudsburg  area and is completing
site work to build a branch office at an  approximate  cost of  $1,200,000.  The
Company is also constructing a new branch facility in the Green Ridge section of
Scranton,   replacing  its  existing  facility,   at  a  cost  of  approximately
$1,500,000.

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.

At December  31,  1997,  there were 1,019  shareholders  of record of the common
stock.

STOCKHOLDERS' EQUITY (in millions)            YEAR
----------------------------------------------------
       $   42,924                             1997
           40,585                             1996
           39,239                             1995
           32,927                             1994
           33,244                             1993


YEAR 2000 COMPLIANCE

The "Year  2000" issue is the result of computer  programs  having been  written
using a  two-digit  field as  opposed  to a  four-digit  field,  to  define  the
applicable  year.  Programs  that are time  sensitive may recognize a date using
"00" as the year 1900  rather  than the year 2000.  Computer  system  failure or
significant miscalculations could result from this problem, if not corrected.

The Company  licenses a minor  portion of its software,  used in conducting  its
business,  from  third  party  software  vendors,  while  most of the  Company's
software  has  been   internally   developed.   The  Company  has   developed  a
comprehensive  list  of  all  software  and  all  hardware  in  use  within  the
organization. Every vendor has been contacted regarding the Year 2000 issue, and
the Company is closely  tracking the progress each vendor is making in resolving
the  problems  associated  with the issue.  Software  is upgraded as the vendors
resolve Year 2000 problems.

<PAGE>

Internally developed software is undergoing  modifications and many systems have
already been modified. Testing procedures are being formulated for comprehensive
testing of this software  beginning in July, 1998, with completion of testing by
the end of 1998.  Additionally,  the Company has begun the process of contacting
its  borrowers to determine  the level of progress  they have made in addressing
the impact that the Year 2000 issue will have on their respective businesses.

The Company does not anticipate any significant additional costs, over and above
normal  operating  costs,  as the  work  will  be  largely  accomplished  by the
Company's computer systems and programming staff.














             (The remainder of this page left intentionally blank.)



<PAGE>


                           CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

               December 31,                                   1997         1996
               -----------------------------------------------------------------
ASSETS         Cash and due from banks                       $ 10,928   $ 12,677
               Federal funds sold                               7,650     10,150
               -----------------------------------------------------------------
                  Cash and Cash Equivalents                    18,578     22,827
               Investment securities:
                  Available-for-sale, at fair value           114,942    112,924
                  Held-to-maturity (fair value of $10,102
                      and $12,277, respectively)               10,106     12,339
               -----------------------------------------------------------------
                  Total Investment Securities                 125,048    125,263
               Loans, net of unearned income                  272,046    240,215
                  Less:  Allowance for loan losses              2,600      2,300
               -----------------------------------------------------------------
                  Loans, Net                                  269,446    237,915
               Bank premises and equipment                      8,646      6,422
               Other real estate owned                            339        610
               Accrued interest receivable                      3,895      3,508
               Other assets                                     1,625      1,490
               -----------------------------------------------------------------
                  Total Assets                               $427,577   $398,035
               -----------------------------------------------------------------

LIABILITIES    Deposits:
                  Non-interest bearing                       $ 46,127   $ 44,657
                  Interest bearing                            328,361    307,369
               -----------------------------------------------------------------
                  Total Deposits                              374,488    352,026
               Other borrowed funds:
                  Repurchase agreements                         5,922      1,997
                  Short-term borrowings                           893        471
               Accrued interest payable                         2,524      2,000
               Other liabilities                                  826        956
               -----------------------------------------------------------------
                  Total Liabilities                           384,653    357,450
               -----------------------------------------------------------------

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                               31,662     29,193
               Unrealized securities gains, net of deferred
                  tax effect of $217 and $284, respectively       422        552
               -----------------------------------------------------------------
                  Total Stockholders' Equity                   42,924     40,585
               -----------------------------------------------------------------
                  Total Liabilities and Stockholders' Equity $427,577   $398,035
               -----------------------------------------------------------------




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



<PAGE>


                        CONSOLIDATED STATEMENTS OF INCOME


(in thousands, except per share data)

           Years Ended December 31,                 1997       1996       1995
           ---------------------------------------------------------------------
INTEREST   Interest and fees on loans             $ 21,884   $ 19,160   $ 16,989
INCOME     Interest and dividends on investments:
                U.S. Treasury securities and U.S.
                   Agency obligations                7,804      8,428      9,955
                Other securities                         1          1          -
           Interest on Federal funds sold              410        304        530
           ---------------------------------------------------------------------
                Total Interest Income               30,099     27,893     27,474
           ---------------------------------------------------------------------
INTEREST   Interest on time deposits of $100,000
EXPENSE        or more                               1,616        975        687
           Interest on other deposits               10,564     10,173     10,501
           Interest on other borrowed funds            205         53         30
           ---------------------------------------------------------------------
                Total Interest Expense              12,385     11,201     11,218
           ---------------------------------------------------------------------
                Net Interest Income                 17,714     16,692     16,256
           Provision for loan losses                   316        334        321
           ---------------------------------------------------------------------
                Net Interest Income After
                 Provision for Loan Losses          17,398     16,358     15,935
           ---------------------------------------------------------------------

OTHER      Trust department income                     858        730        722
INCOME     Service charges on deposit accounts         648        664        682
           Merchant transaction income               4,083      4,043      4,070
           Other fee income                            204        209        219
           Other operating income                      492        306        357
           Realized gains on securities, net             -          -        152
           ---------------------------------------------------------------------
                Total Other Income                   6,285      5,952      6,202
           ---------------------------------------------------------------------
OTHER      Salaries and employee benefits            7,578      6,860      6,577
EXPENSES   Occupancy expenses, net                   1,278      1,221      1,146
           Furniture and equipment expenses            850        806        752
           FDIC assessments                             44          2        378
           Merchant transaction expenses             3,365      3,412      3,439
           Other operating expenses                  3,769      3,432      3,380
           ---------------------------------------------------------------------
                Total Other Expenses                16,884     15,733     15,672
           ---------------------------------------------------------------------
NET INCOME Income before income taxes                6,799      6,577      6,465
           Applicable income taxes                   2,074      1,975      2,009
           ---------------------------------------------------------------------
                Net Income                        $  4,725   $  4,602   $  4,456
           ---------------------------------------------------------------------
PER SHARE       Earnings per Share                $   2.20   $   2.14   $   2.07
           ---------------------------------------------------------------------


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



<PAGE>


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
                                                                      Unrealized
                                                                      Securities            Total
                                               Common     Retained    Gains (Losses),    Stockholders'
(in thousands except per share data) Stock     Surplus    Earnings    Net of Taxes         Equity
----------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>         <C>           <C>               <C>
Balance, December 31, 1994           $  21    $ 10,819    $ 24,297      $ (2,210)         $  32,927
      Net income, 1995                   -           -       4,456             -              4,456
      Cash dividends declared
          ($.937 per share)              -           -      (2,014)            -             (2,014)
      Unrealized securities gains,
          net of taxes of  $1,934        -           -           -         3,870              3,870
----------------------------------------------------------------------------------------------------

Balance, December 31, 1995              21      10,819      26,739         1,660             39,239
      Net income, 1996                   -           -       4,602             -              4,602
      Cash dividends declared
          ($1.00 per share)              -           -      (2,148)            -             (2,148)
      Unrealized securities losses,
          net of taxes of  $571          -           -           -        (1,108)            (1,108)
----------------------------------------------------------------------------------------------------

Balance, December 31, 1996              21      10,819      29,193           552             40,585
      Net income, 1997                   -           -       4,725             -              4,725
      Cash dividends declared
          ($1.05 per share)              -           -      (2,256)            -             (2,256)
      Unrealized securities losses,
          net of taxes of $67            -           -           -          (130)              (130)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1997           $  21    $ 10,819    $ 31,662      $    422          $  42,924
----------------------------------------------------------------------------------------------------

</TABLE>

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






<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)  Years Ended December 31,                                        1997          1996          1995
                ---------------------------------------------------------------------------------------------------
<S>             <C>                                                          <C>            <C>            <C>
OPERATING       Net Income                                                   $   4,725      $  4,602       $  4,456
ACTIVITIES      Adjustments to reconcile net income to net cash
                   provided by operating activities:
                     Depreciation                                                  972           929            916
                     Provision for loan losses                                     316           334            321
                     Deferred income tax (benefit) provision                       (8)            17             66
                     Amortization of securities (net of accretion)                 296           510            538
                     Net realized gain on securities                                 -             -           (152)
                     Loss on other real estate                                     176            52             27
                     (Increase) decrease in interest receivable                   (387)          885           (556)
                     (Increase) decrease in other assets                          (136)           98            430
                     Increase in income tax payable                                 51            65             99
                     Increase in interest payable                                  523           105            515
                     (Decrease) increase in other liabilities                     (105)          172            (42)
                ---------------------------------------------------------------------------------------------------
                     Net cash provided by operating activities                   6,423         7,769          6,618

INVESTING       Purchase of investment securities available-for-sale           (48,472)      (14,793)       (43,886)
ACTIVITIES      Proceeds from sales and maturities of investment securities
                  available-for-sale                                            46,000       37,000          36,042
                Purchase of investment securities to be held-to-maturity             -       (5,002)              -
                Proceeds from repayments of investment securities
                  held-to-maturity                                               2,194        1,590          27,661
                Net loans originated                                           (32,274)     (31,040)        (29,951)
                Proceeds from other real estate                                    523          143             689
                Investment in premises and equipment                            (3,196)      (1,163)           (566)
                ---------------------------------------------------------------------------------------------------
                     Net cash used by investment activities                    (35,225)     (13,265)        (10,011)

FINANCING       Net decrease in demand and savings deposits                    (12,393)        (647)         (5,038)
ACTIVITIES      Net proceeds on time deposits                                   34,855       16,287          14,943
                Decrease in federal funds purchased                                  -             -         (1,700)
                Increase in repurchase agreements                                3,925        1,997              -
                Net increase (decrease)  in short-term borrowings                  422          295            (201)
                Cash dividends paid                                             (2,256)      (2,148)         (2,014)
                ---------------------------------------------------------------------------------------------------
                     Net cash provided by financing activities                  24,553       15,784           5,990
                ---------------------------------------------------------------------------------------------------
                     Net (decrease) increase in cash and cash equivalents       (4,249)      10,288           2,597
                ---------------------------------------------------------------------------------------------------
                Cash and cash equivalents at January 1                          22,827       12,539           9,942
                ---------------------------------------------------------------------------------------------------
                Cash and cash equivalents at December 31                     $  18,578      $ 2,827        $ 12,539
                ---------------------------------------------------------------------------------------------------
</TABLE>


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



<PAGE>


                      General Notes To Financial Statements

1     NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

 The Company  operates from eight 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 and
consumer loans.

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

BASIS OF PRESENTATION

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

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

This  reorganization  among entities under common control has been accounted for
at historical cost in a similar manner to a pooling of interests.  The financial
statements  have been restated as if the  transaction had occurred on January 1,
1995.

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.

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.

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 SFAS No. 119.

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

<PAGE>

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.

PENSION EXPENSE

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

POSTRETIREMENT BENEFITS EXPENSE

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














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<PAGE>


                      General Notes To Financial Statements

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

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 pretax 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 are adjusted through the provision for income taxes.

CASH FLOWS

For purposes of the Statement 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,
1997, 1996 and 1995 as follows:


                         1997        1996         1995
--------------------------------------------------------
Income taxes paid     $  1,985    $  1,935     $  1,835
Interest paid         $ 11,861    $ 11,097     $ 10,704



Non-cash  transactions  during the years ended December 31, 1997, 1996 and 1995,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $427, $498, and $527, 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

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
"Earnings Per Share" (SFAS 128).  SFAS 128 replaced the  calculation  of primary
and fully diluted  earnings per share with basic and diluted earnings per share.
The adoption of SFAS 128 had no effect on the calculation of the Company's basis
earnings per share. Diluted earnings per share is inapplicable to the Company.
Earnings  per share  amounts for all periods have been  presented in  conformity
with SFAS 128.

Basic  earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding during each year (2,148,000).

RECENT ACCOUNTING PRONOUNCEMENTS

Reporting Comprehensive Income: In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, "Reporting Comprehensive Income". This Statement
will require an entity to include a statement of  comprehensive  income in their
full set of general purpose financial statements.  Comprehensive income consists
of the net income or loss of the  entity,  plus or minus the change in equity of
the entity during the period from transactions,  other events, and circumstances
resulting  from  non-owner  sources.  Statement  No. 130 is effective  for years
beginning  after  December 15, 1997,  and will require  financial  statements of
earlier periods that are presented for comparative purposes to be reclassified.

Disclosures  about  Segments of an Enterprise and Related  Information:  In June
1997, the Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards No. 131.  "Disclosures about Segments of an Enterprise and
Related  Information" (SFAS 131). SFAS 131 establishes  standards for the manner
for which public business enterprises report certain information about operating
segments of their  business in both their annual and interim  financial  reports
provided to shareholders.  SFAS 131 is effective for financial statement periods
beginning  after  December  15,  1997.  In  the  initial  year  of  application,
comparative   information   for  earlier   years  is  to  be  restated,   unless
impracticable.  In addition,  the  provisions of SFAS 131 need not be applied to
interim financial statements issued in the initial year of application.

<PAGE>

Management  believes  that  the  adoption  of SFAS  130 and 131  will not have a
material impact on the Consolidated Financial Statements.

2     CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                            1997        1996
----------------------------------------------------------
Cash items in process of collection  $  1,796    $  1,234
Non-interest bearing deposits           4,131       7,150
Cash on hand                            5,001       4,293
----------------------------------------------------------
     Total                           $ 10,928    $ 12,677
----------------------------------------------------------



3     INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 1997
and 1996 are as follows:

                            Available-for-Sale

                                              Gross       Gross
                               Amortized    Unrealized  Unrealized   Fair
1997                              Cost        Gains       Losses     Value
----------------------------------------------------------------------------
U.S. Treasury securities       $ 114,283      $ 639       $ -     $ 114,922
Equity securities                     20          -         -            20
----------------------------------------------------------------------------
Total Available-for-Sale       $ 114,303      $ 639       $ -     $ 114,942
----------------------------------------------------------------------------










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<PAGE>


                      General Notes To Financial Statements

3     INVESTMENT SECURITIES (continued)

The amortized cost and fair value of investment  securities at December 31, 1997
and 1996 are as follows:

                            Available-for-Sale

                                               Gross      Gross
                                Amortized    Unrealize  Unrealized    Fair
1996                               Cost         Gains     Losses      Value
----------------------------------------------------------------------------
U.S. Treasury securities        $ 112,068     $ 889       $ 53    $ 112,904
Equity securities                      20         -          -           20
----------------------------------------------------------------------------
Total Available-for-Sale        $ 112,088     $ 889       $ 53    $ 112,924
----------------------------------------------------------------------------



A summary of transactions involving  available-for-sale debt securities in 1997,
1996 and 1995 is as follows:

December 31,                1997         1996      1995
---------------------------------------------------------
Proceeds from sales         $ -          $ -    $ 13,042
Gross realized gains          -            -         152
Gross realized losses         -            -           -



                             Held-to-Maturity

                                              Gross      Gross
                               Amortized    Unrealized Unrealized    Fair
1997                              Cost        Gains     Losses       Value
----------------------------------------------------------------------------

Obligations of U.S. Agencies:
Mortgage-backed securities      $ 10,106        $ 3       $ 7      $ 10,102
----------------------------------------------------------------------------
Total Held-to-Maturity          $ 10,106        $ 3       $ 7      $ 10,102
----------------------------------------------------------------------------


                             Held-to-Maturity

                                               Gross      Gross
                                Amortized    Unrealized Unrealized    Fair
1996                              Cost         Gains      Losses      Value
----------------------------------------------------------------------------

Obligations of U.S. Agencies:
Mortgage-backed securities       $ 12,339       $ -       $ 62     $ 12,277
----------------------------------------------------------------------------
Total Held-to-Maturity           $ 12,339       $ -       $ 62     $ 12,277
----------------------------------------------------------------------------



Investment  securities  with  amortized  costs and fair  values of  $56,026  and
$56,381 at December 31, 1997 and $44,070 and $44,366 at December 31, 1996,  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, 1997 by
contractual  maturity  are shown  below.  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      $ 55,910    $ 56,057    $      -    $      -
After one year through five years:
     U.S. Treasury securities        58,373      58,865           -           -
--------------------------------------------------------------------------------
     Subtotal                       114,283     114,922           -           -
Mortgage-backed securities                -           -      10,106      10,102
--------------------------------------------------------------------------------
     Total Debt Securities        $ 114,283    $114,922    $ 10,106    $ 10,102
--------------------------------------------------------------------------------







<PAGE>


4    LOANS

December 31,                                           1997              1996
--------------------------------------------------------------------------------
Loans secured by real estate:
     Construction and land development               $   3,731         $   3,770
     Secured by farmland                                     7                18
     Secured by 1-4 family residential properties:
        Revolving, open-end loans                        9,932            11,001
        Secured by first liens                         131,112           115,035
        Secured by junior liens                         18,497            10,692
     Secured by multi-family properties                    561               442
     Secured by non-farm, non-residential properties    30,549            30,103
Commercial and industrial loans to U.S. addresses       26,841            19,966
Loans to individuals for household, family and other
     personal expenditures:
     Credit card and related plans                       2,293             2,298
     Other (installment and student loans, etc.)        38,648            36,739
     Obligations of states and political
       subdivisions                                      8,910             9,427
All other loans                                            987               903
--------------------------------------------------------------------------------
Gross Loans                                            272,068           240,394
Less:  Unearned income on loans                             22               179
--------------------------------------------------------------------------------
        Loans, Net of Unearned Income                $ 272,046         $ 240,215
--------------------------------------------------------------------------------

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,031, $866 and $940 at December 31, 1997, 1996 and 1995,  respectively.  If
interest on those loans had been  accrued,  such income would have been $89, $66
and $69 for 1997, 1996 and 1995,  respectively.  Interest income on those loans,
which is recorded  only when  received,  amounted to $35,  $45 and $56 for 1997,
1996 and 1995,  respectively.  Also, at December 31, 1997 and 1996, the Bank had
loans totalling $441 and $435, respectively, which were past due 90 days or more
and still accruing  interest  (credit card,  home equity and guaranteed  student
loans).  Unearned income  includes net  unamortized  loan fees of $0 and $104 at
December 31, 1997 and 1996 respectively.





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<PAGE>


                      General Notes To Financial Statements

5     ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,              1997             1996             1995
------------------------------------------------------------------------------
Balance at beginning of year        $ 2,300          $ 2,100          $ 2,100
Provision charged to operations         316              334              321
Recoveries credited to allowance        106               48               60
------------------------------------------------------------------------------
                                      2,722            2,482            2,481
Losses charged to allowance            (122)            (182)            (381)
------------------------------------------------------------------------------
     Balance at End of Year         $ 2,600          $ 2,300          $ 2,100
------------------------------------------------------------------------------


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

Years Ended December 31,       Book Provision     Tax Deduction
           1997                     $ 316             $  166
           1996                     $ 334             $  134
           1995                     $ 321             $  321


The balance of the allowance for loan losses as reported for Federal  income tax
purposes  was $948  for the  years  ended  December  31,  1997,  1996 and  1995,
respectively.

6     PREMISES AND EQUIPMENT

December 31,                                        1997                 1996
-------------------------------------------------------------------------------
Land                                              $ 2,764              $ 1,982
Buildings and improvements                         10,853                9,078
Furniture and equipment                             8,134                7,495
-------------------------------------------------------------------------------
                                                   21,751               18,555
Less:  Accumulated depreciation                    13,105               12,133
-------------------------------------------------------------------------------
     Net Bank Premises and Equipment              $ 8,646              $ 6,422
-------------------------------------------------------------------------------


Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation  expense  amounted to $972 in
1997, $929 in 1996 and $916 in 1995.

Occupancy  expenses were reduced by rental income received in the amount of $58,
$60 and $137 in the years ended December 31, 1997, 1996 and 1995, 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, 1997
and 1996 was $339 and $610,  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:



<PAGE>


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

  1997       100%         $ 3,950     $ 3,936     None               $ -
  1996       100%         $ 2,055     $ 2,041     None               $ -
  1995       100%         $ 2,055     $ 2,041     None               $ -

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



9     DEPOSITS

December 31,                      1997           1996

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

Demand - Non-interest bearing  $    46,127    $    44,657
Demand - Interest bearing           23,826         25,291
Savings                             71,722         75,095
Money markets                       63,055         73,145
Time - Over $100,000                38,152         22,738
Time - Other                       131,606        111,100
----------------------------------------------------------
     Total                     $  374,488     $   352,026
----------------------------------------------------------

Scheduled maturities of time deposits
are as follows:


1998                        $134,008
1999                          28,098
2000                           4,032
2001                           1,854
2002                           1,754
2003 and thereafter               12
------------------------------------
            Total           $169,758
------------------------------------


10    OTHER BORROWED FUNDS

At December 31, 1997 and 1996, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase Agreements.

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

Investment  securities with amortized costs of $7,987 and $5,964 and fair values
of $8,023 and $5,990 were pledged to secure  repurchase  agreements  at December
31, 1997 and 1996.




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<PAGE>


                      General Notes To Financial Statements

10    OTHER BORROWED FUNDS

Years Ended December 31,                            1997            1996
---------------------------------------------------------------------------
Amount outstanding at year end                   $   6,815       $   2,468
Average interest rate at year end                    4.57%           4.70%
Maximum amount outstanding at any month end      $   6,815       $   4,667
Average amount outstanding                       $   4,807       $   1,156
Weighted average interest rate during the year:
     Federal funds purchased                         5.04%           4.11%
     Repurchase agreements                           4.05%           4.00%
     Demand notes to U.S. Treasury                   5.38%           5.23%

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 $9,971 and $9,919 at  December  31 1997 and $9,998 and $9,962 at
December 31, 1996 with an interest  rate of 5.00% at each year end.  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, 1997 and 1996.

11    RETIREMENT BENEFIT PLANS

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

The amounts contributed for the last three years are as follows:

Years Ended December 31,              1997            1996            1995
----------------------------------------------------------------------------
Employee Stock Ownership Plan       $  140          $  140          $  140
Retirement Profit Sharing Plan      $    -          $    -          $    -
Employees' Pension Plan             $   241         $  232          $  256

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,  1997 and  1996,  the ESOP  held  92,448  and  84,800  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.

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.

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.

For 1997, 1996 and 1995, the minimum  required  contribution to the pension fund
was $0, $0 and $35,  respectively and the maximum contribution allowed was $241,
$232 and $256, respectively.

The determination of net periodic pension cost and prepaid pension cost was made
in accordance with SFAS 87 as follows:

Years Ended December 31,             1997        1996         1995
-------------------------------------------------------------------
Service cost                        $ 259       $ 242        $ 188
Interest cost                         404         353          318
Actual return on plan assets         (850)       (540)        (774)
Net amortization and deferral         285          40          322
-------------------------------------------------------------------
     Net Periodic Pension Cost      $  98       $  95        $  54
-------------------------------------------------------------------

<PAGE>

In determining the projected benefit obligation,  the following assumptions were
made:

Years Ended December 31,                     1997        1996
---------------------------------------------------------------
Assumed discount rate                        6.75%       7.00%
Rate of increase in compensation levels      4.50%       4.50%
Long-term rate of return on assets           9.00%       9.00%



A  reconciliation  of the funded status of the plan with amounts reported on the
Balance Sheets is as Follows:


December 31,                                 1997            1996
------------------------------------------------------------------
Projected benefit obligation              $(6,610)         $(5,513)
     (Accumulated benefit obligation-
       $5,051 and $4,443, respectively)
     (Vested benefit obligation-$5,007
       and $4,397, respectively)
Fair value of plan assets                   6,872            5,967
------------------------------------------------------------------
Funded Status                                 262              454
Unrecognized net (asset) or obligation
     existing at year-end                    (265)            (331)
Unrecognized prior service cost               (85)             (93)
Unrecognized net (gain) or loss             1,121              863
Adjustment to recognize additional
     minimum liability                          -                -
------------------------------------------------------------------
     Prepaid Pension Cost                 $ 1,033          $   893
------------------------------------------------------------------


SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company also maintains an unfunded plan,  established in 1994, that provides
certain officers with supplemental  retirement benefits to replace benefits lost
due to limits imposed on qualified plans by Federal tax law.

The determination of net periodic pension cost and accrued pension cost was made
in accordance with SFAS 87 as follows:


Years Ended December 31,                       1997        1996         1995
----------------------------------------------------------------------------
Service cost                                  $  7        $  7         $  6
Interest cost                                   10           8            8
Amortization of prior service cost (gain)        8           8            8
Amortization of unrecognized loss                -           -            -
----------------------------------------------------------------------------
     Net Periodic Pension Cost                $ 25        $ 23         $ 22
----------------------------------------------------------------------------







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<PAGE>


                      General Notes To Financial Statements

11    RETIREMENT BENEFIT PLANS (continued)

In determining the projected benefit obligation,  the following assumptions were
made:

Years Ended December 31,                 1997        1996
--------------------------------------------------------------
Assumed discount rate                       6.75%       7.00%
Rate of increase in compensation            4.50%       4.50%
levels

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

December 31,                                 1997            1996
------------------------------------------------------------------
Projected benefit obligation                $ 154           $ 129
Fair value of plan assets                       -               -
------------------------------------------------------------------
Funded Status                                 154             129
Unrecognized net (asset) or obligation
     existing at year-end                       -               -
Unrecognized prior service cost               (42)            (50)
Unrecognized net (gain) or loss                (3)              5
Adjustment to recognize additional
     minimum liability                          -               -
------------------------------------------------------------------
     Accrued Pension Cost                   $ 109           $  84
------------------------------------------------------------------


12    POSTRETIREMENT BENEFIT PLAN

The Company  sponsors an unfunded,  non-vesting  defined benefit  postretirement
life insurance  plan covering  substantially  all of its employees.  The plan is
non-contributory  and  provides  for a  reducing  level of term  life  insurance
coverage following retirement.

The  Company  contributed  $1,  $1 and $5 to the plan  during  the  years  ended
December 31, 1997, 1996 and 1995, respectively.

A  reconciliation  of the funded status of the plan with amounts reported on the
Balance Sheets is as follows:
December 31,                                         1997       1996       1995
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
   Retirees                                         $   7      $   7      $   4
   Fully eligible active plan participants             23         21         23
   Other active plan participants                      18         14         15
--------------------------------------------------------------------------------
   Accumulated postretirement benefit obligation       48         42         42
Fair Value of plan assets                               -          -          -
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
   in excess of plan assets                            48         42         42
Unrecognized transition (asset) or obligation           -          -          -
Unrecognized prior service cost                        (6)        (7)        (8)
Unrecognized net gain or (loss)                       131        143        149
--------------------------------------------------------------------------------
   Accrued Postretirement Benefit Cost              $ 173      $ 178      $ 183
--------------------------------------------------------------------------------

Net periodic postretirement benefit costs included the following components:

Years Ended December 31,                           1997        1996        1995
--------------------------------------------------------------------------------
Service cost                                       $  2        $  2        $  2
Interest cost                                         3           3           3
Actual return on plan assets                          -           -           -
Amortization of unrecognized net (gain) or loss      (9)         (8)        (13)
--------------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost           $ (4)       $ (3)       $ (8)
--------------------------------------------------------------------------------


Weighted average discount rates of 6.75%, 7.25% and 6.50% were used to determine
the accumulated  benefit  obligation for the years ended December 31, 1997, 1996
and 1995, respectively.

<PAGE>

13    INCOME TAXES

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

Years Ended December 31,                     1997        1996         1995
----------------------------------------------------------------------------
Currently payable                          $ 2,082     $ 1,958      $ 1,943
Deferred (benefit) provision                    (8)         17           66
----------------------------------------------------------------------------
     Total                                 $ 2,074     $ 1,975      $ 2,009
----------------------------------------------------------------------------


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,                     1997        1996         1995
----------------------------------------------------------------------------
Tax at statutory rate                      $ 2,312     $ 2,236      $ 2,198
Reduction for non-taxable interest            (299)       (256)        (186)
Other reductions                                61          (5)          (3)
----------------------------------------------------------------------------
     Applicable Income Taxes               $ 2,074     $ 1,975      $ 2,009
----------------------------------------------------------------------------


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

Years Ended December 31,              1997        1996         1995
--------------------------------------------------------------------
Accretion of discount on bonds        $ 73        $ 47         $ 23
Accelerated depreciation               (54)        (61)         (65)
Supplemental benefit plan               (8)          -            -
Allowance for loan losses             (102)        (68)           -
Prepaid pension cost                    48          47           69
Loan fees/costs                         35          52           39
--------------------------------------------------------------------
     Total                            $ (8)       $ 17         $ 66
--------------------------------------------------------------------













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<PAGE>


                      General Notes To Financial Statements

13    INCOME TAXES (continued)

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

December 31,                               1997        1996
-------------------------------------------------------------
Deferred tax assets:
     Allowance for loan losses             $ 562       $ 460
     Unamortized loan fees                     -          35
     Depreciation                             99          45
     Supplemental Benefit Plan                 8           -
-------------------------------------------------------------
        Total Deferred Tax Assets          $ 669       $ 540
-------------------------------------------------------------


December 31,                                1997        1996
-------------------------------------------------------------
Deferred tax liabilities:
     Unrealized securities gains          $  217      $  284
     Prepaid pension costs                   372         323
     Depreciation                              -           -
     Accretion                               212         140
-------------------------------------------------------------
        Total Deferred Tax Liabilities       801         747
-------------------------------------------------------------
        Net Deferred Tax liability        $ (132)     $ (207)
-------------------------------------------------------------



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

14    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, 1997 and 1996 are as follows:

                                     1997        1996
-------------------------------------------------------
Commitments to extend credit:
     Fixed rate                   $ 12,604    $ 14,963
     Variable rate                $ 30,340    $ 33,886

Standby letters of credit         $    849    $    328



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.

The Company has purchased  land in the East  Stroudsburg  area and is completing
site work to build a branch office at an  approximate  cost of  $1,200,000.  The
Company is also constructing a new branch facility in the Green Ridge section of
Scranton,   replacing  its  existing  facility,   at  a  cost  of  approximately
$1,500,000.

15    FAIR VALUE DISCLOSURE

GENERAL

<PAGE>

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 value 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














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<PAGE>


                      General Notes To Financial Statements

15    FAIR VALUE DISCLOSURE (continued)

assumed  prepayment  risk.  Off balance  sheet  carrying  amounts and fair value
letters  of credit  represent  the  deferred  income  fees  arising  from  those
unrecognized financial instruments.

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

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

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

                                            December 31, 1997        December 31, 1996
-----------------------------------------------------------------------------------------
                                           Carrying    Fair         Carrying      Fair
                                            Amount     Value         Amount       Value
-----------------------------------------------------------------------------------------
<S>                                        <C>        <C>          <C>         <C>
Financial Assets:
     Cash and due from banks               $  10,928  $  10,928    $  12,677   $ 12,677
        Federal funds sold                     7,650      7,650       10,150      10,150
--------------------------------------- --------------------------------------------------
            Cash and cash equivalents         18,578     18,578       22,827      22,827
     Investment Securities:
        Available-for-sale:
        U.S. Treasury securities             114,922    114,922      112,904     112,904
        Other securities                          20         20           20          20
        Held-to-maturity:
        U.S. Agency obligations               10,106     10,102       12,339      12,277
-----------------------------------------------------------------------------------------
            Total investment securities      125,048    125,044      125,263     125,201
     Loans, net of unearned income:
        Real estate mortgages                194,389    194,757      171,061     171,118
        Commercial                            26,841     26,841       19,966      19,966
        Consumer and other                    50,816     50,652       49,188      48,972
        Less:  Allowance for loan losses       2,600                   2,300
-----------------------------------------------------------------------------------------
            Loans, net                       269,446    272,250      237,915     240,056
-----------------------------------------------------------------------------------------
            Total Financial Assets           413,072  $ 415,872      386,005   $ 388,084
                                                      =========                =========
Other assets                                  14,505                  12,030
-----------------------------------------------------------------------------------------
            Total Assets                   $ 427,577               $ 398,035
-----------------------------------------------------------------------------------------
Financial Liabilities
     Demand - Non-interest bearing         $  46,127  $  46,127    $  44,657   $  44,657
        Demand - Interest bearing             23,826     23,826       25,291      25,291
     Savings                                  71,722     71,722       75,095      75,095
        Money markets                         63,055     63,055       73,145      73,145
        Time                                 169,758    170,019      133,838     133,944
-----------------------------------------------------------------------------------------
            Total Deposits                   374,488    374,749      352,026     352,132
     Repurchase agreements                     5,922      5,922        1,997       1,997
     Short-term borrowings                       893        893          471         471
-----------------------------------------------------------------------------------------
            Total Financial Liabilities      381,303  $ 381,564      354,494   $ 354,600
                                                      =========                =========
Other Liabilities                              3,350                   2,956
Stockholders' Equity                          42,924                  40,585
-----------------------------------------------------------------------------------------
            Total Liabilities and
            Stockholders' Equity           $ 427,577               $ 398,035
-----------------------------------------------------------------------------------------

Unrecognized Financial Instruments:

        Standby Letters of Credit          $      (8) $      (8)   $      (3)  $      (3)

</TABLE>



<PAGE>


                      General Notes To Financial Statements

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 the Red Barn Village in Newton Township which is being used
as a remote  banking  facility.  Rental expense was $67 in 1997, $66 in 1996 and
$64 in 1995. 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, 1997 are as
follows:

                                     Mount       Meadow       Newton
                                     Pocono      Avenue      Township     Total
--------------------------------------------------------------------------------
1998                                 $  44        $ 18         $ 3        $  65
1999                                    44          18           3           65
2000                                    44          18           -           62
2001                                    44          12           -           56
2002                                    44           -           -           44
2003 to 2011                           374           -           -          374
--------------------------------------------------------------------------------
Total minimum payments required      $ 594        $ 66         $ 6        $ 666
--------------------------------------------------------------------------------


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,                   1997        1996
--------------------------------------------------------------
Beginning Balance                        $ 4,550     $ 4,243
Additions                                  3,383       3,985
Collections                               (3,275)     (3,678)
--------------------------------------------------------------
Ending Balance                           $ 4,658     $ 4,550
--------------------------------------------------------------

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's and the Bank's capital amounts and  classification are
also subject to qualitative judgements by the regulators about components,  risk
weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  Capital  Adequacy  table  below)  of Tier 1 and Total  Capital  to
risk-weighted  assets and of Tier 1 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, 1997, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 1997, the most recent  notification  from the Federal Deposit
Insurance  Corporation  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 1 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.

<PAGE>

The Pennsylvania  Banking Code restricts  capital funds available for payment of
dividends to the  Retained  Earnings of the Bank.  Accordingly,  at December 31,
1997, 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.












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<PAGE>


                      General Notes To Financial Statements



18    REGULATORY MATTERS (continued)


               Actual                              Regulatory Requirements
------------------------------------------    ----------------------------------

                                                 For Capital      To Be "Well
                                              Adequacy Purposes    Capitalized"

As of December 31, 1997    Amount    Ratio    Amount    Ratio   Amount    Ratio
                           ------    -----    ------    -----   ------    -----
--------------------------------------------  ----------------------------------

Total Capital
(to Risk Weighted Assets)  $44,888   23.55%   >$15,251  >8.0%   >$19,064  >10.0%
                                              -         -       -         -

Tier 1 Capital
(to Risk Weighted Assets)  $42,502   22.29%   >$7,626   >4.0%   >$11,438  >6.0%
                                              -         -       -         -

Tier 1 Capital
(to Average Assets)        $42,502   10.25%   >$ *      > *     >$20,727  >5.0%
                                              -         -       -         -

*3.0% ($12,436),  4.0% ($16,581) or 5.0% (20,727) depending on the bank's CAMEL
Rating and other regulatory risk factors.



As of December 31, 1996    Amount    Ratio    Amount    Ratio   Amount     Ratio
                           ------    -----    ------    -----   ------     -----
--------------------------------------------------------------------------------

Total Capital
(to Risk Weighted Assets)  $42,333   22.43%   >$15,099  >8.0%   $18,873   >10.0%
                                              -         -                 -

Tier 1 Capital
(to Risk Weighted Assets)  $40,033   21.21%   >$7,549   >4.0%   $11,324   > 6.0%
                                              -         -                 -

Tier 1 Capital
(to Average Assets)        $40,033   10.18%   >$ *      > *     >$19,668  > 5.0%
                                              -         -       -          -

*3.0% ($11,801),  4.0% ($15,734) or 5.0% (19,668)  depending on the bank's CAMEL
Rating and other regulatory risk factors.
--------------------------------------------------------------------------------









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<PAGE>



                      General Notes To Financial Statements

19    PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)


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

This  reorganization  among entities under common control has been accounted for
at historical cost in a manner similar to a pooling of interests.  The financial
statements  have been restated as if the  transaction had occurred on January 1,
1995.

The condensed Company-only information follows:


BALANCE SHEETS

December 31,                         1997        1996
-------------------------------------------------------
Investment in subsidiary          $ 42,924    $ 40,585
-------------------------------------------------------
      Total Assets                $ 42,924    $ 40,585
-------------------------------------------------------
      Total Stockholders' Equity  $ 42,924    $ 40,585
-------------------------------------------------------


STATEMENTS OF INCOME

Year Ended December 31,                       1997        1996        1995
---------------------------------------------------------------------------
Earnings of subsidiary
     Dividends received                    $ 2,256     $ 2,148     $ 2,014
     Undistributed net income of
        subsidiary                           2,469       2,454       2,442
---------------------------------------------------------------------------
Net Income                                 $ 4,725     $ 4,602     $ 4,456
---------------------------------------------------------------------------



STATEMENTS OF CASH FLOWS

Years Ended December 31,                            1997        1996      1995
--------------------------------------------------------------------------------
Operating Activities:
Net Income                                        $ 4,725     $ 4,602   $ 4,456
Adjustments to reconcile net income to net cash
   provided by operating activities:
      Equity in undistributed net income of
          subsidiary                               (2,469)     (2,454)   (2,442)
--------------------------------------------------------------------------------
      Net cash provided by operating activities     2,256       2,148     2,014
--------------------------------------------------------------------------------
Investing Activities:
Investment in Interim Bank subsidiary                (465)          -         -
Special dividend from subsidiary                      465           -         -
--------------------------------------------------------------------------------
      Net cash provided by investing activities         -           -         -
--------------------------------------------------------------------------------
Financing Activities:
Proceeds from short-term debt                         470           -         -
Payment of short-term debt                           (470)          -         -
Proceeds from sale of stock                             5           -         -
Purchase of stock                                      (5)          -         -
Cash dividends paid                                (2,256)     (2,148)   (2,014)
--------------------------------------------------------------------------------
      Net cash used by financing activities        (2,256)     (2,148)   (2,014)
--------------------------------------------------------------------------------
      Net increase in cash and cash equivalents         -           -         -
--------------------------------------------------------------------------------
Cash and cash equivalents at January 1                  -           -         -
--------------------------------------------------------------------------------
Cash and cash equivalents at December 31          $     -     $     -   $     -
--------------------------------------------------------------------------------






<PAGE>



                                                               February 24, 1998



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,  1997 and 1996,  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, 1997.
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, 1997 and 1996,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  1997,  in  conformity
with generally accepted accounting principles.



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



 .






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<PAGE>


                                Company Officers


PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel
Richard E. Grimm
Executive Vice-President and Treasurer
Robert F. Duguay
Senior Vice-President and Trust Officer
D. William Hume
Senior Vice-President and Assistant Secretary
Thomas E. Clewell
Vice-President and Assistant Trust Officer
Andrew A. Kettel, Jr.
Vice-President
Michael Kosh
Vice-President and Assistant Trust Officer
Audrey F. Markowski
Vice-President
Lois Maurer
Vice-President and Assistant Secretary
Richard P. Rossi
Vice-President, Director of Human Resources
James Tobin
Vice-President, Charge Card Department Manager
Otto P. Trostel
Vice-President, Marketing
John H. Warnken
Vice-President, Operations
P. Frank Kozik
Secretary
Patrick Scanlon
Controller
Robert P. Heim
Director of Internal Audit
Gerard P. Vasil
Manager, Data Processing
Henry V. Janoski
Chief Investment Officer, Trust Department



PENN SECURITY BANK AND TRUST COMPANY OFFICERS

ASSISTANT VICE-PRESIDENTS

Carl M. Baruffaldi
Nancy Burns
Denise M. Cebular
Carol R. Curtis
          Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Geraldine Hughes
Ann M. Kennedy
Eleanor Kruk

OFFICERS (continued)

Donald F. LaTorre
Caroline Mickelson
Deborah A. Wright

ASSISTANT CASHIERS

Pamela Edwards
Karyn Gaus
Susan T. Holweg
Jacqueline Lucke
Kristen A. McGoff
          and Branch Operations Officer
Candace F. Quick
Aleta Sebastianelli
          and Assistant Secretary
Sharon Thauer
Eileen Walsh
ACCOUNTING OFFICER
Luree M. Waltz
ASSISTANT CONTROLLER
Susan M. Bray
ASSISTANT DIRECTOR OF INTERNAL AUDIT
Anne M. Cottone
ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua
BRANCH OPERATIONS OFFICER
Lauren L. Lankford
BUSINESS DEVELOPMENT OFFICER
Christie A. Casciano
CHARGE CARD OPERATIONS OFFICER
Eileen Yanchak
COMPUTER OPERATIONS OFFICER
Charles Penn
CREDIT REVIEW OFFICER
Mark M. Bennett
          and Assistant Secretary
DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay
DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo
HUMAN RESOURCE OFFICER
Sharon Rosar
LOAN OFFICERS
Denise Belton
Frank Gardner
Barbara Garofoli
Jeffery Solimine
OPERATIONS OFFICER
Patricia Pliske
TELLER TRAINING OFFICER
Linda A. Wolf
TRUST ACCOUNTING OFFICER
Joseph Woytovich
TRUST OPERATIONS OFFICER
Carol Trezzi


<PAGE>


                                Company Officers



PENSECO FINANCIAL SERIVES 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
Captain, Trans World Airlines


D. William Hume
Senior Vice-President and Assistant Secretary


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


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


Robert W. Naismith, Ph.D.
President and CEO, William Naismith & Associates, Business Consultant


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


Emily S. Perry
Account Executive, Murray Insurance Company


Sandra C. Phillips
Penn State Master Gardner Community Volunteer


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




PENN SECURITY BANK AND TRUST COMPANY
ADVISORY BOARDS


ABINGTON OFFICE
James L. Burne, DDS
Nancy Burns
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Atty. Patrick J. Lavelle
Sandra C. Phillips

East Scranton Office
Marie W. Allen
Carl M. Baruffaldi
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno

Green Ridge Office
Joseph N. Connor
Frances E. Kavulich
Atty. Patrick J. Mellody
Caroline Mickelson
Howard J. Snowdon

Mount Pocono Office
Bruce Berry
Francis Cappelloni
J. Patrick Dietz
Robert C. Hay
Ronald J. Storey
Atty. Kirby Upright

North Pocono Office
Denise M. Cebular
George F. Edwards
Atty. David Z. Smith

South Side Office
Atty. Zygmunt R. Bialkowski, Jr.
Michael P. Brown
Lois Ferrari
Donald F. LaTorre
Jeffrey J. Leventhal
Dr. Ted M. Stampien