PENSECO FINANCIAL SERVICES CORP - 10-K Annual Report

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(INSIDE COVER)

Customer Services

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

DEPOSIT ACCOUNTS

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

LENDING

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

OTHER SERVICES

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

BRANCH LOCATIONS (with ATMs)

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

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

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

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

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

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

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

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

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

Other ATM locations

Acorn Market
Route 209
Marshall's Creek, PA

Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA

Meadow Ave. & Hemlock St.
Scranton, PA

Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA

Red Barn Village
Newton Ransom Blvd
Newton, PA

On the Cover

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

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

Financial Highlights
In thousands, except
per share data

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

Contents

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

Form 10-K

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

Penseco Financial Services Corporation / 2000 Annual Report 1

President's Letter

Dear Shareholder

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

2 Penseco Financial Services Corporation / 2000 Annual Report

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

Sincerely yours,

Otto P. Robinson, Jr.
President

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

The bottom portion of this page of the 2000 Annual Report to Shareholders
contains one picture. A description of the picture follows:

Board of Directors

Seated left to right:

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

Standing left to right:

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

Penseco Financial Services Corporation / 2000 Annual Report 3

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

Promotions & Appointments

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

Christe A. Casciano
Vice-President, Director of Marketing

Lynn M. Peters Thiel
Vice-President and Compliance Officer

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

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

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

Lisa A. Kearney
Assistant Vice-President

Jennifer S. Wohlgemuth
Assistant Vice-President

Lori A. Dzwieleski
Assistant Cashier

4 Penseco Financial Services Corporation / 2000 Annual Report

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

Promotions & Appointments

Barbara Garofoli
Assistant Cashier

Susan A. Kopp
Assistant Cashier

Stephen A. Hoffman
Branch Operations Officer

Community Events

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

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

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 5

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

INVESTMENT SERVICES

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

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

Louis J. Rizzo
Registered Representative

Mark J. Zakoski
Registered Representative

Linda B. Gable
Assistant Representative
Order Processing

6 Penseco Financial Services Corporation / 2000 Annual Report

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

FORM 10-K

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

For the Fiscal Year Ended December 31, 2000

Commission File Number 000-23777

PENSECO FINANCIAL SERVICES CORPORATION

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

Securities Registered Under
Section 12(g) of the Act

Common Stock, Par Value $ .01 per share

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

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

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

Documents Incorporated by Reference

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

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

Penseco Financial Services Corporation / 2000 Annual Report 7

PENSECO FINANCIAL SERVICES CORPORATION

PART I

ITEM 1 Business

GENERAL

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

COMPETITION

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

EMPLOYEES

As of March 1, 2001, the Company employed 199 full-time equivalent employees.
The employees of the Company are not represented by any collective bargaining
group. Management of the Company considers relations with its employees to be
good.

SUPERVISION AND REGULATION

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

8 Penseco Financial Services Corporation / 2000 Annual Report

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

FORWARD LOOKING INFORMATION

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

ITEM 2 Properties

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

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

ITEM 3 Legal Proceedings

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

ITEM 4 Submission of Matters to a Vote of Security Holders

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

Penseco Financial Services Corporation / 2000 Annual Report 9

PART II

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

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

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

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

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

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

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

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

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

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

TRANSFER AGENT

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

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

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

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

10 Penseco Financial Services Corporation / 2000 Annual Report

ITEM 6 Selected Financial Data

(in thousands, except per share data)

RESULTS OF OPERATIONS:

2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------

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

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 11

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

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

SUMMARY

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

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

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

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

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

12 Penseco Financial Services Corporation / 2000 Annual Report

RESULTS OF OPERATIONS

Net Interest Income

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 13

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

The table below presents average balances, interest income on a fully taxable
equivalent basis and interest expense, as well as average rates earned and paid
on the Company's major asset and liability items for the years 2000, 1999 and
1998.

2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------------

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

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

Financial Ratios

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

14 Penseco Financial Services Corporation / 2000 Annual Report

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

Dollar Change
Amount Change in Change in in Rate-
2000 compared to 1999 of Change Volume Rate Volume
----------------------------------------------------------------------------------

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 15

PROVISION FOR LOAN LOSSES

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

OTHER INCOME

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

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

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

OTHER EXPENSES

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

Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------
Salaries and employee benefits $ 7,951 $ 7,528 $ 7,331
Occupancy expenses, net 1,387 1,334 1,274
Furniture and equipment expenses 1,189 1,227 908
Merchant transaction expenses 4,784 4,471 3,764
Other operating expenses 3,995 3,752 3,709
- ---------------------------------------------------------------------
Total Other Expenses $ 19,306 $ 18,312 $ 16,986
=====================================================================

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

INCOME TAXES

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

FINANCIAL CONDITION

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

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

INVESTMENT PORTFOLIO

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

December 31, 2000 1999 1998
- -------------------------------------------------------------------------
U.S.Treasury securities $ 54,662 $ 66,459 $ 81,916
U.S. Agency obligations 39,654 9,643 11,402
States & political subdivisions 29,624 28,591 23,634
Other securities 1,868 1,818 1,810
- -------------------------------------------------------------------------
Total Investment Securities $ 125,808 $ 106,511 $ 118,762
=========================================================================

16 Penseco Financial Services Corporation / 2000 Annual Report

LOAN PORTFOLIO

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

December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------

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

LOANS

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

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

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

LOAN QUALITY

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

Penseco Financial Services Corporation / 2000 Annual Report 17

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, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------

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

Loans are generally placed on a nonaccrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is charged against current income. Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,210, $836 and $929 at December 31, 2000, 1999 and 1998,
respectively. If interest on those loans had been accrued, such income would
have been $138, $140 and $108 for 2000, 1999 and 1998, respectively. Interest
income on those loans, which is recorded only when received, amounted to $86,
$22 and $30 for 2000, 1999 and 1998, respectively. There are no commitments to
lend additional funds to individuals whose loans are on non-accrual status.
The management process for evaluating the adequacy of the allowance for
loan losses includes reviewing each month's loan committee reports which list
all loans that do not meet certain internally developed criteria as to
collateral adequacy, payment performance, economic conditions and overall credit
risk. These reports also address the current status and actions in process on
each listed loan. From this information, adjustments are made to the allowance
for loan losses. Such adjustments include both specific loss allocation amounts
and general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall portfolio quality,
and current economic conditions that may affect the borrower's ability to pay.
As of December 31, 2000, there are no significant loans as to which management
has serious doubt about their collectibility.
At December 31, 2000, 1999 and 1998, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area and repayment thereof is affected by economic
conditions in this market area.

LOAN LOSS EXPERIENCE

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

Years Ended December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------

Balance at beginning of year $ 2,950 $ 2,830 $ 2,600 $ 2,300 $ 2,100
Charge-offs:
Real estate mortgages 37 82 69 38 87
Commercial and all others 51 13 252 - -
Credit card and related plans 27 65 37 52 64
Installment loans 24 26 25 32 32
- -------------------------------------------------------------------------------------------
Total charge-offs 139 186 383 122 183
- -------------------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 30 - 1 79 22
Commercial and all others - 195 - 1 2
Credit card and related plans 9 10 9 17 16
Installment loans 17 12 8 9 9
- -------------------------------------------------------------------------------------------
Total recoveries 56 217 18 106 49
- -------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 83 (31) 365 16 134
- -------------------------------------------------------------------------------------------
Provision charged to operations 233 89 595 316 334
- -------------------------------------------------------------------------------------------
Balance at End of Year $ 3,100 $ 2,950 $ 2,830 $ 2,600 $ 2,300
===========================================================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.03% (0.01)% 0.13% 0.01% 0.06%
===========================================================================================

18 Penseco Financial Services Corporation / 2000 Annual Report

The allowance for loan losses is allocated as follows:

December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Amount %1 Amount %1 Amount %1 Amount %1 Amount %1
- -----------------------------------------------------------------------------------------------------------------

Real estate mortgages $ 1,500 79% $ 1,500 78% $ 1,550 80% $ 1,350 71% $ 1,125 71%
Commercial and all others 1,100 10 950 10 830 9 850 19 875 22
Credit card and related plans 150 1 150 1 150 1 150 1 150 1
Personal installment loans 350 10 350 11 300 10 250 9 150 6
- -----------------------------------------------------------------------------------------------------------------
Total $ 3,100 100% $ 2,950 100% $ 2,830 100% $ 2,600 100% $ 2,300 100%
=================================================================================================================

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

DEPOSITS

The primary source of funds to support the Company's operations is its deposit
base. Company deposits increased $20.1 million to $387.4 million at December 31,
2000 from $367.3 million at December 31, 1999, an increase of 5.5%. Company
deposits decreased $10.2 million to $367.3 million at December 31, 1999 from
$377.5 million at December 31, 1998, a decrease of 2.7%. The increase in
deposits in 2000 is the result of the Company introducing new deposit products
along with increasing its non-interest bearing deposits. The decline in deposits
in 1999 is the result of the Company concentrating on maintaining core deposits,
along with increasing its non-interest bearing deposits, which helped to reduce
the cost of funds.

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

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

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

ASSET/LIABILITY MANAGEMENT

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

LIQUIDITY

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

Penseco Financial Services Corporation / 2000 Annual Report 19

CAPITAL RESOURCES

A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
provides a basis for future growth and expansion and also provides additional
protection against unexpected losses.
Additional sources of capital would come from retained earnings from the
operations of the Company and from the sale of additional common stock.
Management has no plans to offer additional common stock at this time.
The Company's total risk-based capital ratio was 18.32% at December 31,
2000. The Company's risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold. This is the current
criteria which the FDIC uses in determining the lowest insurance rate for
deposit insurance. The Company's risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital requirements without the necessity of increasing its
equity capital.

DIVIDEND POLICY

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

STOCKHOLDERS' EQUITY (in millions) YEAR
- ----------------------------------------------
$ 50,067 2000
45,743 1999
44,961 1998
42,924 1997
40,585 1996

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

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

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

20 Penseco Financial Services Corporation / 2000 Annual Report

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

Non-Rate Fair
2001 2002 2003 2004 2005 Thereafter Sensitive Total Value
- ------------------------------------------------------------------------------------------------------------------------------------

ASSETS
Fixed interest rate securities:

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

Penseco Financial Services Corporation / 2000 Annual Report 21

ITEM 8 Financial Statements and Supplementary Data

Consolidated Balance Sheets

(in thousands, except per share data)

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

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

STOCKHOLDERS' Common stock, $.01 par value, 15,000,000
EQUITY shares authorized, 2,148,000
shares issued and outstanding 21 21
Surplus 10,819 10,819
Retained earnings 38,269 35,996
Accumulated other comprehensive income 958 (1,093)
-----------------------------------------------------------------
Total Stockholders' Equity 50,067 45,743
-----------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 467,230 $ 428,614
=================================================================

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

22 Penseco Financial Services Corporation / 2000 Annual Report

Consolidated Statements of Income

(in thousands, except per share data)

Years Ended December 31, 2000 1999 1998
-----------------------------------------------------------------------

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

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

Penseco Financial Services Corporation / 2000 Annual Report 23

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2000, 1999 and 1998

Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(in thousands, except per share data) Stock Surplus Earnings Income Equity
- --------------------------------------------------------------------------------------------------------

Balance, December 31, 1997 $ 21 $ 10,819 $ 31,662 $ 422 $ 42,924

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

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

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

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

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

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

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

Cash dividends declared ($1.15 per share) - - (2,470) - (2,470)
- --------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 21 $ 10,819 $ 38,269 $ 958 $ 50,067
========================================================================================================

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

24 Penseco Financial Services Corporation / 2000 Annual Report

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------

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

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

Penseco Financial Services Corporation / 2000 Annual Report 25

General Notes To Financial Statements

1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

BASIS OF PRESENTATION

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

USE OF ESTIMATES

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

EMERGING ACCOUNTING STANDARDS

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

INVESTMENT SECURITIES

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

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

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

PREMISES AND EQUIPMENT

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

LONG-LIVED ASSETS

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

PENSION EXPENSE

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

26 Penseco Financial Services Corporation / 2000 Annual Report

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

POSTRETIREMENT BENEFITS EXPENSE

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

ADVERTISING EXPENSES

Advertising costs are expensed as incurred. Advertising expenses for the years
ended December 31, 2000, 1999 and 1998, amounted to $466, $387 and $442,
respectively.

INCOME TAXES

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

CASH FLOWS

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

The Company paid interest and income taxes during the years ended December 31,
2000, 1999 and 1998 as follows:

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

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

TRUST ASSETS AND INCOME

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

EARNINGS PER SHARE

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

RECLASSIFICATIONS

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

2 CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

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

3 INVESTMENT SECURITIES

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

Available-for-Sale

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

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

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 27

3 INVESTMENT SECURITIES(continued)

Held-to-Maturity

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

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

Investment securities with amortized costs and fair values of $74,820 and
$77,872 at December 31, 2000 and $50,446 and $49,130 at December 31, 1999, were
pledged to secure trust funds, public deposits and for other purposes as
required by law.
The amortized cost and fair value of debt securities at December 31, 2000
by contractual maturity, are shown in the following table. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

Available-for-Sale Held-to-Maturity
- ------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury
securities $ 24,007 $ 23,992 $ - $ -
States & political
subdivisions - - - -
After one year through
five years:
U.S. Treasury
securities 30,126 30,670 - -
U.S. Agency
securities 34,666 35,749 - -
States & political
subdivisions 11,914 11,767 - -
After five years
through ten years:
States & political
subdivisions 1,257 1,246 - -
After ten years:
States & political
subdivisions 284 280 16,331 17,060
- -------------------------------------------------------------------------
Subtotal 102,254 103,704 16,331 17,060
Mortgage-backed
securities - - 3,905 3,780
- ------------------------------------------------------------------------
Total Debt Securities $ 102,254 $ 103,704 $ 20,236 $ 20,840
========================================================================

4 LOANS

Major classifications of loans are as follows:

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

Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,210, $836 and $929 at December 31, 2000, 1999 and 1998, respectively. If
interest on those loans had been accrued, such income would have been $138, $140
and $108 for 2000, 1999 and 1998, respectively. Interest income on those loans,
which is recorded only when received, amounted to $86, $22 and $30 for 2000,
1999 and 1998, respectively. Also, at December 31, 2000 and 1999, the Bank had
loans totalling $336 and $476, respectively, which were past due 90 days or more
and still accruing interest (credit card, home equity and guaranteed student
loans).

5 ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------
Balance at beginning of year $ 2,950 $ 2,830 $ 2,600
Provision charged to operations 233 89 595
Recoveries credited to allowance 56 217 18
- ---------------------------------------------------------------------------
3,239 3,136 3,213
Losses charged to allowance (139) (186) (383)
- ---------------------------------------------------------------------------
Balance at End of Year $ 3,100 $ 2,950 $ 2,830
===========================================================================

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

Years Ended December 31, Book Provision Tax Deduction
- ------------------------ -------------- -------------
2000 $ 233 $ 52
1999 $ 89 $ 0
1998 $ 595 $ 365

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

28 Penseco Financial Services Corporation / 2000 Annual Report

6 BANK PREMISES AND EQUIPMENT

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

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

7 OTHER REAL ESTATE OWNED

Real estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned as of December 31, 2000
and 1999 was $201 and $33, respectively, supported by appraisals of the real
estate involved.

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

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

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

9 DEPOSITS

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

9 DEPOSITS (continued)

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

10 OTHER BORROWED FUNDS

At December 31, 2000 and 1999, other borrowed funds consisted of demand notes to
the U.S. Treasury, Repurchase agreements and Federal funds purchased.
Short-term borrowings generally have original maturity dates of thirty days
or less.
Investment securities with amortized costs and fair values of $22,038 and
$22,498 at December 31, 2000 and $12,097 and $11,816 at December 31, 1999, were
pledged to secure repurchase agreements.

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

The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000, secured by pledged securities with amortized costs and
fair values of $10,092 and $10,039 at December 31, 2000 and $10,130 and $9,833
at December 31, 1999, with an interest rate of 6.0% and 5.0% at December 31,
2000 and December 31, 1999, respectively. There is no stated expiration date for
the credit facility as long as the Company maintains the pledged securities at
the Federal Reserve Bank. There was no outstanding balance as of December 31,
2000 and 1999, respectively.
The Company has the availability of a $5,000 overnight Federal funds line
of credit with First Union Bank. There was no balance outstanding as of December
31, 2000 and 1999, respectively.
The Company maintains a collateralized maximum borrowing capacity of
$176,555 with the Federal Home Loan Bank of Pittsburgh (FHLB). There was no
balance outstanding or assets pledged as of December 31, 2000.

Penseco Financial Services Corporation / 2000 Annual Report 29

11 EMPLOYEE BENEFIT PLANS

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

In determining the benefit obligation the following assumptions were made:

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

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

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

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

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

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

The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $140, $130 and $0, respectively at December 31, 2000
and $145, $111 and $0, respectively at December 31, 1999.

30 Penseco Financial Services Corporation / 2000 Annual Report

12 INCOME TAXES

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

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

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

Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------
Tax at statutory rate $ 2,053 $ 2,194 $ 2,058
Reduction for non-taxable
interest (748) (471) (269)
Other (reductions)
additions (9) 58 (17)
- ---------------------------------------------------------------
Applicable Income Taxes $ 1,296 $ 1,781 $ 1,772
===============================================================

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

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

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

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

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

13 ACCUMULATED OTHER COMPREHENSIVE INCOME

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

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

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

14 COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 2000 and 1999 are as follows:

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

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

Penseco Financial Services Corporation / 2000 Annual Report 31

15 FAIR VALUE DISCLOSURE

GENERAL

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

VALUATION METHODS AND ASSUMPTIONS

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

December 31, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------

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

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

Standby Letters of Credit $ (21) $ (21) $ (11) $ (11)

32 Penseco Financial Services Corporation / 2000 Annual Report

16 OPERATING LEASES

The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several locations which are being used as remote banking
facilities. Rental expense was $81 in 2000, $80 in 1999 and $71 in 1998. All
leases contain renewal options. The Mount Pocono and the Meadow Avenue leases
contain the right of first refusal for the purchase of the properties and
provisions for annual rent adjustments based upon the Consumer Price Index.
Future minimum rental commitments under these leases at December 31, 2000
are as follows:

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

17 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

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

Years Ended December 31, 2000 1999
- ---------------------------------------------
Beginning Balance $ 4,921 $ 4,008
Additions 2,914 3,892
Collections (1,876) (2,979)
- ---------------------------------------------
Ending Balance $ 5,959 $ 4,921
=============================================

18 REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classifications are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table on the following page) of Tier I and Total
Capital to risk-weighted assets and of Tier I Capital to average assets
(Leverage ratio). The table also presents the Company's actual capital amounts
and ratios. The Bank's actual capital amounts and ratios are substantially
identical to the Company's. Management believes, as of December 31, 2000, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Company as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized", the Company must maintain minimum Tier I
Capital, Total Capital and Leverage ratios as set forth in the Capital Adequacy
table. There are no conditions or events since that notification that management
believes have changed the Company's categorization by the FDIC.
The Company and Bank are also subject to minimum capital levels which could
limit the payment of dividends, although the Company and Bank currently have
capital levels which are in excess of minimum capital level ratios required.
The Pennsylvania Banking Code restricts capital funds available for payment
of dividends to the Retained Earnings of the Bank. Accordingly, at December 31,
2000, the balances in the Capital Stock and Surplus accounts totalling $10,840
are unavailable for dividends.
In addition, the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's affiliates. These transactions include
extensions of credit, purchases of or investments in stock issued by the
affiliate, purchases of assets subject to certain exceptions, acceptance of
securities issued by an affiliate as collateral for loans, and the issuance of
guarantees, acceptances, and letters of credit on behalf of affiliates. These
restrictions prevent the Company's affiliates from borrowing from the Bank
unless the loans are secured by obligations of designated amounts. Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's Capital Stock and Surplus, and the aggregate
of such transactions with all affiliates is limited to 20 percent of the Bank's
Capital Stock and Surplus. The Federal Reserve System has interpreted "Capital
Stock and Surplus" to include undivided profits.

Penseco Financial Services Corporation / 2000 Annual Report 33

18 REGULATORY MATTERS (continued)

Actual Regulatory Requirements
- ---------------------------------------------- ---------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------

Total Capital
(to Risk Weighted Assets) $ 52,209 18.32% > $ 22,796 > 8.0% > $ 28,494 > 10.0%

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

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

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

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

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

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

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

19 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

The condensed Company-only information follows:

BALANCE SHEETS

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

STATEMENTS OF INCOME

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

STATEMENTS OF CASH FLOWS

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

34 Penseco Financial Services Corporation / 2000 Annual Report

McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants

February 21, 2001

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

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

We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and its wholly owned subsidiary, Penn Security
Bank and Trust Company as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 2000.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 35

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

There were no changes in or disagreements with accountants on matters of
accounting principles or practices or financial statement disclosures in 2000.

PART III

ITEM 10 Directors and Executive Officers of the Registrant

The information on Directors of the Company on pages 4,5 and 6 in the definitive
proxy statement relating to the Company's Annual Meeting of stockholders, to be
held May 1, 2001, is incorporated herein by reference thereto.

The information on Executive Officers on pages 6 and 7 in the definitive proxy
statement relating to the Company's Annual Meeting of stockholders, to be held
May 1, 2001, is incorporated herein by reference thereto.

ITEM 11 Executive Compensation

The information contained under the heading "Executive Compensation" on page 6
in the definitive proxy statement relating to the Company's Annual Meeting of
stockholders, to be held May 1, 2001, is incorporated herein by reference
thereto.

ITEM 12 Security Ownership of Certain Beneficial Owners and Management

The information contained under the heading "Voting Securities & Principal
Holders Thereof" on pages 2 and 3 in the definitive proxy statement relating to
the Company's Annual Meeting of stockholders, to be held May 1, 2001, is
incorporated herein by reference thereto.

ITEM 13 Certain Relationships and Related Transactions

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

36 Penseco Financial Services Corporation / 2000 Annual Report

PART IV

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

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

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

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

(3) Exhibits

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

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

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

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

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

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

27 Financial Data Schedule

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

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

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

Penseco Financial Services Corporation / 2000 Annual Report 37

SIGNATURES

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

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

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

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

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

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

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

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

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

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

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

38 Penseco Financial Services Corporation / 2000 Annual Report

INDEX TO EXHIBITS

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

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

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

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

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

9 Voting trust agreement None

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

11 Statement re: Computation of per None
share earnings

12 Statements re: Computation of ratios None

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

16 Letter re: Change in certifying None
accountant

18 Letter re: Change in accounting None
principles

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

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

23 Consents of experts and counsel None

24 Power of attorney None

27 Financial Data Schedule None

99 Additional Exhibits None

Penseco Financial Services Corporation / 2000 Annual Report 39

Company Officers

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

Richard E. Grimm
Executive Vice-President and Treasurer

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

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

Andrew A. Kettel, Jr.
Senior Vice-President

Christe A. Casciano
Vice-President, Director of Marketing

Thomas E. Clewell
Vice-President and Assistant Trust Officer

Audrey F. Markowski
Vice-President

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

Lynn M. Peters Thiel
Vice-President and Compliance Officer

James Tobin
Vice-President, Charge Card Manager

John H. Warnken
Vice-President, Operations

Robert P. Heim
Director of Internal Audit

Henry V. Janoski
Chief Investment Officer, Trust Services

Patrick Scanlon
Controller

Susan M. Bray
Assistant Controller and Assistant Treasurer

Gerard P. Vasil
Manager, Data Processing

P. Frank Kozik
Secretary

Mark M. Bennett
Credit Review Officer and Assistant Secretary

PENN SECURITY BANK AND TRUST COMPANY OFFICERS

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

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

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

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak

ASSISTANT DIRECTOR OF Internal Audit
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

BRANCH OPERATIONS OFFICER
Stephen A. Hoffman

COMPUTER OPERATIONS OFFICER
Charles Penn

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo

FINANCIAL REPORTING OFFICER
John R. Anderson III

HUMAN RESOURCES OFFICER
Sharon Rosar

LOAN ADMINISTRATION OFFICER
Susan D. Blascak

LOAN OFFICERS
Denise Belton
Frank Gardner

OPERATIONS OFFICER
Patricia Pliske

TAX OFFICER
Robert W. McDonald

TRUST OPERATIONS OFFICER
Carol Trezzi

40 Penseco Financial Services Corporation / 2000 Annual Report

BACK COVER

Company Board Members

PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

Edwin J. Butler
Retired Bank Officer

Richard E. Grimm
Executive Vice-President and Treasurer

Russell C. Hazelton
Retired Captain, Trans World Airlines

D. William Hume
Retired Bank Officer

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

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

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

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

Emily S. Perry
Retired Insurance Account Executive & Community Volunteer

Sandra C. Phillips
Penn State Master Gardener Community Volunteer

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

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

PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

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

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

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

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

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

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

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