GRANGE NATIONAL BANC CORP, 10KSB, 1999-04-01

GRANGE NATIONAL BANC CORP
10KSB, 1999-04-01
NATIONAL COMMERCIAL BANKS

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

Form 10-KSB

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ______________________ to ______________________

Commission file number 0-13599

GRANGE NATIONAL BANC CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-2314065
----------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

198 E. Tioga St., Tunkhannock, Pennsylvania 18657
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (717) 836-2100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $5.00
-----------------------------
(Title of class)

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, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registrant S-B 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-KSB or any amendment to
this Form 10-KSB, [ ]

The Registrant's revenues for the year ending December 31, 1998 were
$10,902,000.

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 25 was $31,470,250. As of March 25, 1999, the
Registrant had 760,957 shares of Common Stock outstanding.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1998 Annual Report to Shareholders are incorporated herein
by reference in response to Part II hereof, and the definitive Proxy Statement
relating to the 1999 Annual Meeting of Shareholders is incorporated by reference
in response to Part III hereof.

Transitional Small Business Disclosure Format: [ ] Yes [X] No

PART I

Item 1: BUSINESS

General

The Company is a Pennsylvania business corporation which is registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"Holding Company Act"). The Company was incorporated on October 2, 1984 for the
purpose of acquiring the Grange National Bank (the "Bank") and thereby enabling
the Bank to operate within a bank holding company structure. The Company became
an active bank holding company on April 30, 1985 when it acquired the Bank. The
Bank is a wholly-owned subsidiary of the Company.

The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
and insurance sales. The Bank has its principal banking office in Laceyville,
Pennsylvania. It also presently has four branch offices in Wyoming County,
Pennsylvania, two branch offices in Susquehanna County, Pennsylvania, three
branch offices office in Luzerne County, Pennsylvania and one branch office in
Bradford County, Pennsylvania. The Bank has four automated teller machines
("ATM"). The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and banking-related services.

The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in the distribution of the assets or earnings of
the Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations in respect of federal funds purchased and certain other borrowings,
as well as deposit liabilities.

The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.

As of December 31, 1998, the Company, on a consolidated basis, had total
assets of $149,953,000, total deposits of $129,891,000, and total shareholder's
equity of $14,767,000.

Grange National Bank

The Bank was incorporated under the laws of the United States of America as
a national bank in 1907 under its present name. Since that time, the Bank has
operated as a banking institution doing

<PAGE>

business at several locations in Wyoming, Susquehanna, Bradford, and Luzerne
Counties, Pennsylvania. The Bank is a member of the Federal Reserve System.

As of December 31, 1998, the Bank had total assets of $149,645,000, total
deposits of $129,902,000 and total shareholders' equity of $14,399,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.

The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at Main and Bee Streets,
Laceyville, Pennsylvania, also provides services to its customers through its
branch network of ten full service banks, which include drive-in facilities and
bank-by-mail services. The bank's offices are located in Wyoming, Susquehanna,
Bradford and Luzerne Counties, Pennsylvania.

The Bank's services include accepting time, demand and savings deposits,
including NOW accounts, regular savings accounts, money market accounts, fixed
rate certificates of deposit and club accounts. Its services also include making
secured and unsecured commercial and consumer loans, financing commercial
transactions either directly or through regional industrial development
corporations or the Small Business Administration, making construction and
mortgage loans and the renting of safe deposit facilities. Additional services
include making residential mortgage loans, small business loans, new car and
truck loans and student loans and providing discount brokerage services. The
Bank's business loans include seasonal credit, collateral loans and term loans.
Life insurance, accident and health insurance and annuities are available
through Grange National Insurance Agency, a wholly owned subsidiary of the Bank.

In September 1992, the Comptroller of the Currency approved the Bank's
application for the establishment of a Trust Department. In July of 1993, the
Bank began to exercise trust powers. The Bank has appointed a trust officer and
retained the services of an attorney with estate planning experience to
administer the services provided by the Trust Department. The Bank has
recognized only minimal income from the Trust Department during 1997 and 1998.
Management does not expect the department to generate net income for the next
several years.

The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any seasonal
fluctuations in the amount of its deposits.

No significant portion of the Bank's loans are concentrated within any one
business industry. Real estate loans however accounted for 72% of the Bank's
loan portfolio at December 31, 1997 and 69% at December 31, 1997. Management
believes this concentration is not serious in its rural agricultural location
where commercial loan demand is minimal. Recognizing the potential adverse
affect these loans could place on interest margins, the Bank has an adjustable
rate mortgage which adjusts annually, as well as continuing to offer a three
year adjustable mortgage. The Bank also continues to offer fixed rate mortgages
for twenty years, and a ten year fixed rate at 1/2% under the twenty year rate.
For the past three years, average mortgage loan balances have approximated 40%
to 42% of the Bank's total average interest earning assets. At December 31, 1998
mortgage loans were approximately 42% of total interest earning assets.

The Bank has no deposits or loans directly with foreign entities, and has a
minimal amount of deposits made by persons working in foreign countries. The
Bank's assets are not invested in foreign securities, Eurodollars or foreign
loans.

<PAGE>

Competition

All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of portions of Wyoming, Bradford, Susquehanna and
Luzerne Counties, Pennsylvania with concentration in the Wyoming County area.
The Bank competes with local commercial banks as well as other commercial banks
with branches in the Bank's market area. The Bank considers its major
competition to be Mellon Bank, headquartered in Pittsburgh, Pennsylvania, First
Union Bank, headquartered in Charlotte, North Carolina, Peoples State Bank,
headquartered in Wyalusing, Pennsylvania, Community Bank and Trust,
headquartered in Forest City, Pennsylvania, M & T Bank, headquartered in
Syracuse New York, PNC, headquartered in Pittsburgh, Pennsylvania, Pioneer Bank,
headquartered in Carbondale, Pennsylvania, Peoples National Bank, headquartered
in Hallstead, Pennsylvania, L A Bank, headquartered in Lake Ariel, Pennsylvania,
Citizens and Northern, headquartered in Wellsboro, Pennsylvania, and Northern
Central Bank, headquartered in Williamsport, Pennsylvania.

The Bank, along with other commercial banks, competes with respect to its
lending activities as well as in attracting demand deposits, with savings banks,
savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares of money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.

The Bank is generally competitive with all competing financial institutions
in its service areas with respect to interest rates paid on time and savings
deposits, service charges on deposit accounts and interest rates charged on
loans.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company and the Bank.

The Company

The Company is registered as a "bank holding company" under the Holding
Company Act, and it, therefore, is subject to regulation by the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board").

Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank that is not already majority owned by it, if after such acquisition,
it would directly or indirectly own or control more than 5% of the voting shares
of such bank. The Holding Company Act also prohibits the acquisition, directly
or indirectly, by the Company of any voting shares of, or interests in, or all
or substantially all of the assets of, any

<PAGE>

bank located outside the Commonwealth of Pennsylvania unless such acquisition is
specifically authorized by the laws of the state in which such bank is located.

The Company is prohibited under the Holding Company Act from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, non-banking activities unless the Federal Reserve Board,
by order or regulation, has found such activities to be closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making such determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public which outweigh possible adverse
effects. The Federal Board has by regulation determined that certain activities
are closely related to banking within the meaning of the Holding Company Act.
These activities include, among other, operating a mortgage, finance, credit
card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent or
underwriter for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and certain stock brokerage and
investment advisory services.

Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Pennsylvania
Banking Code of 1965, as amended (the "Banking Code"), the Pennsylvania
Department of Banking has the authority to examine the books, records and
affairs of any Pennsylvania bank holding company or to require any documentation
deemed necessary to insure compliance with the Banking Code.

The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.

The Company, as an affiliate of the Bank within the meaning of the Federal
Reserve Act, is subject to certain restrictions under the Federal Reserve Act
regarding extensions to it by the Bank, investments in the stock or other
securities of the Company by the Bank and the use of the stock or other
securities of the Company as collateral for loans by the Bank to any borrower.
Further, under the Federal Reserve Act and the Federal Reserve Board
regulations, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provisions of property or services. These
so-called "anti-tie-in provisions" generally provide that a bank may not extend
credit, lease or sell property, or furnish any service, or fix or vary the
consideration for any of the foregoing to a customer on the condition or
requirement that the customer provide some additional credit, property or
service to the bank, to the bank's holding company or to any other subsidiary of
the bank's holding company or on the condition or requirement that the customer
not obtain other credit, property or service from a competitor of the bank, the
bank's holding company or any subsidiary of the bank's holding company.

Pennsylvania law allows bank holding companies located in other states and
the District of Columbia to acquire Pennsylvania banks and bank holding
companies, but only if the state in which the acquiror is located grants
reciprocal acquisition rights to Pennsylvania bank holding companies. All
interstate acquisitions involving Pennsylvania banks or bank holding companies
require the prior approval of the Pennsylvania Department of Banking.

<PAGE>

The Bank

The Bank, as a national bank, is subject to the National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
approval of the OCC.

As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit, credit practices, the disclosure of
credit terms and discrimination in credit transactions.

The Bank is subject to certain limitations on the amount of cash dividends
that it can pay.

As a consequence of the current increased regulation of commercial banking
and bank holding company activities in the United States, the costs of doing
business of the Bank and the Company may be expected to increase due to
increased FDIC insurance assessments and the increased costs and expenses
associated with complying with this increased regulation.

Effect of Governmental Policy

One of the most significant factors affecting the Bank's earnings is the
difference between the interest rates paid by the Bank on its deposits and its
borrowings and the interest rates earned by the Bank on loans to its customers
and securities owned by the Bank. The yields of its assets and the rates paid on
its liabilities are sensitive to changes in prevailing rates of interest. Thus,
the earnings and growth of the Bank will be influenced by general economic
conditions, the monetary and fiscal policies of the federal government, and the
policies of regulatory agencies, particularly the Federal Reserve Board, which
implements national monetary policy. An important function of the Federal
Reserve System is to regulate the money supply and credit conditions in order to
mitigate recessionary and inflationary pressures. Among the techniques used to
implement these objectives are open market operations in U.S. Government
securities and changes in reserve requirements of banks and in the discount rate
on bank borrowings. These techniques influence overall growth and distribution
of credit, bank loans, investments and deposits, and may also affect interest
rates charged on loans or paid on deposits. The nature and impact of any future
changes in monetary policies cannot be predicted.

From time to time, legislation has been enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. Legislative proposals which could affect the Company and
the banking business in general have been proposed and may be introduced before
the United States Congress and other governmental bodies. These proposals may
alter the Company's

<PAGE>

structure, regulation, disclosure, and reporting requirements. In addition,
various banking regulatory agencies frequently propose rules and regulations to
implement and enforce existing legislation. It cannot be predicted whether or in
what form any such legislation or regulations will be enacted or the extent to
which the business of the Company would be affected thereby.

On June 21, 1993 legislation referred to as "Truth in Savings" became
effective and is codified for banks in the Federal Reserve Bank's Regulation DD.
"Truth in Savings" is intended to encourage comparative shopping for deposit
products by consumers. Regulation DD applies to all consumer accounts and other
qualifying accounts. Regulation DD regulates computation of interest,
advertising content, notice of change of terms, and requirements of information
to be disclosed when opening an account and in periodic statements. "Truth in
Savings" has been compared to "Truth in Lending" regulations, both for what the
legislation says it is trying to accomplish, and for the compliance burden and
resulting costs for Banks and consumers.

Federal Deposit Insurance Corporation Improvement Act of 1991

On December 19, 1991, the President signed into law the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). Among other things,
FDICIA provides increased funding for the Bank Insurance Fund ("BIF") and
provides for expanded regulation of depository institution and their affiliates,
including bank holding companies.

The BIF funding and reserve restoration provisions could result in
significant increases in the assessment rate on deposits of BIF institutions
(such as the Bank) over the next 15 years. Under current law, as amended by
FDICIA, the insurance assessment paid by the BIF-insured institutions shall be
as specified in a schedule required to be issued by the FDIC that would specify,
at semi-annual intervals, target reserve ratios designed to increase the reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with statute in 15 years. Beginning with the first
semi-annual period of calendar year 1993 and for each subsequent semi-annual
period, banks will pay semi-annual assessments under a transitional risk-based
assessment system which became effective on November 2, 1992. Under this system,
banks will pay a semi-annual assessment at a rate which is based upon the
assessment risk classification assigned to the bank by the FDIC. In determining
the risk classification, the FDIC will assign each bank to one of three capital
groups and within each capital group to one of three supervisory subgroups.
Depending upon the assessment risk classification assigned to a bank, the
semi-annual assessments to be paid by banks beginning in 1996 will range from
0.00% of an institution's average assessment base for banks assigned to the
highest capital group and highest supervisory subgroup to 0.27% for banks
assigned to the lowest capital group and lowest supervisory subgroup. Banks will
be notified of their assessment risk classification by the first day of the
month preceding each semi-annual period.

FDICIA further provides authority for special assessments against insured
deposits and for the development of a general risk-based deposit insurance
assessment system under which the premium levels of BIF institutions will vary
in relation to their perceived risk profiles.

FDICIA requires each federal banking agency, including the FRB and OCC, to
revise its risk-based capital standards prior to June 1993, to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and risks of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages.

<PAGE>

Effective December 1992, FDICIA provides the federal banking agencies with
broad powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized", "adequately capitalized, "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized".

The FDIC has issued a rule which sets the capital level for each of the
five capital categories established in FDICIA. Under the rule a bank is deemed
to be "well capitalized" if the bank has a total risk-based capital ratio of 10%
or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a
leverage ratio of 5% or greater, and is not subject to any order or final
capital directive by the FDIC to meet and maintain a specific capital level for
any capital measure. A bank is deemed "adequately capitalized" if the bank has a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage capital ratio of 4% or greater (or 3% or
greater for the most highly rated banks), and does not meet the definition of a
"well capitalized" bank. A bank that has total risk-based capital, Tier 1
risk-based capital and leverage capital that is less than 8%, 4% and 4%,
respectively, is deemed "undercapitalized". Under the regulation, "significantly
undercapitalized" banks are those with total risk-based capital, Tier 1
risk-based capital and leverage capital that is less than 5%, 3% and 3%,
respectively. Finally, "critically undercapitalized" banks are defined as those
banks which have a ratio of tangible equity to total assets that is equal to or
less than 2%. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.

FDICIA provides that an insured depository institution may not pay
management fees to any person, including any holding company, having control of
the institution if, after making the payment, the institution would be within
any three of the undercapitalized categories, nor may an institution, except
under certain circumstances and with prior regulatory approval, make any capital
distribution if, after making the distribution, the institution would be within
any three of the undercapitalized categories. Institutions that are classified
"undercapitalized" are subject to the following mandatory supervisory actions:
increased monitoring by the institution's federal regulator; a requirement to
submit a capital restoration plan; a restriction on growth of the institution's
total assets; and a limitation on the institution's ability to make any
acquisitions, open any new branch offices or engage in any new line of business
with out approval of the institution's federal regulator. Institutions that are
classified "significantly undercapitalized" are subject to the mandatory
supervisory actions applicable to "undercapitalized" institutions and are
required to restrict the payment of bonuses and raises to senior executive
officers of the institution. With certain exceptions, "critically
undercapitalized" institutions are required to be placed in conservatorship or
receivership within 90 days.

FDICIA also provides that the federal regulators may take certain
discretionary actions with respect to any institution that is under capitalized,
if it is determined the action is necessary to resolve the problems of the
institution, at the least possible cost to the deposit insurance fund. These
discretionary supervisory actions include: placing limits on asset growth and
restrictions on

<PAGE>

activities; requiring the institution to issue additional capital stock (which
may include voting stock) or be acquired; placing restrictions on transactions
with affiliates; restricting the interest rates the institution may pay on
deposits; ordering a new election for the institution's board of directors;
requiring that certain senior executive officers or directors be dismissed;
prohibiting the payment of principal or interest on subordinate debt;
prohibiting the holding company from making capital distributions without prior
regulatory approval; and requiring the holding company to divest the institution
or any other affiliate. If the insured depository institution is
"undercapitalized", the parent bank holding company is required to guarantee
that the institution will comply with any capital restoration plan submitted to
and approved by the appropriate federal banking agency in an amount equal to the
lesser of (i) 5% of the institution's total assets at the time the institution
became undercapitalized, or (ii) the amount which is necessary (or would have
been necessary) to bring the institution into compliance with all applicable
capital standards as of the time the institution fails to comply with the
capital restoration plan. FDICIA also amends current law with respect to
acceptance of brokered deposits by insured depository institutions to permit
only a "well capitalized" depository institution to accept brokered deposits
without regulatory approval.

FDICIA contains a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect to
deposit accounts. FDICIA also requires annual examination of all insured
depository institutions by the appropriate federal banking agency with some
exceptions for small, well-capitalized institutions and state-chartered
institutions examined by state regulators. The federal banking agencies are
required to set compensation standards for insured depository institutions that
would prohibit excessive compensation, fees or benefits to officers, directors,
employees and principal shareholders. FDICIA also expands the range of merger,
purchase and assumption, and deposit transfer transactions involving banks and
savings associations that are exempt from payment of exit and entry fees for
transfers of deposits between the BIF and the Savings Association Insurance
Fund.

The foregoing necessarily is a summary and general description of certain
provisions of FDICIA and does not purport to be complete. Many of the provisions
of FDICIA will be implemented through the adoption of regulations by various
federal banking agencies. Moreover, many of the significant provisions of the
legislation have not yet become effective. As of the date hereof, the Company is
continuing to study the legislation and the regulations relating to the
legislation but cannot yet assess its impact on the Company or the Bank.

Interstate Banking

The "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994"
(the "Interstate Act"), among other things, permitted bank holding companies to
acquire banks in any state one year after enactment. Effective June 1, 1997, a
bank may merge with a bank in another state so long as both states have not
opted out of interstate branching between the date of enactment and May 31,
1997. States were permitted to enact laws opting out of interstate branching
before June 1, 1997, subject to certain conditions. States were also permitted
to enact laws permitting interstate merger transactions before June 1, 1997 and
host states were permitted to impose conditions on a branch resulting from an
interstate merger transaction that occurs before June 1, 1997, if the conditions
did not discriminate against out-of-state banks, were not preempted by Federal
law and did not apply or require performance after May 31, 1997. Pennsylvania
enacted laws opting in immediately to interstate merger and interstate branching
transactions. Interstate acquisitions and mergers would both be subject, in
general, to certain concentration limits and state entry rules relating to the
age of the bank.

<PAGE>

Under the Interstate Act, the responsible federal regulatory agency is
permitted to approve the acquisition of a branch of an insured bank by an
out-of-state bank of bank holding company without the acquisition of the entire
bank or the establishment of a "de novo" branch only if the law of the state in
which the branch is located permits out-of-state banks to acquire a branch of a
bank without acquiring the bank or permits out-of-state banks to establish "de
novo" branches. Pennsylvania passed such a law.

On July 3, 1997, the President signed into law an amendment to the
Interstate Act which provides in general that branches of state-chartered banks
that operate in other states will be covered by the laws of the chartering
state, rather than the host state.

National Monetary Policy

In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market in
United States Government securities, setting the discount rate and changes in
reserve requirements against bank deposits. These instruments are used in
varying combinations to influence overall growth and distribution of credit,
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies
upon the future business, earnings and growth of the Company and the Bank cannot
be predicted.

Employees

As of December 31, 1998, the Company had a total of 85 full and part-time
employees. The Company provides a variety of employment benefits and considers
its relationship with its employees to be good.

Item 2: Properties

The Company's main executive offices and financial operations center, which
also serve as a branch bank, are located at 198 E. Tioga Street, Tunkhannock,
Pennsylvania, which the Company owns. The Bank's main banking office is located
at Main and Bee Streets in the borough of Laceyville, Wyoming County,
Pennsylvania, which building is owned by the Company. In addition, the Company
owns five additional properties where its other branches are located, at Route
267, Lawton, Pennsylvania, at the corner of U.S. Route 6 and Bridge Street, in
the Borough of Meshoppen, Pennsylvania, at the intersection of U.S. Routes 309
and 29 in Monroe Township, Pennsylvania, at 198 E. Tioga St., Tunkhannock,
Pennsylvania, on Main Street in Little Meadows, Pennsylvania, and at 400 Main
Street, Towanda, Pennsylvania. The Bank has an operating lease with PNC to rent
a former First Eastern Bank office as a branch office in Edwardsville,
Pennsylvania, and a lease agreement a branch office in a shopping plaza in
Trucksville, and at the Pine Mall in Wilkes-Barre, Luzerne County. During 1993
the Company purchased a property along U.S. Route 309 in Dallas Township for a
branch office. The Company intends to place this parcel on the market for

<PAGE>

sale, as the Trucksville site is near this parcel and is a superior location for
a branch office. The Company purchased a property in Laceyville, near the Bank's
main office, to be used for additional operations of the Bank, and to rent to
tennants.

Item 3: Legal Proceedings

The nature of the Company's business generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of the management of the Company, there are no
proceedings pending to which the Company is a party or to which its property is
subject, which, if determined adversely to the Company, would be material in
relation to the Company's shareholders' equity or financial condition.

Item 4: Submission of Matters to a Vote of Security Holders

None

<PAGE>

PART II

Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters

Incorporated by reference from the section entitled "Common Stock Market
Price, Book Value and Dividends" in the Company's Annual Report to Shareholders
for the year ended December 31, 1998.

Item 6: Selected Financial Data

Incorporated by reference from the section entitled "Selected Financial
Data" in the Company's Annual Report to shareholders for the year ended December
31, 1998.

Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations

Incorporated by reference from the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report to Shareholders for the year ended December 31, 1998.

Item 8: Financial Statements and Supplementary Data

Incorporated by reference from the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements thereto included in
the Company's Annual Report to Shareholders for the year ended December 31,
1998.

Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

<PAGE>

PART III

Item 10: Directors and Executive Officers of the Registrant

Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.

Item 11: Executive Compensation

Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.

Item 12: Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.

Item 13: Certain Relationships and Related Transactions

Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.

<PAGE>

PART IV

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

(a) Documents filed as part of this report:

(1) Financial Statements. The following consolidated financial
statements and the notes thereto of the Company, which are included in the
Company's Annual Report to Shareholders for the year ended December 31, 1998,
and the report of independent public accountants which is also included in such
Annual Report, are incorporated herein by reference in to Item 8 of this Report:

Consolidated Balance Sheets -
December 31, 1998 and 1997

Consolidated Statements of Income -
Years ended December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows Years ended December 31, 1998,
1997 and 1996

Consolidated Statements of Shareholders' Equity Years ended December 31,
1998, 1997 and 1996

Notes to Consolidated Financial Statements

Report of Independent Certified Public Accountants

(2) Financial Statement Schedules. Financial statement schedules are
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.

Exhibits

Number Title

3.1 Amended and Restated Articles of Incorporation of Grange National Banc
Corp. (Incorporated by reference from Exhibit 3.1 to Grange National
Banc Corp.'s Registration Statement on Form SB-2 (Registration No.
33-76838) filed with the Commission on March 24, 1994).

3.2 Bylaws of the Company, as amended (Incorporated by reference from
Exhibit 3.2 to Grange National Banc Corp.'s Registration Statement on
Form SB-2 (Registration No. 33-76838) filed with the Commission on
March 24, 1994).

<PAGE>

4.1 Grange National Banc Corp. Specimen Stock Certificate (Incorporated by
reference from Exhibit 4.1 to Grange National Banc Corp.'s
Registration Statement on Form SB-2 (Registration No. 33-76838) filed
with the Commission on March 24, 1994).

*10.1 Employee Stock Option Plan (Filed as Exhibit 10.1 to Grange National
Banc Corp.'s Registration Statement on Form SB-2 (Registration No.
33-76838) filed with the Commission on March 24, 1994).

*10.2 Non-employee Director Stock Option Plan (Filed as Exhibit 10.2 to
Grange National Banc Corp.'s Registration Statement on Form SB-2
(Registration No. 33-76838) filed with the Commission on March 24,
1994).

*10.3 Employment Contract with Thomas A. McCullough dated March 25, 1998,
filed herein as Exhibit 10.3.

*10.4 Incentive Stock Option Plan (Filed with the 1996 Proxy Statement on
April 1, 1996).

13.1 Annual Report to Shareholders for the year ended December 31, 1997
(such report, except for those portions expressly incorporated by
reference in this Annual Report on Form 10-K, is furnished for the
information of the Commission and is not to be deemed filed as part of
this Report).

21.1 Subsidiaries of the Company (incorporated by reference from exhibit
21.1 to Grange National Banc Corp.'s Registration Statement on Form
SB-2 (Registration Statement No. 33-76838) filed with the Commission
on March 24, 1994).

* Management contract or compensatory plan or arrangement

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1998.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

(Specific sections incorporated are identified
under applicable items herein)

Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 1998 are incorporated by reference in Parts II and IV of
this Report.

With the exception of the information incorporated by reference in Parts II
and IV of this Report, the Company's Annual Report to Shareholders for the year
ended December 31, 1998 in not deemed "filed" with the Securities and Exchange
Commission for any purpose.

Certain portions of the Company's 1999 Proxy Statement filed in connection
with its Annual Meeting of Shareholders are incorporated by reference in Part II
of this Report.

Other documents incorporated by reference are listed in the Exhibit Index.

<PAGE>

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

GRANGE NATIONAL BANC CORP.
(Registrant)

Date March 25, 1999 /s/ Robert C. Wheeler
-------------- -------------------------------
Robert C. Wheeler
Chairman of the Board)

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 and on the dates indicated.

/s/ Robert C. Wheeler 3/25/99
- ---------------------------------- -----------------------------------
Robert C. Wheeler (Date) John W. Purtell (Date)
Chairman of the Board Vice-Chairman and Director
Director

/s/ Sally A. Steele 3/25/99 /s/ Brian R. Ace 3/25/99
- ---------------------------------- -----------------------------------
Sally A. Steele (Date) Brian R. Ace (Date)
Secretary and Director Director

/s/ Thomas C. Burns 3/25/99 /s/ R. Levi Tyler 3/25/99
- ---------------------------------- -----------------------------------
Thomas C. Burns (Date) R. Levi Tyler (Date)
Director Director

/s/ W. Kenneth Price 3/25/99 /s/ Edward A. Coach 3/25/99
- ---------------------------------- -----------------------------------
W. Kenneth Price (Date) Edward A. Coach (Date)
Director Director

/s/ Thomas A. McCullough 3/25/99 /s/ Philip O. Farr 3/25/99
- ---------------------------------- -----------------------------------
Thomas A. McCullough (Date) Philip O. Farr (Date)
President and Director Comptroller
Chief Executive Officer Chief Accounting Officer
Chief Financial Officer

<PAGE>

GRANGE NATIONAL BANC CORP.
Main and Bee Streets
Laceyville, Pennsylvania 18623

Dear Shareholders:

The Annual Meeting of Shareholders of Grange National Banc Corp. will be
held at 10:00 a.m. on May 7, 1999 at the Pink Apple Restaurant, 651 SR 6W,
Tunkhannock, Pennsylvania.

The items to be voted on at this meeting are listed in the attached proxy
statement.

Enclosed is a form of proxy for your use. We urge you to vote by signing
the proxy, even though you plan to attend the meeting, and mailing it to us in
the accompanying stamped envelope. Be sure it is signed exactly as the name or
names appear on the proxy.

A copy of our Annual Report for 1998 is enclosed.

Sincerely yours,

Robert C. Wheeler
Chairman of the Board

April 5, 1999

Enclosures

<PAGE>

GRANGE NATIONAL BANC CORP.
Main and Bee Streets
Laceyville, Pennsylvania 18623

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to be held May 7, 1999

TO OUR SHAREHOLDERS;

Notice is hereby given that the annual meeting of shareholders of GRANGE
NATIONAL BANC CORP. ("Company") will be held on May 7, 1999 at 10 a.m.
(prevailing time), at the Pink Apple Restaurant, 651 SR 6 W, Tunkhannock,
Pennsylvania 18657, for the following purposes:

1. To elect three Class 2 Directors named herein to serve for a
three-year term as Directors of the Company, as more fully described
in the accompanying Proxy Statement;

2. To transact such other business as may properly come before this
meeting or any postponement or adjournment thereof.

The Board of Directors has fixed April 1, 1999 as the record date for the
determination of shareholders entitled to vote at the annual meeting. Only
shareholders of record at the close of business on that date will be entitled to
notice of, and to vote at, the annual meeting.

If the annual meeting is adjourned for one or more periods aggregating at
least 15 days because of the absence of a quorum, those shareholders entitled to
vote who attend the reconvened annual meeting, if less than a quorum as
determined under applicable law, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in this Notice of Annual Meeting.

YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO SIGN,
DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE; NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.

April 5, 1999 By Order of the Board of Directors,

Robert C. Wheeler, Chairman of the Board

<PAGE>

GRANGE NATIONAL BANC CORP.
Main and Bee Streets
Laceyville, Pennsylvania 18623

PROXY STATEMENT

The accompanying proxy is solicited by and on behalf of the Board of
Directors of Grange National Banc Corp. ("Company") for use at the annual
meeting ("Annual Meeting") of shareholders to be held on May 7, 1999 at 10:00
a.m. (prevailing time) at the Pink Apple Restaurant, 651 SR 6 W, Tunkhannock,
Pennsylvania 18657 and at any postponement or adjournment thereof. The
approximate date on which this Proxy Statement and the accompanying form of
proxy will first be sent or given to shareholders is April 7, 1999.

Sending in a signed proxy will not affect the shareholders' right to
attend the meeting and vote in person since the proxy is revocable. Any
shareholder giving a proxy has the power to revoke it by, among other methods,
giving written notice to the Secretary of the Company at any time before the
proxy is exercised.

The expense of the proxy solicitation will be borne by the Company. In
addition to solicitation by mail, proxies may be solicited in person or by
telephone, telegraph or teletype by directors, officers or employees of the
Company and its bank subsidiary, Grange National Bank ("Bank") without
additional compensation. Upon request by record holders of the Company's Common
Stock, par value $5.00 per share ("Common Stock"), who are brokers, dealers,
banks or voting trustees, or their nominees, the Company is required to pay the
reasonable expenses incurred by such record holders for mailing proxy material
and annual shareholder reports to any beneficial owners of Common Stock.

A form of proxy is enclosed. If properly executed and received in time
for voting, and not revoked, the enclosed proxy will be voted as indicated in
accordance with the instructions thereon. If no directions to the contrary are
indicated, the persons named in the enclosed proxy will vote all shares of the
Company's Common Stock for election of all nominees for Class 2 Directors
hereinafter named.

The enclosed confers discretionary authority to vote with respect to any
and all of the following matters that may come before the meeting: (i) matters
which the Company does not know that are presented at the meeting; (ii) approval
of the minutes of a prior meeting of shareholders, if such approval does not
amount to ratification of the action taken at the meeting; (iii) the election of
any person to any office for which a bona fide nominee is unable to serve or for
good cause will not serve; (iv) any proposal omitted from this Proxy Statement
and form of proxy pursuant to Rules 14a-8 or 14a-9 under the Securities Exchange
Act of 1934, as amended; and (v) matters incident to the conduct of the meeting.
In connection with such matters, the persons named in the enclosed form of proxy
will vote in accordance with their best judgment.

The Company is not aware of any matters which will be brought before the
Annual Meeting (other than procedural matters) which are not referred to in the
enclosed notice of the Annual Meeting.

The Board of Directors has fixed April 1, 1999 as the record date
("Record Date") for the determination of shareholders entitled to vote at the
Annual Meeting. Only shareholders of record on the Record Date are entitled to
notice of, and to vote at, the Annual Meeting.

The Company had 760,957 shares of Common Stock outstanding on the Record
Date. The presence, in person or by proxy, of shareholders entitled to cast a
majority of the votes which all shareholders are entitled to cast on a
particular matter constitutes a quorum for the purpose of considering such
matter. All shares of the Company's Common Stock present in person or
represented by proxy and entitled to vote at the Annual Meeting, no matter how
they are voted or whether the abstain from voting will be counted in

<PAGE>

determining the presence of a quorum. If the Annual Meeting is adjourned because
of the absence of a quorum, those shareholders entitled to vote who attended the
adjourned meeting, although constituting less than a quorum as provided herein,
shall nevertheless constitute a quorum for the purpose of electing of directors.
If the Annual Meeting is adjourned for one or more periods aggregating at least
15 days because of the absence of a quorum, those shareholders are entitled to
vote who attend the reconvened Annual Meeting, if less than a quorum as
determined under applicable law, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in the Notice of Annual Meeting.
Each share of Common Stock outstanding is entitled to one vote on each matter
which may be brought before the Annual Meeting except for certain restrictions
(hereinafter summarized).

The election of directors will be determined by a plurality vote and the
three nominees receiving the most "for" votes will be elected.

Under the Pennsylvania Business Corporation Law, an abstention,
withholding of authority to vote or broker non-vote will not have the same legal
effect as an "against" vote and will not be counted in determining whether the
proposal has received the required shareholder vote.

Article 8 of the Company's Amended and Restated Articles of
Incorporation, as amended, restricts the rights of a Person (as hereafter
defined) to cast (or execute written consents with respect to) more than 10% of
the total votes which all shareholders are entitled to cast at a meeting, unless
authorized to do so by the Board of Directors and subject to such conditions as
the Board of Directors may impose. The term "Person" includes not only
individuals and entities, but also groups of individuals and entities who act
together for the purpose of acquiring, holding, disposing of or voting Common
Stock.

The casting of votes by a Person as a proxy holder for other shareholders
is not counted in computing the 10% limitation to the extent that the proxies so
voted were revocable and were secured from other shareholders who are not
members of a group which included such Person. Giving a revocable proxy to a
Person does not in itself cause the shareholder giving the proxy to be a member
of a group which includes such Person. Article 8 provides that the determination
by the Board of Directors of the existence or membership of a group, and of a
number of votes any Person or each member of a group is entitled to cast, is
final and conclusive absent clear and convincing evidence of bad faith.

In the event of a violation of Article 8 and in addition to other
remedies afforded the Company, the judges of election cannot count votes cast in
violation of Article 8 and the Company or its nominees have an option to acquire
from the violator shares of Common Stock in excess of the 10% limit at prices
which would in certain situations be lower than the current market price of such
shares.

The foregoing is a brief summary of Article 8 and is qualified and
amplified in all respects by the exact provisions of the Amended and Restated
Articles of Incorporation, as amended, a copy of which can be obtained in the
same manner as the Company's Annual Report on Form 10-KSB for 1998. See "ANNUAL
REPORT TO SHAREHOLDERS AND FORM 10-KSB".

SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS

The following table sets forth, as of April 1, 1999, the beneficial
ownership of the Company's Common Stock by each director and nominee for
director of the Company, by each executive officer named in the Summary
Compensation Table, and by the directors, nominees for directors and executive
officers of the Company as a group. To the Company's knowledge, there is no
other person who beneficially owned 5%

-2-

<PAGE>

or more of the Company's outstanding Common Stock as of April 1, 1999. Unless
otherwise specified, all persons listed below have sole voting and investment
power with respect to their shares.

Amount of Common
Name of Individual or Stock Beneficially Percent of
Identity of Group Owned (a) Class(a)
- -------------------------------------------------------------------------------
Brian R. Ace 12,616(b) 1.66%
Thomas C. Burns 14,820(b) 1.95%
Edward A. Coach 2,473(c) 0.33%
Thomas A. McCullough 35,956(d) 4.94%
W. Kenneth Price 20,200(b)(e) 2.66%
John W. Purtell 51,777(b) 6.82%
Box 70
LeRaysville, PA 18829
Sally A. Steele 12,499(b) 1.65%
R. Levi Tyler 19,914(b) 2.62%
Robert C. Wheeler 12,446(b) 1.71%

Directors, Nominees, and Executive 218,481(f) 25.66%
Officers as a Group (11 persons)

- ----------
(a) The securities "beneficially owned" by an individual are determined as of
the Record Date in accordance with the definition of "beneficial ownership"
set forth in the regulations of the Securities and Exchange Commission.
Accordingly, they may include securities owned by or for, among others, the
spouse and minor children of the individual and any other relative who has
the same home as such individual, as well as other securities as to which
the individual has or shares voting or investment power or has the right to
acquire within 60 days after the Record Date. Beneficial ownership may be
disclaimed as to certain of the securities.

(b) Includes 7,956 shares which may be acquired within 60 days upon the
exercise of options granted under the Company's Non-Employee Director Stock
Option Plan and the Company's Incentive Stock Option and Nonstatutory Stock
Option Plan.

(c) Includes 2,061 shares which may be acquired within 60 days upon the
exercise of options granted under the Company's Non-Employee Director Stock
Option Plan.

(d) Includes 546 shares held by Mr. McCullough as a custodian for his children,
216 shares owned jointly with other relatives, 1082 shares held in street
name and 23,040 shares which may be acquired within 60 days upon the
exercise of options granted under the Company's Employee Stock Option Plan.

(e) Includes 1626 shares owned individually by Mr. Price's spouse.

(f) Includes 101,458 shares which may be acquired within 60 days upon exercise
of options.

-3-

<PAGE>

ELECTION OF DIRECTORS

As permitted under Pennsylvania law, the Articles of Incorporation of the
Company provide for staggering the terms of office of the Company's directors by
dividing the Board of Directors into three classes, with members of each class
serving three-year terms. The Company's Articles of Incorporation further
provide that the Board of Directors shall consist of not fewer than five nor
more than 25 directors, with the exact number fixed by the Board of Directors.
The Board of Directors currently consists of nine members.

At the Annual Meeting, the shareholders will elect three Class 2 Directors
to serve for a term of three years and until their successors are elected and
qualified.

The Board of Directors has designated the persons listed below to be
nominees for election as Class 2 Directors. The nominees are being nominated to
serve until the end of their terms and until their successors are elected and
qualified. The Company has no reason to believe that any of the nominees will be
unavailable for election; however, should any nominee become unavailable for any
reason, the Board of Directors may designate a substitute nominee. The proxy
agents intend (unless authority has been withheld) to vote for the election of
the Company's nominees.

A vote in favor of the three Class 2 directors nominated by the Board of
Directors will also be deemed to be a vote in favor of having three Class 1
directors.

The Bylaws of the Company require that nominations for Directors to be
elected at an annual meeting of shareholders, except those made by management of
the Company, must be submitted to the Secretary of the Company in writing not
later than the close of business on the 20th day immediately preceding the date
of the meeting. Such notification shall contain the following information to the
extent known to the notifying shareholder: (a) name and address of each proposed
nominee; (b) the principal occupation of each proposed nominee; (c) the total
number of shares of capital stock of the Company that will be voted for each
proposed nominee; (d) the name and residence address of the notifying
shareholder; and (e) the number of shares of capital stock of the Company owned
by the notifying shareholder. Nominations not made in accordance herewith may,
in such officer's discretion, be disregarded by the presiding officer of the
meeting, and upon the presiding officer's instruction, the vote talliers may
disregard all votes cast for each nominee. In the event the same person is
nominated by more than one shareholder, the nomination shall be honored, and all
shares of capital stock of the Company shall be counted if at least one
nomination for that person complies with this provision.

The Company's Bylaws provide that every Director must be a shareholder of
the Company and must own in the Director's name the number of shares (if any)
required by law in order to qualify as such Director.

-4-

<PAGE>

Information as to Directors and Nominees

The following table contains certain information with respect to the
nominees for Class 2 Directors.

Year First Elected
or Appointed
Principal Occupation Director of the
Name/Age as of Record Date During Last 5 Years Company or Bank
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas C. Burns, Age 64 Retired; Dentist 1972

John W. Purtell, Age 69 President, S.F. Williams Inc., 1969
automobile dealership.

Brian R. Ace, Age 44 Owner of Laceyville Hardware Store 1992
</TABLE>

The following table contains certain information with respect to Class 3
Directors whose terms of office expire in 2000.

Thomas A. McCullough, Age 52 President and Chief Executive Officer 1990
of the Bank and the Company since 1991;
previously Vice President of the Bank
and the Company

Edward A. Coach, Age 50 Certified Public Accountant 1997
</TABLE>

The following table contains certain information with respect to the
nominees for Class 1 Directors whose term expires in the year 2001.

R. Levi Tyler, Age 66 Dairy Farmer 1979

Sally A. Steele, Age 42 Attorney 1991
</TABLE>

-5-

<PAGE>

Board of Directors, Committees and Attendance at Meetings

During 1998, there were 15 meetings of the Board of Directors of the
Company and 23 meetings of the Board of Directors of the Bank. All Directors
attended more than 75% of the meetings of the Board of Directors and all
Committee members attended more than 75% of their meetings.

The Board has an Audit Committee consisting of Brian Ace, W. Kenneth Price,
Edward Coach and Robert C. Wheeler, which was formed in January 1994. Prior to
the formation of the Audit Committee, its function was performed by the Board of
Directors as a whole. The purpose of the Audit Committee is to review all
recommendations made by the Company's independent public accountants with
respect to the accounting methods used and the system of internal controls
followed by the Company and to advise the Board of Directors with respect
thereto. The Audit Committee met once during 1998.

The Company has a Compensation Committee consisting of Sally A. Steele,
John W. Purtell, W. Kenneth Price, Thomas C. Burns and Thomas A. McCullough. The
Compensation Committee makes recommendations to the Board with respect to the
compensation of the officers and key employees, with the exception of Mr.
McCullough whose compensation is determined by the Board of Directors as a
whole. The Compensation Committee met one time during 1998.

The Company has a Nomination Committee for nomination of new directors,
consisting of W. Kenneth Price, Sally A. Steele and Robert C. Wheeler. The
Nominating Committee did not meet during 1998.

Board of Directors Fees

Members of the Board of Directors were compensated at the rate of $275.00
per meeting attended in 1998 and will be paid $300.00 per meeting attended in
1999. Nonemployee Trust Committee members were paid $100 per meeting in 1998 and
will be paid $100 per meeting in 1999.

Directors Stock Options

The Company has a Non-Employee Director Stock Option Plan pursuant to which
each Director of the Company on April 1, 1994 received an option to purchase
2,142 shares of Common Stock, another option on April 1, 1997 to purchase an
additional 2,142 shares of Common Stock, and pursuant to which each Director is
entitled on April 1, 2000 to receive an additional option to purchase 2,142
shares of Common Stock or such lower number as then available divided by the
number of persons eligible to receive options. In addition, each Non-Employee
Director received in 1996 a grant of an option to purchase 3,673 shares of
Common Stock under the Company's Incentive Stock Option and Nonstatutory Stock
Option Plan which was approved at the 1996 Annual Meeting of shareholders.

Directors Deferred Income (DDI) Plan

Directors are given the option of deferring their fees or accepting a cash
payment. A non-qualified Directors Deferred Income (DDI) Plan has been
implemented for those Directors who wish to participate in the Plan. Under the
provisions of the DDI Plan, each Director is provided with the opportunity to
defer all or a portion of his fees earned as a Director in return for a future
payment by the Company to the Director of deferred fees plus interest. Under the
provisions of the DDI Plan, the Company and each participating Director executes
an agreement whereby the Director agrees to defer all or a portion of his fees
for a five-year period. The agreement provides each participating Director with
a deferred income payout (payable for a ten-year period) beginning at age 65 (or
at the end of the five-year deferral period if the Director is age 60 or older
at the beginning of the five-year deferral period). The agreement also provides
each participating Director with a pre-payout death benefit, payable to the
Director's named beneficiary for a ten-year period, should a participating
Director die prior to the beginning of the deferred income payout. The DDI
agreement

-6-

<PAGE>

may be amended by mutual written consent of both the Director and the Company,
and the Company, upon written consent of the Director (or his beneficiary, if
applicable) may accelerate payment of benefits in a lump-sum present-value
payment. The DDI Plan is an unfunded plan, although the Company has the right to
acquire investments to informally and indirectly provide funding for the future
payments under the plan.

Directors' Performance Adjusted Plan

The Board of Directors has designed and implemented a Directors'
Performance Adjusted Plan which is designed to provide certain compensation to
members of the Board of Directors. The plan establishes certain annual target
goals of Return on Assets ("ROA") for the Bank and increases compensation to
participating Directors based on the level of ROA reached by the Bank during the
year. Target levels on ROA will be determined by the Board of Directors on an
annual basis. Under the plan directors are eligible to receive annual fees
ranging from $125 to $1,350 per director. For the Bank's performance in 1998,
each Director received $904.92 under this plan.

Executive Compensation

The following table sets forth all cash compensation paid by the Company
and the Bank for services rendered in all capacities to the Company and the Bank
during the fiscal years ended December 31, 1998, 1997 and 1996 to the President
and Chief Executive Officer of the Company and the Bank, the only executive
officer of the Company and the Bank whose salary and bonus exceeded $100,000
during the fiscal year ended December 31, 1998.

SUMMARY COMPENSATION TABLE

Long Term
Annual Compensation Compensation
------------------------- ------------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options Compensation
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas A. McCullough, 1998 $90,000 $33,442(1) 0 $18,538(4)
President and Chief 1997 $79,070 $31,977(2) 0 $17,535(4)
Executive Officer 1996 $74,948 $36,368(3) 0 $15,844
</TABLE>

- ----------
(1) Represents bonus earned for 1998.

(2) Represents bonus earned for 1997.

(3) Represents bonus earned for 1996.

(4) Includes $7,535 contributed to Mr. McCullough's 401(k) retirement plan
which is a benefit available to all employees as described in the
Retirement Plan below. Also includes $1,549 which was the Bank's 25%
matching contribution to the Retirement Plan. This figure also includes
$2,741 representing a portion of the premium on a split-dollar life
insurance policy on Mr. McCullough's life. The Bank pays the annual premium
until Mr. McCullough's normal retirement. Upon termination or payment of a
claim, the premiums paid by the Bank will be refunded to the Bank and Mr.
McCullough or his family will receive the excess amount. Mr. McCullough
also participates in the non-qualified Directors Deferred Income (DDI) Plan
described above which is available to all Directors who wish to defer all
or a portion of their Directors fees. During 1998 Mr. McCullough elected to
defer $6,712 in Directors fees.

-7-

<PAGE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES

(a) (b) (c) (d) (e)
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End(#) FY-End($)
Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas A. McCullough 3000 $83,040 16,508/7,373 $553,878/$237,337
</TABLE>

Retirement Plan

On November 22, 1995 the Board of Directors approved the implementation of
an Employee Stock Ownership Plan with 401(k) Provisions ("KSOP"), which replaced
the Simplified Employee Pension Plan ("SEP") which was the retirement plan
previously utilized by the Bank. The KSOP, which is a type of stock bonus plan,
is a plan of deferred compensation in which Company contributions are used to
provide participating employees with stock in Grange National Banc Corp. The
KSOP also provides that participants may make contributions to the Plan on a
before-tax basis, pursuant to provisions found under Section 401(k) of the
Internal Revenue Code. Participants may elect to defer up to 15% of their
compensation up to a maximum of $9,240. During 1998 the Company provided a
matching contribution of 25% of employee contributions up to 6% of total
compensation. The Company contributed $16,848 as matching contributions to
employee deferrals during 1998. The Company also made an optional contribution
to the plan of $77,820 during 1998 which represents 6% of gross salaries.

The Company maintains a plan providing supplemental income for certain
executive officers, including Thomas A. McCullough. The plan provides for the
payment of a fixed annual benefit commencing at age 62, or later at the election
of the Board of Directors and officer. As required by generally accepted
accounting principles, the Company recognized an expense of $23,165 in 1998 and
will recognize an expense of $25,366 in 1999 in connection with Mr. McCullough's
benefit.

Employment Agreement

The Company entered into an Employment Agreement on March 25, 1998 with
Thomas A. McCullough, the President and Chief Executive Officer of the Company
and the Bank. The Agreement provides for an initial term of three years expiring
in March, 2001, but the term will be extended automatically for one additional
year on each anniversary date of the date of commencement of the initial term,
unless either the Company or Mr. McCullough gives contrary written notice to the
other before such anniversary date. Under the Agreement, Mr. McCullough will
receive a base annual salary as determined by the Board of Directors (but not
less than $90,000), an annual bonus in the discretion of the Board, director's
fees, the use of an automobile, and other employee benefits under the Company's
benefit plans. If Mr. McCullough's employment is terminated by the Company or
him due to Permanent Disability (as defined), by the Company without Cause (as
defined), or by Mr. McCullough by reason of Constructive Discharge (as defined),
Mr. McCullough shall be entitled to receive his base salary (except that any
payments shall be offset by any amounts paid to him under the Company's
disability program) and shall be entitled to group medical and other insurance
benefits until the end of the term of employment. If Mr. McCullough's employment
is terminated by the Company for Cause or by him for reasons other than
Constructive Discharge or Permanent Disability, he shall receive no payment
under the Agreement. In the event of the

-8-

<PAGE>

termination of Mr. McCullough's employment after a Change in Control (as
defined) of the Company, he shall be entitled to receive an amount equal to
three times the average aggregate annual salary, bonus and director's fees paid
to him by the Company during the three calendar years preceding the taxable year
in which the date of termination occurred, and he shall be entitled to continued
medical and other insurance coverage for the three-year period following the
termination. Mr. McCullough shall continue to receive the benefit of the
split-dollar insurance agreement and the executive supplemental income plan
described above. The Agreement also provides for the non-disclosure by Mr.
McCullough of confidential information of the Company and contains his agreement
not to compete with the Company during the term of employment or any severance
period.

Other Transactions

The Bank has had and expects to have in the future, loan and other banking
transactions in the ordinary course of business with many of its Directors,
executive officers and their associates. All extensions of credit to such
persons have been made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and in the opinion of the
management of the Bank, do not involve more than a normal risk of collectibility
or present other unfavorable features.

Certain Filings

Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities, to file with the SEC initial reports
of beneficial ownership and reports as to changes in beneficial ownership. Such
persons are required to provide the Company with copies of all Section 16(a)
forms they file. Based solely on the review of the copies of such reports
furnished to the Company and representations that no other reports were
required, the Company notes that during 1998, directors and executive officers
filed untimely reports on transactions as follows: Thomas C. Burns, one report
regarding one transaction.

INDEPENDENT PUBLIC ACCOUNTANTS

The accounting firm of Daniel Kenia, P.C. acted as the Company's
independent accountant for the fiscal year ended December 31, 1998. A
representative of Daniel Kenia, P.C. is expected to be present at the Annual
Meeting and to have the opportunity to make a statement, if he desires to do so,
and is expected to be available to respond to appropriate questions.

SHAREHOLDER PROPOSALS

Shareholder proposals regarding the 2000 Annual Meeting must be submitted
to the Company by December 1, 1999.

ANNUAL REPORT

This Proxy Statement is accompanied by the Annual Report to Shareholders of
the Company for the year ended December 31, 1998.

-9-

<PAGE>

EACH PERSON SOLICITED HEREUNDER CAN OBTAIN A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 REQUIRED TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHOUT CHARGE, EXCEPT FOR
EXHIBITS TO THE REPORT, BY SENDING A WRITTEN REQUEST THEREFOR TO:

Sally A. Steele, Secretary
Grange National Banc Corp.
Main and Bee Streets
P.O. Box 56
Laceyville, Pennsylvania 18623

By Order of the Board of Directors

Sally A. Steele, Secretary

-10-

THIS AGREEMENT, made as of March 25, 1998 by and between Grange National
Banc Corp. ("Banc Corp") and Grange National Bank ("Bank") (hereinafter
collectively referred to as the "Company"), and Thomas A. McCullough
("Executive").

BACKGROUND

Executive is currently serving, and is willing to continue to serve, as
President and Chief Executive Officer of both Banc Corp and Bank, each of which
desires to retain Executive in such position on the terms and conditions herein
set forth.

NOW THEREFORE, in consideration of the mutual covenants herein contained
and intending to be legally bound hereby, the parties hereto agree as follows:

1. Employment. Company agrees to employ Executive and Executive agrees to
serve as President and Chief Executive Officer of Banc Corp and Bank during the
Term of Employment as defined in Section 2 hereof. During the Term of
Employment, Executive shall devote his full business time and attention and his
best efforts to the affairs of the Company, and shall perform such duties
consistent with his position as shall be assigned by the Board of Directors of
the Company; provided, however, that Executive may engage in other activities,
such as activities involving personal investments, activities involving
charitable, educational, religious and similar types of organizations, speaking
engagements, membership on the boards of directors of other organizations not
competing with the Company and similar activities to the extent that such
activities do not inhibit, compete or conflict in any material way with the
performance of Executive's duties under this Agreement or the business of the
Company.

2. Term of Employment. The initial term of employment hereunder shall be a
period of three years commencing on March 25, 1998 and ending on March 25, 2001.
The term of employment under this Agreement shall be extended automatically for
one additional year on each anniversary of the date of the commencement of the
initial term of employment unless either Company or Executive gives contrary
written notice to the other not less than 180 days before any such anniversary
date. References in this Agreement to "Term of Employment" shall refer to the
initial term of employment and any extensions to the initial term of employment.

3. Compensation, Benefits and Business Expenses. For all services rendered
by Executive to Company in any capacity during the Term of Employment,
including, without limitation, services as an executive officer, director, or
member of any committee of the Company, or any subsidiary, affiliate or division
thereof, Executive shall be compensated as follows:

<PAGE>

(a) Base Salary. Company shall pay to Executive a base annual salary as
determined by its Board of Directors in its sole discretion, payable in
substantially equal periodic installments during the calendar year in accordance
with the Company's usual payroll practice. The Board of Directors of the Company
shall review annually and, in light of such review, may in its sole discretion
increase such base annual salary taking into account Executive's
responsibilities, increase in the cost of living, increases in salaries of
executives of other similar corporations, performance of the Executive and the
Company, and other pertinent factors. Notwithstanding anything contained herein
to the contrary, Executive's base annual salary will in no event be less than
ninety thousand dollars ($90,000).

(b) Bonus. The Company, in the sole discretion of its Board of Directors,
may award Executive annual bonuses based on his performance taking into account
the factors described in Section 3(a) above. The bonus, if any, in respect of
any calendar year, shall be paid on or before March 15 of the succeeding
calendar year.

(c) Stock Options. Executive shall be eligible to receive grants under the
Company's stock option plans at the sole discretion of the Company's Board of
Directors.

(d) Director's Fees. Executive shall be paid fees for service as a director
of Banc Corp and Bank in the same amounts and manner as are other directors of
Banc Corp and Bank who are not employees.

(e) Benefit Plans. Executive shall be entitled to participate in all
employee benefit plans of the Company, as presently in effect or as they may be
modified or supplemented from time to time, including, without limitation, plans
providing retirement benefits, medical and dental insurance, life insurance,
disability insurance, and accidental death or dismemberment insurance.

(f) Executive Supplemental Income Agreement. Executive shall be entitled to
the benefits of the Executive Supplemental Income Agreement between the Company
and Executive dated January 1, 1996, which agreement remains in full force and
effect.

(g) Split Dollar Insurance Agreement. Executive shall be entitled to the
benefits of the Split Dollar Insurance Agreement between the Company and
Executive dated March 13, 1991 with respect to Policy No. 3478406 issued by the
Guardian Life Insurance Company, which agreement remains in full force and
effect.

(h) Vacations and Sick Leave. Executive shall be entitled to paid annual
vacation periods not to exceed four weeks in any calendar year and to reasonable
sick leave in accordance with the Company's policies.

<PAGE>

(i) Automobile. The Company shall provide to Executive a standard-sized
automobile without cost to Executive and shall pay or reimburse all normal
expenses, insurance, maintenance, repairs and other operating charges and
expenses for such automobile.

(j) Business Expense Reimbursement. Company shall pay or reimburse
Executive for all reasonable travel and other expenses incurred by Executive in
connection with the performance of his duties under this Agreement.

4. Termination of Employment Other Than in Connection with a Change in
Control.

(a) Definitions. For purposes of this Agreement, the following terms have
the indicated meanings:

(i) The term "Cause" means (A) Executive's conviction of or plea of
guilty or nolo contendere to a felony or first degree misdemeanor; (B) the
receipt of a final written directive or order of any governmental
regulatory agency or entity requiring the removal of Executive as chief
Executive Officer; (C) Executive's failure to comply with any provision of
this Agreement; or (D) Executive engaging in conduct involving personal
dishonesty, breach of fiduciary duty for personal profit, willful violation
of any law or regulation, willful failure to comply with the lawful
policies of the Company's Board of Directors or persistent negligence,
incompetence or misconduct, which conduct in the reasonable judgment of the
Company's Board of Directors has caused or will cause substantial damage to
the Company's financial condition.

(ii) The term "Constructive Discharge" means the failure of the
Company or its successors without the prior consent of Executive to fulfill
the obligations under this Agreement in any material respect, including any
material change by the Company in the functions, duties or responsibilities
of the Executive's position with the Company which would (without regard to
a change in title) reduce the ranking, responsibility, importance or
scope of such position.

(iii) The term "Permanent Disability" means the inability of the
Executive to work for a period of six full calendar months during any eight
consecutive calendar months due to illness or injury of a physical or
mental nature, supported by the completion by Executive's attending
physician of a medical certification form outlining the disability and
treatment.

(iv) The term "Without Cause" means a reason for termination of
Executive's employment by the Company other than Permanent Disability,
retirement, expiration of the Term of Employment, or Cause.

3
<PAGE>

(b) Termination for Permanent Disability or Without Cause or Constructive
Discharge. In the event that Executive's employment hereunder is terminated by
the Company or Executive due to Permanent Disability, by the Company Without
Cause or by Executive by reason of Constructive Discharge, the Company shall, as
severance pay, continue, subject to the provisions of Sections 6 and 7 below, to
pay Executive's base salary as in effect at the time of such termination until
the expiration of the Term of Employment ("Severance Period"); provided, that in
the case of Permanent Disability, such payments shall be offset by any amounts
otherwise paid to Executive under the Company's disability program generally
available to other employees. In addition, earned but unpaid base salary as of
the date of termination of employment shall be payable in full. Group medical
and dental, life, disability (if applicable), and other insurance shall be
continued at the Company's expense through the end of the Severance Period.

(c) Termination for Cause or Death or Voluntary Termination by Executive.
In the event that the Executive's employment hereunder is terminated by the
Company for Cause or by Executive's death or if Executive voluntarily terminates
his employment with the Company for reasons other than a Constructive Discharge
or Permanent Disability, any earned but unpaid base salary as of the date of
termination of employment shall be payable in full. However, no other payments
shall be made, or benefits provided, by the Company under this Agreement except
for stock options to the extent exercisable under the plans, benefits provided
under the Split Dollar Insurance Agreement dated March 13, 1991, and the
Executive Supplemental Income Agreement dated January 1, 1996, and any other
benefits which the Executive is entitled to receive under the terms of employee
benefit programs maintained by the Company for its employees. Executive shall
give the Company three (3) months' written notice prior to any voluntary
termination by him for reasons other than Constructive Discharge, Permanent
Disability, or a Change in Control.

5. Termination of Employment in Connection with a Change in Control.

(a) Definitions. For purposes of this Agreement, the following terms shall
have the indicated meanings:

(i) The term "Change in Control" means:

(A) a change in control of Banc Corp which would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 ("Exchange
Act"), provided that, without limitation, such a change in control
shall be deemed to have occurred if any "persons" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act in effect on the
date hereof), other than Banc Corp or any "person" who on the date
hereof is a director of officer of Banc Corp, is or becomes the
"beneficial owner" (as

<PAGE>

defined in Rule 13(d)-3 under the Exchange Act), directly or
indirectly, of securities of Banc Corp representing 25% or more of the
combined voting power of Banc Corp's then outstanding securities;

(B) (1) any consolidation, merger or other similiar type of
transaction involving Banc Corp in which all of the holders of voting
stock of the Banc Corp immediately before the consolidation, merger or
similar transaction will not own 50% or more of the voting shares of
the continuing or surviving corporation immediately after such
consolidation, merger or similar transaction, or (2) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of Banc Corp;
or

(C) if during any period of two consecutive years during the term
of this Agreement, individuals who at the beginning of such period
constitute the Board of Directors of Banc Corp cease for any reason to
constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has
been approved in advance by directors representing at least two-thirds
of the directors then in office who were directors at the beginning of
the period.

(ii) The term "Termination upon a Change in Control" means a
termination of employment of Executive upon or within 12 months after a
Change in Control, or prior to a Change in Control, following the date of a
public announcement by the Company ("Announcement Date") of a prospective
transaction which, if consummated, would be a Change in Control, either:

(A) initiated by the Company for any reason other than (1)
Executive's death or (2) for Cause as defined herein; or

(B) initiated by Executive (1) due to Constructive Discharge
during the period beginning on the Announcement Date and ending 12
months following the Change in Control, or (2) for any reason during
the 12 months following the Change in Control.

(iii) The term "Separation Period" means the three-year period
beginning on the date of Executive's Termination upon a Change in Control.

(b) Payments for Termination upon a Change in Control. Within 30 days of
Executive's Termination upon a Change in Control, Company shall pay to Executive
in a single payment in cash and/or provide to Executive (as applicable), the
following:

5
<PAGE>

(i) Executive's earned but unpaid base salary as of the date of
termination and all benefits, if any, due under the Company's benefit and
compensation plans;

(ii) three times the average aggregate annual salary, bonus and
director's fees paid to Executive by the Company and includable in
Executive's gross income for federal income tax purposes during the three
calendar years preceding the taxable year in which the date of termination
occurs; and

(iii) continued medical and dental, life, disability and other
insurance during the Separation Period with coverage equivalent to coverage
to which Executive had been entitled prior to termination.

Notwithstanding the above provisions of this Section 5(b), if the lump sum
severance payment under this Section 5(b), either along or together with other
payments which Executive has the right to receive from the Company, would
constitute a "parachute payment" (as defined in Section 280G of the Internal
Revenue Code of 1986, as amended ["Code"]), such lump sum severance payment
shall be reduced to the largest amount as will result in no portion of the lump
sum severance payment under this Section 5(b) being subject to the excise tax
imposed by Section 49999 of the Code. The determination of any reduction in the
lump sum severance payment under this Section 5(b) pursuant to the foregoing
provision shall be made by independent counsel to the Company in consultation
with the independent certified public accountants of the Company.

6. Agreement Not to Compete. Without the consent in writing of the Board
of Directors of the Company, Executive shall not, during the Term of Employment
(which includes any Severance Period as defined in Section 4(b) hereof) engage
directly or indirectly in any banking business competing with the Company, which
business has offices within 30 miles of any banking office of the Company;
provided, however, that Executive shall not hereby be precluded or prohibited
from owning passive investments, including securities of other banking
institutions, so long as such ownership does not require him to devote any time
to the management or control of the business or activities in which he has
invested. The provisions of this Section 6 shall be inapplicable if Executive's
employment has been terminated by reason of a Change in Control.

7. Non-Disclosure of Confidential Information. During the Term of
Employment, or following Executive's termination of employment for any reason
whatsoever, Executive shall not disclose, use, transfer or sell, except in the
course of employment with the Company, any confidential information or
proprietary data of the Company so long as such information or proprietary data
remains confidential and has not been disclosed or is otherwise in the public
domain, except as required by law or pursuant to legal process.

<PAGE>

8. Withholding Taxes. The Company may directly or indirectly withhold from
any payment made hereunder all Federal, state, municipal or other taxes as shall
be required pursuant to any law or governmental regulation or ruling.

9. No Mitigation. Executive shall not be required to mitigate the amount of
any payment or benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by Executive from
other employment or otherwise.

10. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company form consolidating or merging into or with, or
transferring all or substantially all of its assets to another corporation which
assumes this Agreement and all obligations and undertakings of the Company
hereunder.

11. Prior Agreements. The Split Dollar Insurance Agreement between the
Company and the Executive dated March 13, 1991 and the Executive Supplement
Income Agreement between the Company and Executive dated January 1, 1996 remain
in full force and effect. The personal Service Contract between the Company and
Executive dated July 16, 1987 and the Deferred Compensation Agreement between
the Company and Executive dated January 1, 1996 are hereby terminated. Except as
otherwise provided herein, this Agreement constitutes the entire understanding
between the Company and Executive relating to the employment of Executive by the
Company and supersedes and cancels all prior written or oral agreements or
understandings with respect to the subject matter of this Agreement.

12. Miscellaneous.

(a) All notices, request, demands and other communications required or
permitted hereunder shall be given in writing and shall be deemed to have been
duly given if delivered or mailed, postage prepaid, by same day or other night
mail as follows:

To Company:

Chairman of the Board
Grange National Banc Corp.
Main and Bee Streets
Laceville, Pennsylvania 18623

To Executive:

Thomas A. McCullough
RR #1, Box 1595
Laceville, Pennsylvania 18623

To our Shareholders,

I am very pleased to report that 1998 was another truly outstanding year for our
bank. We achieved record asset growth with a $25,537,000 increase in assets or
20.5% over the previous year. Deposit and Loan growth were equally impressive
with respective increases of 19.4% and 17.5%. Our net profit also increased from
$1,607,801 in 1997 to $1,860,331 in 1998 or 15.7% over the previous year. This
resulted in a net increase per basic share from $2.17 to $2.50 compared to 1997.
We are particularly pleased with our strong increase in profits since this was
achieved despite added expenses as a result of hiring additional management
personnel and the opening of our newest branch office at the Pine Mall in
Wilkes-Barre.

We believe that these outstanding results had a direct impact on the price of
our stock which increased significantly during the year from $28.00 to $47.50
after adjusting for a 2 for 1 stock split on July 1, 1998. As we begin 1999 we
are hopeful that we will be able to maintain our growth rate, which should
continue to have a positive effect on earnings. We acknowledge however, that the
bank must strive to develop and introduce new income producing products in order
to offset the negative effects of shrinking net interest margins as a result of
strong competition and loan refinancing as customers take advantage of lower
interest rates now available.

We are continuing to make slow but steady progress with our Laceyville
Redevelopment project. During 1998 we fully renovated the former R. B. Learn
Insurance Agency building. This office space was then rented to a chiropractor
and his wife who appear to have established a very successful practice. This
enterprise, along with the family restaurant next door, are having a positive
impact on the Laceyville Business Community. We will continue with our efforts
to acquire a tenant for a portion of our remaining space and we are still
considering the possibility of transferring our insurance agency to this
location when it is financially practical to do so. During 1998 we also rented
the previously vacant building next to our Bowman's Creek branch office. This
has resulted in additional revenue as well as some new accounts for our bank.

We continue to believe our future prospects are excellent. We have a number of
newer branch offices which should continue to grow and produce profits for our
bank. As these branches reach maturity our net profit should increase as the
volume of new business improves our overall efficiency ratio. We also believe
that the merger and consolidation activity which has occurred at larger
institutions will continue to create new relationship opportunities which we
intend to develop whenever possible.

The Board of Directors, Management and Employees would like to express our
sincere gratitude to the shareholders for your solid support and confidence.
Please be assured that we will continue to focus on further improvement in
shareholder value as well as providing the best possible service to our
customers. It is a pleasure to serve as CEO of your bank.

Best regards
Thomas A. McCullough,
President and Chief Executive Officer

<PAGE>

Grange National Banc Corp. and Subsidiary

Selected Financial Data

- --------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
SUMMARY OF OPERATIONS:
Gross interest income ............ $ 10,116 $ 8,798 $ 7,655 $ 6,599 $ 5,296
Gross interest expense ........... 4,452 3,788 3,245 2,858 2,093
--------------------------------------------------------------
Net interest income .............. 5,664 5,010 4,410 3,741 3,203
Loan loss provision .............. 270 190 125 115 87
--------------------------------------------------------------
Net interest income after
loan loss provision ............. $ 5,394 $ 4,820 $ 4,285 $ 3,626 $ 3,116
==============================================================
Income before income taxes ....... $ 2,570 $ 2,292 $ 2,158 $ 1,697 $ 1,531
Provision for income taxes ....... 710 684 660 518 485
--------------------------------------------------------------
Net income ....................... $ 1,860 $ 1,608 $ 1,498 $ 1,179 $ 1,046
==============================================================
PER SHARE DATA:
Net income basic ................. $ 2.50 $ 2.17 $ 2.02 $ 1.59 $ 1.52
Net income diluted ............... $ 2.25 $ 2.04 $ 1.99 $ 1.62 $ 1.55
Cash dividends ................... -- -- -- $ 0.10 $ 0.21
Stock dividends .................. $ 0.71 $ 0.44 $ 0.37 $ 0.07 --
AVERAGE SHARES OUTSTANDING ........ 744 742 740 740 687
FINANCIAL CONDITION AT YEAR END:
Total assets ..................... $149,953 $124,417 $104,199 $91,622 $76,305
Total loans ...................... 90,499 76,995 62,033 52,538 46,733
Allowance for loan losses ........ 940 767 623 532 479
Total deposits ................... 129,891 108,789 91,055 79,866 67,014
Stockholders' equity ............. 14,767 12,638 10,940 9,522 8,243
RATIOS:
Based on Average Balances:
Return on assets ................. 1.37% 1.39% 1.51% 1.40% 1.41%
Return on equity ................. 13.68 13.80 14.73 13.32 15.08
Equity to assets ................. 10.04 10.15 10.30 10.51 9.36
Primary capital to assets ........ 10.71 10.67 10.63 11.09 9.96
Internal capital generation rate 13.47 13.50 14.56 12.43 13.05
At Year End:
Equity to assets ................. 9.84 10.16 10.50 10.39 10.80
Primary capital to assets ........ 10.47 10.77 11.10 10.97 11.43
Cash dividend payout ratio ....... 1.58% 1.43% 1.20% 6.69% 13.43%
BOOK VALUE/SHARE .................. $ 19.65 $ 17.40 $ 15.40 $ 13.22 $ 11.93
</TABLE>

Note: share and per share amounts have been restated to give effect to stock
dividends and stock splits.

-2-

<PAGE>

Grange National Banc Corp. and Subsidiary

Grange National Banc Corp. (Company) is a Pennsylvania bank holding
company, headquartered in Laceyville, Pennsylvania, with Grange National Bank
(Bank) as its only subsidiary. Established in 1907, the Bank provides friendly
and affordable banking, insurance and trust services to communities in Wyoming,
Susquehanna, Bradford and Luzerne counties.

Grange National Bank's deposit services include checking, savings and money
market accounts, certificates of deposit, Individual Retirement Accounts and MAC
automated teller machine cards. Loan services include personal, business and
municipal loans, residential, commercial and municipal mortgages, Small Business
Administration loans, personal and commercial lines of credit and letters of
credit. Insurance is offered through Grange National Insurance Agency, a
subsidiary of the bank. Offerings include life and disability insurance, as well
as annuities. Grange's other services include discount brokerage, safe deposit
facilities and payroll processing.

The Trust department offers personal and investment trusts, trusts under
will, estate administration services, living trusts and Individual Retirement
Accounts.

Highlights

The Company reported record net income of $1,860,000 in 1998 compared to
$1,608,000 in 1997, an increase of 15.7% for the period. The returns on assets
and equity were 1.37% and 13.68%, respectively, in 1998 compared to 1.39% and
13.80% in 1997. Lower earnings ratios for 1998 result from adding additional
loan officers and the Pine Mall office in 1998. The addition of loan officers
will help generate additional loan income, and the addition of the Pine Mall
will generate additional deposits and loans. The Company's high equity to assets
ratio of 9.84% at 1998 year end continues to have an adverse effect on the
return on equity ratio, however the bank's continued growth has reduced the
ratio each year. A high equity to assets ratio while depressing the return on
equity ratio, allows the company to expand the Bank, as it has recently done
with the opening of offices in Little Meadows, Towanda, the Back Mountain and
the Pine Mall in Wilkes-Barre. The deposits these offices are attracting
continues to reduce the equity to assets ratio to a more typical level of around
8.50%, and provide the resources for increased lending and investment by the
Bank. These loans and investments in turn will enable the Bank to generate
higher future profits.

Per share net income increased to $2.50 in 1998 from $2.17 in 1997, for an
increase of 15%. Dividends to stockholders increased from $0.44 (stock dividend)
in 1997, to $0.71 (stock dividend) in 1998, an increase of 57%. The stock
dividends declared by the Company increases the amount of stock in circulation,
while keeping capital in the Bank for future expansion needs. From the
stockholder's standpoint, they do not pay tax on the stock they receive, and
have the option of selling the stock if they do want the cash. In addition, the
Company declared a 2 for 1 stock split for stockholders of record on July 30,
1999, further increasing the shares in circulation.

-3-

<PAGE>

At year end 1998, Grange had total assets of $149,953,000, total deposits
of $129,891,000, and total shareholders' equity of $14,767,000, compared to
$124,417,000 in total assets, $108,789,000 in total deposits, and $12,638,000 in
total shareholders' equity at year end 1997, increases of 21%, 19% and 17%,
respectively. At year end the Company had approximately 830 shareholders and
eighty-five full and part-time employees. During 1998 Grange paid over
$1,835,000 in salaries and benefits to its employees and paid over $850,000 in
various taxes to the federal, state and local governments.

1998 was a year of bolstering the bank's operational infrastructure. During
1998 we tested most of our "mission critical" systems for Year 2000 problems,
upgraded our mainframe computer, upgraded our Trust Department computer and
software, hired additional loan officers and a Trust Administrator as well as
introducing a new product for business customers. Year 2000 testing has been
successful in that we have not encountered any Year 2000 failures during the
testing. Of course the real test comes on December 31. Computer upgrades for the
Bank and Trust Department were necessary to accommodate the addition of the Pine
Mall office, as well as future growth. Additional loan officers were hired due
both to people retiring and increased loan volume. A Trust Administrator was
hired to handle the increasing needs of the Trust Department and to help expand
the Department. Lastly, the bank introduced a new product for business
customers. "Business Manager" helps business by collecting their accounts
receivable for them. This provides the business with the cash flow sooner and
helps them remain profitable.

The Company's redevelopment project on Main Street, Laceyville has obtained
an additional tenant, a chiropractor, Dr. Eric Herman. The Bank's building in
Bowman's Creek has also obtained a tenant, Northeast Data, a communications
company.

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

The consolidated financial statements and selected financial data presented
elsewhere in this report should be read to obtain an understanding of the
following discussion and analysis.

FINANCIAL CONDITION

The Company's primary source of profits is its activities as a financial
intermediary, using funds from customers' deposits, other borrowing sources and
shareholders' equity, to invest in loans, bonds and interest bearing deposits in
other banks. The difference between the cost of acquiring funds and the return
on investments in loans, securities and interest bearing deposits is the
Company's net interest yield. During the last three years ended December 31, net
interest yields have ranged from 4.72% in 1998 to 4.79% in 1997 and 4.87% in
1996.

-4-

<PAGE>

Interest rate risk management requires the Bank to maintain an appropriate
balance between interest sensitive assets and interest sensitive liabilities,
liquidity to meet loan demand , depositor's withdrawals, and operating expenses,
and to provide an adequate capital base for expansion and unforeseen losses. A
discussion of each of the factors relating to the financial condition of the
Company follows.

LIQUIDITY AND RATE SENSITIVITY

The objective of liquidity management is to maintain adequate cash
resources to meet the short and long term operating requirements of the Company.
These requirements include funding for loans to customers, funding to take
advantage of prudent investment strategies, and funding for bank operations
expansion. Management continued its strategy of relying on access to the Bank's
line of credit at the Federal Home Loan Bank of Pittsburgh to fund daily cash
needs, enabling the Bank to be more fully invested in higher yielding
investments. Maturing investments and time deposits continue to provide funding
for the longer term, while the line of credit funds short term fluctuations. The
Company's "borrowing capacity" at the Federal Home Loan Bank is $50,979,000,
which had a $3,343,000 balance at December 31, 1998. The Bank's deposit balance
at FHLB was approximately $5,013,000. Investments maturing or expected to be
called in 1999 include $1,070,000 in bonds classified as held to maturity, and
$1,256,000 in bonds available for sale. In addition, the bank holds an
additional $28,316,000 in bonds, maturing in more than one year, classified as
available for sale, which can also be used to meet liquidity needs. Additional
liquidity is provided by a stable growth of core deposits. Management expects to
need more cash and liquidity than normal at the end of 1999 to provide for
possible customer demand due to Year 2000 concerns, and considers its sources of
liquidity adequate to meet these needs.

The Company's earnings are dependent on the maintenance of an adequate net
interest yield or spread between rates earned on assets and the cost of interest
bearing liabilities. To maintain an adequate spread during both rising and
declining rate environments, interest rate sensitivity must be managed so that
the Company is positioned to respond within a reasonable period of time, to
changing interest rates and, or changing balances in interest earning assets as
compared to interest bearing liabilities. Management of the investment portfolio
requires decisions between investing in short-term investments which enhance
rate sensitivity or long-term investments which inhibit rate sensitivity but
provide higher yields. Management will invest in long term investments (i.e. 10
- - 20 year maturities) when their yields are high enough to compensate for their
greater interest rate risk. Additionally, management manages the risk by the use
of a "trigger" strategy to sell certain long term bonds when they reach specific
price levels in order to minimize or preclude losses. The funds will then be
reinvested in securities at the new interest rates.

Management of the loan portfolio has more variables than the investment
portfolio. Competition from other lenders as well as consumer's desire for
particular loan products greatly influence management's decisions regarding the
composition of the loan portfolio. The Bank is able to create loan products to
enhance its ability to react to interest rate changes, but consumers

-5-

<PAGE>

will require features which will make them attractive before they will utilize
the loan products. While convenience and service are considered by the consumer,
pricing is also considered. Consumers will generally require more favorable
pricing when interest rate risk is shifted from the Bank to them. Certain
products such as fixed rate mortgages are expected by the consumer. These
products carry considerable interest rate risk because of their long term and
need to be priced accordingly. (In pricing these products, such as long term
mortgages, consideration of interest rate risk is in addition to other factors
such as collateral risk, credit risk, and repayment risks.) Competition from
other lenders greatly impacts the Bank's choices regarding pricing and terms for
loans.

A low-risk rate sensitivity position is achieved by having a similar amount
of assets repricing, or maturing, at or about the same time as the Bank's
liabilities re-price or mature. Management measures its assets and liability
positions by use of a rate sensitivity report which categorizes the Bank's
assets and liabilities on the basis of re-pricing opportunities and maturity
dates. Rate sensitive balances are defined as those balances that mature or can
be repriced within one year. However, management recognizes certain trends and
historical experiences with respect to particular or similar products. For
example, the Bank has a number of deposit accounts, including savings, NOW
accounts and money market accounts which may be withdrawn at any time.
Management knows that while all customers in these account categories could
withdraw their funds on any given day, they will not do so, even with interest
rate changes. These accounts are core deposits and not subject to the same
pressures from interest rates as time deposits. Demand and savings deposits tend
to fluctuate based primarily on the cash flow and transaction needs of the
customer, as well as other non-interest rate factors such as account fees and
customer service. Management makes the assumption that these deposits will not
fluctuate more than 10% within three months, not more than an additional 15%
during the following three to twelve month period and not more than an
additional 30% during the following one to five years. The following table
illustrates the Bank's interest rate sensitivity positions as of December 31,
1998. The time periods used refer to the earliest possible repricing period
(with the exception of "Other Deposits"), not maturity. Management believes the
Bank has an adequately balanced position in all categories.

-6-

<PAGE>

Repricing

Less than Three to One to After
three twelve five five
(In thousands) months months years year
---------------------------------------------
Assets:
Interest bearing deposits .... $ 5,013 $ 298 $ 299 --
Investment securities:
Available for sale ........... 500 764 11,749 $16,532
Held to maturity ............. 783 648 12,540 2,483
Loans ........................ 10,277 8,155 24,164 48,331
---------------------------------------------
Total ......................... 16,573 9,865 48,752 67,346
---------------------------------------------
Liabilities:
Time deposits ................ 14,526 27,031 22,577 --
Other deposits ............... 4,525 6,787 13,524 20,361
Borrowed funds ............... 1,128 -- 3,357 --
---------------------------------------------
Total ......................... 20,179 33,818 39,508 20,361
---------------------------------------------
Gap:
By period .................... ($3,606) ($23,953) $ 9,244 $46,985
=============================================
By cumulative ................ ($3,606) ($27,559) ($18,315) $28,670
=============================================
Cumulative Gap as
Percentage of total assets.... -2.40% -18.38% -12.21% 19.11%

When taking advantage of repricing gaps to enhance portfolio yield, management
must have a strategy to minimize losses if interest rates become volatile and
rise too quickly. Although management expects rates to remain fairly stable with
perhaps a slight increase near the end of 1999, it has implemented a strategy to
sell longer term bonds when they reach specific price levels. This will provide
the bank with higher yields and control interest rate risk in the bond
portfolio. Management continues to take advantage of temporary volatility as
buying opportunities enhance the investment portfolio's yield.

The Bank continues to offer adjustable rate loans and mortgages as part of
its product mix in order to reduce imbalances in its longer term GAP positions.
The Bank now purchases bonds with maturities ranging from five to twenty years.
These maturities, along with the use of the Bank's credit line at the Federal
Home Loan Bank and the ability to sell bonds in the "available for sale" portion
of the portfolio, provides adequate cash flow to respond to changing interest
rates and liquidity needs. Management continuously monitors the Bank's gap
position in order to adjust loan pricing or deposit pricing when conditions
change.

-7-

<PAGE>

LOAN PORTFOLIO

Total loans outstanding at December 31, 1998 increased by $13,504,000 or
18% to $90,499,000 from the December 31, 1997 total of $76,995,000. This
compares with a 24% increase in 1997 and a 18% increase in 1996. The average
loan balance for 1998 was $82,532,000 compared to $69,392,000 for 1997. Primary
growth occurred in one-to-four family mortgages and commercial mortgages.
One-to-four family mortgages increased by $7,492,000 or 18% to $48,731,000 at
year end 1998. Commercial mortgages increased by $4,478,000 or 47% to
$14,076,000. Most of the loan activity has come from the Towanda and Back
Mountain offices. These offices are generally competing with very large banks
and is an indication of the consumer and businessman's need for the service of a
community bank. The average interest rate on total loans decreased slightly from
9.39% for 1997 to 9.24% for 1998.

Major classifications of loans at December 31, 1998 and 1997 are as
follows:

(In thousands) 1998 1997
------- -------
Real estate mortgages:
Agricultural ....................................... $ 1,323 $ 1,441
Residential, 1 - 4 family .......................... 48,731 41,239
Residential, multi-family .......................... 747 687
Nonfarm, nonresidential properties ................. 14,076 9,598
-----------------------
Total real estate mortgages ................... 64,877 52,965
Agricultural loans ................................... 268 285
Commercial loans ..................................... 13,653 12,702
Municipal loans ...................................... 2,043 1.789
Consumer loans ....................................... 10,086 9,979
-----------------------
Total .......................................... 90,927 77,720
Unearned income ................................ 428 725
-----------------------
Total .......................................... $90,499 $76,995
=======================

-8-

<PAGE>

Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1998 are as follows:

Within One - After
(In thousands) One Year Five Years Five Years Total
-------------------------------------------
Real estate mortgages ............ $ 1,546 $11,103 $52,228 $64,877
Agricultural loans ............... 126 120 22 268
Commercial loans ................. 3,755 3,463 6,435 13,653
Municipal loans .................. 1,342 402 299 2,043
Consumer loans ................... 674 6,581 2,831 10,086
-------------------------------------------
Total................... $ 7,443 $21,669 $61,815 $90,927
===========================================
Loans at fixed interest rates .... $ 3,317 $18,317 $48,512 $70,146
Loans at variable interest rates.. 4,126 3,352 13,303 20,781
-------------------------------------------
Total................... $ 7,443 $21,669 $61,815 $90,927
===========================================

Non-accrual loans at December 31, 1998 were $205,000 and $136,000 in 1997.
Accrual of interest is discontinued on a loan when management believes after
considering economic and business conditions and results collection efforts,
that the borrower's financial condition is such that full recovery of the loan
balance is doubtful. Interest that would have been accrued if the loans were not
classified as non-accrual was approximately $19,000 in 1998 and $13,000 in 1997.

ALLOWANCE FOR LOAN LOSSES

The provision for loan losses and related allowance for loan losses are
based upon management's continued evaluation of the current loan portfolio
considering factors including general economic conditions, adequacy of
collateral on past due loans, past and expected loan loss experience,
composition of loan portfolio, unusual risk concentrations, allowance as a
percentage of total loans and other pertinent factors. No portion of the reserve
is specifically allocated to any individual loan or loan classification. The
total allowance balance is available to absorb losses from all loans included in
the portfolio.

Net charge-offs during 1998 were $97,000 compared to $46,000 during 1997,
representing an increase of 111% for the period. Average loans increased from
$69,392,000 in 1997 to $82,532,000 for 1998. At December 31 the balance in the
allowance for loan losses increased from $767,000 in 1997 to $940,000 in 1998,
and the ratio of loan loss allowance to loans was 1.00% and 1.04% respectively.
Management is of the opinion that the quality of the loan portfolio remains
strong, but anticipates that losses over the next year may increase in

-9-

<PAGE>

proportion to the increase in the size of the loan portfolio, and a projected
loss of $100,000 in connection with two commercial loans. Provisions for loan
losses have increased in the last two years due to management's efforts to
maintain the reserve at a level adequate for the increasing size of the loan
portfolio and to cover other potential losses which have been identified by
management and the Board of Directors.

The following sets forth loans past due 90 days or more on which interest
has continued to be accrued, at December 31:

(In thousands) 1998 1997
---- ----
Real estate mortgages... $ 1 $311
Demand. ................ 9 0
Installment ............ 0 1
----

TOTAL .................. $ 10 $312
=================

This table summarizes the Company's loan loss experience for the years ended
December 31:

(In thousands) 1998 1997
---- ----
Balance at beginning of period ........ $ 767 $ 623
---------------------------
Charge-offs:
Commercial, consumer and agricultural 59 49
Real estate mortgages ............... 40 0
Installment ......................... 3 2
---------------------------

TOTAL ................................. 102 51
---------------------------
Recoveries:
Commercial, consumer and agricultural 1 3
Real estate mortgages ............... 0 0
Installment ......................... 4 2
---------------------------

TOTAL ................................. 5 5
---------------------------
Net charge-offs ....................... 97 46
---------------------------
Provision charged to operations ....... 270 190
---------------------------
Balance at end of period .............. $ 940 $ 767
===========================
Average loans outstanding ............. $82,532 $69,392
Loans outstanding, December 31 ........ $90,499 $76,995
Loan reserve ratios:
Net loan charge-offs - average loans 0.12% 0.07%
Reserve - loans, December 31 ........ 1.04% 1.00%

-10-

<PAGE>

INVESTMENT PORTFOLIO

The Company's investment portfolio increased by $8,498,000 or 22% during
the year ended December 31, 1998 to $46,706,000. The increase was due to deposit
growth. If not for the continued strong loan demand, investment growth would
have been greater. Available for sale securities increased by $17,323,000 or
132% to $30,225,000 and Held to maturity securities decreased by $8,756,000, or
35% to $16,454,000, from December 31, 1997 to December 31, 1998, as management
has designated primarily all new bond purchases as Available for Sale.

Management has started to purchase longer term bonds in its
available-for-sale portfolio in order to achieve higher returns. Should the
value of these bonds decline significantly due to rising interest rates,
management has a strategy in place to sell bonds in order to minimize any loss.
Credit quality remains a high priority when purchasing bonds, and management
continues to maintain a portfolio substantially free of "credit risk".

The Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" requires the Company to
classify its debt and equity securities into three categories: held to maturity,
available for sale, or trading. Available for sale are evaluated quarterly, and
their carrying values adjusted to reflect their market values, with the
resulting adjustment being reflected as an adjustment, net of tax, to the
Company's equity. The market value of investments available for sale as of
December 31, 1998, reflect an increase in the unrealized gain from December 31,
1997 of $176,000.

The carrying value of investment securities both available for sale, and
held to maturity at December 31, are summarized as follows:

(In thousands) 1998 1997
---- ----
Available for sale:
US Treasury securities ................... $ 5,886 $ 6,602
US government agencies and corporations... 15,553 3,709
State and municipal securities ........... 8,133 2,189
Other securities ......................... 680 502
-----------------
Total ................................. $30,252 $13,002
=================

Held to maturity:
US Treasury securities ...................
US government agencies and corporations... $10,729 $18,905
State and municipal securities ........... 2,984 4,181
Other securities ......................... 2,741 2,120
-----------------
Total ........................ $16,454 $25,206
=================

The following table sets forth the maturities of investment and debt
securities at December 31, 1998 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of such securities:

-11-

<PAGE>

Maturing Maturing Maturing Maturing
within one to five five to ten after ten
(In thousands) one year years years years
------------ -------- --------------------------------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury
securities .......... $ 1,256 6.04% $ 4,506 6.04% -- -- -- --
U.S. government
agencies and
corporations ........ -- -- 6,032 6.24% $ 5,918 6.50% $ 3,519 6.08%
State and municipal
securities .......... -- -- 1,044 6.55% 5,579 6.94% 1,342 7.39%
Other securities ...... -- -- -- -- -- -- $ 662 --
------- ------- ------- --------
Total ................. $ 1,256 6.04% $11,582 6.17% $11,497 6.75% $ 5,523 6.67
======= ======= ======= ========

Held to maturity:
U.S. government
agencies and
corporations ........ $ 500 6.00% $ 7,280 6.51% $ 2,484 6.94% $ 464 7.65%
State and municipal
securities .......... 570 6.16% 2,415 7.03% -- -- -- --
Other securities ...... -- -- 2,741 6.46% -- -- -- --
------- ------- ------- --------
Total ................. $ 1,070 6.09% $12,436 6.60% $ 2,484 6.94% $ 464 7.65%
======= ======= ======= ========
</TABLE>

DEPOSITS

Deposits at December 31, 1998 were $129,891,000, an increase of $21,102,000
or 19% from the December 31, 1997 balance of $108,789,000. Non-interest bearing
deposits increased $6,034,000 or 41%, to $20,710,000 and interest bearing
deposits increased $15,068,000 or 16% to $109,181,000. The percentage of
non-interest bearing deposits to average total deposits for 1998 increased to
15% from 14% for 1997. The percentage of average non-interest bearing deposits
to average total deposits is important to the Bank's profitability because it
decreases the Bank's overall interest expense.

Average time deposits increased by $8,489,000 during 1998 to $59,230,000
from $50,741,000 during 1997. Their proportion of total average deposits
increased to 50% form 49% for 1997. Average deposits in savings and money market
accounts increased by $2,804,000 from 1997 to 1998, and average deposits in NOW
and Super-NOW accounts increased by $1,768,000 during the same period.
Management anticipates continued strong growth in deposits from the office in
Towanda, the Back Mountain office at Trucksville and the bank's newest at the
Pine Mall in Wilkes-Barre.

The average balance of deposits and average rates paid on such deposits
during the years ended December 31 are set forth in the following table:

-12-

<PAGE>

<TABLE>
<CAPTION>
1998 1997

Average Average Average Average
(In thousands) Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Demand deposits:
Noninterest bearing ........... $ 17,505 -- $ 14,786 --
Interest bearing .............. 12,673 2.11% 10,905 2.17%
Savings and money market deposits 28,995 2.68% 26,191 2.74%
Time deposits ................... 59,230 5.57% 50,741 5.52%
-------- --------

TOTAL ........................... $118,403 $102,623
======== ========
</TABLE>

Maturities of certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1998 are as follows:

Certificates Other
of Time
(In thousands) Deposits Deposits Total
----------- --------- -----
<S> <C> <C> <C>
3 months or less.......................... $1,476 -- $ 1,476
3 to 6 months............................. 2,425 -- 2,425
6 to 12 months............................ 1,841 -- 1,841
Over 12 months............................ 4,087 -- 4,087
No set maturity, state deposit............ $200 200
-------------- --------------------------
TOTAL..................................... $9,829 $200 $10,029
============== ==========================
</TABLE>

CAPITAL

An adequate capital position is necessary to support continued growth and
earnings, to meet the needs of depositors and borrowers, and to sustain a
reasonable rate of return for stockholders. Stockholders' equity increased by
$2,129,000 or 17% from $12,638,000 at December 31, 1997 to $14,767,000 at
December 31, 1998. This was approximately the same increase as the $1,698,000 or
16% increase from December 1996 to December 1997. The average equity to assets
ratio was 10.04%, 10.15% and 10.30% for the years 1998, 1997 and 1996,
respectively.

The Board of Directors decision to declare stock dividends instead of cash
dividends has, along with strong profits, helped maintain a high equity to
assets ratio. Because of the strong demand for the Company's stock, the stock
dividend is popular with stockholders. The additional equity is necessary to
keep pace with the strong deposit growth the Bank has experienced, and expects
to continue as a result of the new offices opened over the past several years.
The Board of Directors hope the additional stock generated by the stock
dividends will help satisfy the demand for the Company's stock as well as make
some stock available for the

-13-

<PAGE>

401(k) Employee Stock Ownership Plan which the Company established in late 1995.

In 1989 the Federal Reserve Board issued risk-based capital guidelines,
which require banking organizations to maintain certain ratios of "qualifying
capital" to "risk-weighted assets". "Qualifying capital" is classified into two
tiers, referred to as Tier 1 and Tier 2 capital. Tier 1 capital consists of
common equity, qualifying perpetual preferred equity and minority interests in
the accounts of unconsolidated subsidiaries, less goodwill. Tier 2 capital
consists of perpetual preferred equity not qualifying for Tier 1 capital, the
allowance for loan losses, mandatory convertible debt and subordinated and other
qualifying securities. The amount of Tier 2 capital may not exceed the amount of
Tier 1 capital. In calculating "risk-weighted", certain risk percentages, as
specified by the Federal Reserve Board, are applied to particular categories of
both on and off-balance sheet assets. The guidelines require that banking
organizations maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4%, and require a minimum ratio of Tier 1 and Tier 2 capital to risk-weighted
assets of 8%.

The Federal Reserve Board has an additional capital standard, referred to
as the Tier 1 leverage ratio. The Tier 1 leverage ratio is defined as Tier 1
capital (as defined under the risk-based guidelines) divided by average total
assets (net of allowance for losses and goodwill). The minimum leverage ratio is
3% for banking organizations that do not anticipate significant growth and that
have well-diversified risk (including no undue interest rate risk), excellent
asset quality, high liquidity and good earnings. Other banking organizations are
expected to have ratios of at least 4% to 5%, depending upon their particular
circumstances, or risk profile of a given banking organization. The Federal
Reserve Board has not advised the Bank of any specific minimum Tier 1 leverage
ratio applicable to it.

The table below sets forth the Bank's Tier 1 and Tier 2 capital, risk
adjusted assets (including off-balance sheet items) the Bank's risk-based
capital ratios, and the Bank's Tier 1 leverage ratios. At December 31, 1998 and
1997, the Bank exceeded all regulatory capital requirements.

Risk-Based Capital
December 31, (in thousands, except ratios) 1998 1997
Tier I capital:
Shareholders' equity ................. $14,369 $12,414
------- -------

Tier II capital:
Loan loss reserve .................... 940 767
------- -------
Total Qualifying Capital ............... $15,309 $13,181
======= =======
Risk-adjusted assets (including
off-balance sheet items) ............. $95,881 $76,937
Tier I Capital Ratio (4.00% required)... 15.40% 16.14%
Total Capital Ratio (8.00% required).... 15.97% 17.13%
Tier I Leverage Ratio .................. 10.55% 10.71%

-14-

<PAGE>

RESULTS OF OPERATIONS

Net income for 1998 totaled $1,860,000 ($2.50 basic per share, based on
744,247 weighted average common shares) as compared to 1997's net income of
$1,608,000 ($2.17 per share based on 741,616 weighted average common shares),
and 1996's net income of $1,179,000 ($2.02 per share based on 740,398 weighted
average common shares).

Net interest income or the spread between total interest income and
interest expense directly impacts the results of operation. The net interest
yield for 1998 declined to 4.72% from 4.79% in 1997. While the average rate on
interest earning assets fell from 8.29% to 8.25%, the average rate on the total
sources to fund the earning assets increased from 3.50% to 3.53%. The Bank's
interest rate spread declined primarily due to lower rates on new loans and many
existing loans being refinanced by customers. Average rates on loans declined
from 9.39% in 1997 to 9.24% in 1998, while average rates on investments
increased from 6.38% in 1997 to 6.44% in 1998. Net interest income for 1998
increased by $767,000 (on a tax equivalent basis) or 15% as was the increase of
$635,000 or 15% for 1997 vs. 1996. Overall, volume had a positive impact of
$861,000 and rate had a negative impact of $94,000 on the change in interest
income.

Loans at year end increased by $13,504,000 or 18% for 1998 over 1997,
compared to an increase of $14,963,000 or 24% for 1997 over 1996, and deposits
at year end increased by $21,102,000 for 1998 over 1997, compared to $17,733,000
for 1997 over 1996. This was a 19% increase for each year. Investment
securities, at year end, increased $8,498,000 or 22% for 1998 over 1997 compared
to $4,205,000 or 12% for 1997 over 1996. Income on loans increased by $1,107,000
(on a tax equivalent basis) or 17% for 1998 compared to 1997, and interest on
investment securities increased $324,000 (on a tax equivalent basis) or 14%.
Management began purchasing bonds with maturities as long as twenty years in
1998 in order to improve yields. These longer bonds are designated as available
for sale, so the bank has the option of selling the bonds should their values
decline significantly due to interest rate changes.

The average rates on interest earning assets decreased slightly during
1998, while the average rates paid on interest bearing liabilities increased
slightly. The loan to deposit ratio at 1998 year end remained at 70% as it was
at 1997 year end. Loan growth is expected to continue, and the loan to deposit
ratio should continue to increase slightly, as loan demand is experienced at the
Tunkhannock, Edwardsville, Little Meadows, Towanda, Back Mountain offices, and
the new Pine Mall office in Wilkes-Barre.

Salaries and employee benefits increased by $209,000 or 13% in 1998 as
compared to 1997. This increase is due primarily to hiring of new employees and
annual salary increases. The bank hired an officer with extensive commercial
lending experience to oversee the Luzerne County offices, and a branch manager
with 35 years experience, for the Tunkhannock office. Staffing of the Pine Mall
office had only a minimal impact on 1998's expenses because the office opened
late in the year.

-15-

<PAGE>

Occupancy and furniture and equipment expense increased by $96,000 or 15%
in 1998 as compared to 1997. The increase in these expenses reflect an increase
in service agreements due to upgrading the mainframe computer, and an increase
in rent expense due to the Pine Mall office. The bank, during 1998, was able to
rent its additional building at Bowman's Creek and this should moderate any
increase in occupancy expenses for 1999.

The Deposit Insurance Funds Act of 1996 (DIFA) passed by Congress and
signed by the President, mandates banks to help pay the cost of the bonds issued
by the "Financing Corporation" (FICO), which were used to finance the savings
and loan bailout. The current annual cost to all Bank Insurance Fund (BIF)
members is 1.296 cents per $100 of deposits. Members of the Savings Association
Insurance Fund (SAIF) are required to pay 6.48 cents per $100 of deposits.
Although banks are being required to pay much less than savings associations, it
should be noted that the savings associations were the institutions that created
the losses. This assessment is expected to cost the Bank approximately $17,000
in 1999. The Federal Deposit Insurance Corporation (FDIC) premium on deposit
insurance remains at zero for 1999.

IMPACT OF INFLATION

The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets or inventories. Management
believes that the most significant impact on financial results is changes in
interest rates and the Company's ability to react to those changes. The
discussion under liquidity and rate sensitivity provides additional information
concerning the importance of maintaining a balanced position between interest
sensitive assets and interest sensitive liabilities, in order to protect against
wide interest rate fluctuations. Inflation also has an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio. An important effect of this has been the
reduction of the proportion of earnings paid out in the form of dividends.
Another significant effect of inflation is on other expenses which tend to rise
during periods of general inflation.

YEAR 2000 IMPACT

The bank has a Year 2000 policy addressing the "Year 2000" Issue concerning
computers and equipment using computer chips to recognize and process
information based on dates in the year 2000 and beyond. If the computer chips do
not recognize the dates in the Year 2000 accurately, certain problems may
result, particularly those concerning calculations based on dates. Inaccuracies
in interest accruals, payment and due dates or other unanticipated results such
as computer shut downs or crashes may occur if the computers or equipment with
computer chips can not properly recognize dates after December 31, 1999. In some
cases failure to

-16-

<PAGE>

properly recognize dates will not effect the operation of particular equipment.
The bank's policy requires testing of all "mission critical" systems to
determine if they will operate correctly in the year 2000. The Bank's policy
also requires it to test systems (hardware and software) used to interface with
other systems, as well to determine the Year 2000 readiness of systems of its
partners which provide mission critical services to the Bank.

The Bank's policy addresses five major components: (1) Awareness; (2)
Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation.
The Bank has completed the first three phases, has nearly completed the
Validation and Testing phase and is working on Implementation. The Bank
anticipates that all mission critical systems will complete testing by Spring of
1999. The Bank is in process of identifying those vendors and customers who
might be vulnerable to Year 2000 problems and possibly expose the Bank to a loss
or disruption of service.

The Bank is developing contingency plans in the event vendors of mission
critical systems fail to be Year 2000 ready in time, or unexpected problems
occur. At this time the Bank can not estimate the cost, if any, that might be
required to implement such contingency plans.

The Bank anticipates that its total Year 2000 related costs will not exceed
$20,000. This estimate is based on current information and includes costs for
review and testing by third parties. The estimate may change as the Bank
progresses with its Year 2000 program and obtains additional information with
and conducts further testing with third parties. At this time, no significant
problems have arisen concerning Year 2000 issues.

Bank regulators have intensively focused on Year 2000 exposures, issuing
guidance concerning the responsibilities of senior management and directors.
Year 2000 testing and certification is being addressed as a key safety and
soundness issue in conjunction with regulatory exams. In May 1997, the Federal
Financial Institutions Examinations Council ("FFIEC") issued an interagency
statement to the chief executive officer of all federally supervised financial
institutions regarding Year 2000 management awareness. The FFIEC has highly
priortized Year 2000 compliance in order to avoid major disruptions to the
operations of financial institutions and the country's financial systems when
the new century begins. The FFIEC statement provides guidance to financial
institutions, providers of data services, and all examining personnel of the
federal banking agencies regarding the Year 2000 Issue.

The Office of the Comptroller of the Currency, which is the bank's primary
regulator, has been conducting Year 2000 compliance examinations. The failure to
implement an adequate Year 2000 program can be identified as an unsafe and
unsound banking practice. The OCC has established an examination procedure which
contains three categories of ratings: "Satisfactory", "Needs Improvement", and
"Unsatisfactory". Banks that receive a Year 2000 rating of Unsatisfactory may be
subject to formal enforcement action, supervisory agreements, cease and desist
orders, civil money penalties, or the appointment of a conservator. In addition,
the OCC will be taking into account Year 2000 compliance programs when reviewing
applications and

-17-

<PAGE>

may deny an application based on Year 2000 related issues. Failure of the Bank
to adequately prepare for Year 2000 issues could negatively impact the Bank's
operations, including the impositions of restrictions on its operations by the
OCC.

Although the Bank has no reason to believe that it will suffer systems
disruptions due to the Year 2000 issue, and is confident that it will not, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect on the Bank's business, financial condition, results of operations, and
business prospects.

COMMUNITY REINVESTMENT ACTIVITIES

The Community Reinvestment Act of 1977 (CRA) was adopted to encourage all
financial institutions to help meet the credit needs of the communities they
serve. The Act requires that each institution perform an annual self assessment
of its record in meeting the needs of its entire community, including low and
moderate income families, consistent with safe and sound banking practices. It
also requires that financial institutions keep a record of their CRA related
performance and that this record be made available to the public. The management
of the Bank is proud of its Community Reinvestment activities and its
performance in meeting the credit needs of people of all income levels, race,
religions or national origins. Following its most recent examination of the
Bank's CRA practices, the Comptroller of the Currency awarded the Bank a
"Satisfactory" rating under the new Community Reinvestment Act examination
procedures. Under these new examination procedures, nearly all the Bank's
efforts to improve the communities in which it operates, no longer are
considered when the CRA exam is conducted. Only very specific activities
targeted only to low and low-to-moderate income households are considered CRA
activities. Activities that help a community as a whole do not qualify, except
under extremely limited circumstances.

In accordance with its plans to continue its efforts to develop products
which are affordable and accessible to all segments of its marketplace, the Bank
has worked with one of its correspondent banks, the Atlantic Central Banker's
Bank, to offer a mortgage product to customers, which only requires a 5% down
payment. This mortgage would require private mortgage insurance, have a low
interest rate, and be sold on the secondary mortgage market.

OTHER ACTIVITIES

The Company purchased the former "Bluhm's II" and R.B. Learn buildings on
Main Street in Laceyville, during 1996 and 1997. These buildings were purchased
in an effort to revitalize the downtown business community by renovating them
and making the space available for commercial purposes. The bank also may
consider utilizing a portion of this space in connection with its insurance
agency. During 1998 the company renovated the former R. B. Learn location and
rented this space to a chiropractor. This enterprise as well as the restaurant
which was opened in 1997 are having a positive impact on the business community.

-18-

<PAGE>

The Bank is also taking a leadership role in the ongoing Laceyville Boro
Revitalization effort. The Borough received a grant from the Commonwealth of
Pennsylvania in order to develop a site master plan to include concepts which
may solve some of the issues affecting the downtown area. A Comprehensive
Planner has been hired to provide plans for streetscape improvement and to
identify other possible business opportunities for the community. Monthly
meetings are held at the bank's location in Laceyville and bank officers take an
active role on the revitalization committee.

It is expected that the community will make a formal application this
spring for additional funds in order to commence work on some of these projects.

TRUST DEPARTMENT

The Bank's Trust Department, established in 1992, continues to grow and
expand. Offering personal trusts, irrevocable trusts, insurance trusts, trusts
under will, estate management services and IRAs. A Trust Administrator, with
considerable experience, has been hired to operate and expand the department.
Plans to expand the department include soliciting accounts under $1,000,000, a
segment large banks no longer pursue. Management does not expect the Trust
Department to be profitable for at least the next few years.

-19-

<PAGE>

Grange National Banc Corp and Subsidiary
Average Balances, Interest Income/Expense and Rates

Years Ended December 31, 1998 December 31, 1997

(1) Interest Average (1) Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages .......................... $53,533. $ 4,681 8.74% $ 44,474 $ 3,873 8.71%
Installment ........................ 4,505. 484 10.74 4,816 560 11.63
Commercial ......................... 24,494 2,457 10.03 20,102 2,082 10.34
---------------------- -----------------------
Total loans ...................... 82,532 7,622 9.24 69,392 6,515 9.39
---------------------- -----------------------
Securities available for sale:
U.S. Treasury securities ........... 6,812 405 5.95 9,660 584 6.05
U.S. government agencies ........... 7,399 462 6.24 1,338 87 6.50
Municipal bonds .................... 4,771 331 6.94 670 49 7.31
Other securities ................... 577 37 6.41 471 28 5.94
---------------------- -----------------------
Total available for sale ......... 19,559 1,235 6.31 12,139 748 6.16
---------------------- -----------------------
Securities held to maturity:
U.S. government agencies ........... 15,035 980 6.52 18,498 1,184 6.40
Municipal bonds .................... 3,404 230 6.76 4,039 278 6.88
Other securities ................... 2,282 149 6.53 920 60 6.52
---------------------- -----------------------
Total held to maturity ........... 20,721 1,359 6.56 23,457 1,522 6.49
---------------------- -----------------------
Total investment securities .... 40,280 2,594 6.44 35,596 2,270 6.38
---------------------- -----------------------
Deposits in banks ................... 3,193 179 5.61 3,155 177 5.61
---------------------- -----------------------
TOTAL .......................... $126,005 $ 10,395 8.25 $108,143 $ 8,962 8.29
========-------------- ========---------------
INTEREST BEARING
LIABILITIES:
Deposits:
NOW and super-NOW .................. $ 12,673 $ 268 2.11 $ 10,905 $ 237 2.17
Savings and money market ........... 28,995 777 2.68 26,191 717 2.74
Certificates of deposit ............ 59,030 3,286 5.57 50,541 2,788 5.52
Other time deposits ................ 200 11 5.50 200 11 5.50
---------------------- -----------------------
Total deposits ................... 100,898 4,342 4.30 87,837 3,753 4.27
Other borrowed funds ................ 2,405 111 4.62 844 34 4.03
---------------------- -----------------------
TOTAL .......................... 103,303 4,453 4.31 88,681 3,787 4.27

Non-interest bearing funds, net (2).. 22,702 19,462
---------------------- -----------------------
TOTAL SOURCES TO FUND
EARNING ASSETS ....................... $126,005 4,453 3.53 $108,143 3,787 3.50
========-------------- ========---------------
NET INTEREST/YIELD ................... $ 5,942 4.72% $ 5,175 4.79%
======== ========
</TABLE>

- ----------
(1) Average balances are daily averages. (2) Demand deposits, stockholders'
equity and other non-interest bearing liabilities less non-interest earning
assets. - Non-accrual loans are reflected in the balances, but contributing
no income. NOTE - Tax exempt interest income has been converted to a tax
equivalent basis at the U.S. federal income tax rate of 34%.

-20-

<PAGE>

Grange National Banc Corp. And Subsidiary
Net Interest Income
Changes Due to Volume and Rate

1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)

Total Due To Due To Total Due To Due To
(In thousands) Change Volume Rate Change Volume Rate
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

INTEREST INCOME:
Loans .......................... $ 1,107 $ 1,212 ($105) $ 1,060 $ 1,234 ($174)
Investment securities .......... 324 302 22 56 46 10
Deposits in other banks ........ 2 2 0 61 59 2
---------------------------------------------------------------
TOTAL ..................... 1,433 1,516 (83) 1,177 1,339 (162)
---------------------------------------------------------------

INTEREST EXPENSE:
Now/Super-Now deposits ......... 31 38 (7) 64 48 16
Savings/Money market deposits... 60 75 (15) 62 62 0
Time deposits .................. 498 471 27 429 413 16
Other Borrowings ............... 77 71 6 (13) (4) (9)
---------------------------------------------------------------
TOTAL ...................... 666 655 11 542 519 23
---------------------------------------------------------------
NET INTEREST INCOME .............. $ 767 $ 861 ($ 94) $ 635 $ 820 $(185)
===============================================================
</TABLE>

The change in interest due to volume and due to rate has been allocated by
reference to changes in the average balances and the average interest rates of
interest earning assets and interest bearing liabilities. Tax-exempt interest
has been converted to a tax equivalent basis at the U.S. federal income tax rate
of 34%.

-21-

<PAGE>

INDEPENDENT AUDITOR'S OPINION

The Board of Directors and Stockholders
Grange National Banc Corp.

We have audited the consolidated balance sheets of Grange National Banc
Corp. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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 Grange National
Banc Corp. and subsidiary as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.

Daniel Kenia, P.C.
Tunkhannock, Pennsylvania

January 25, 1999

-22-

<PAGE>

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks ............................................... $ 2,615,466 $ 2,514,202
Interest bearing deposits ............................................. 5,610,125 2,417,987
Investment securities (Note 2):
Available for sale .............................................. 30,251,442 13,001,723
Held to maturity, (market value
1998, $16,677,000; 1997, $25,316,000) ......................... 16,454,603 25,205,836
------------------------------
Loans (Note 3) ........................................................ 90,927,128 77,720,098
Less: unearned interest income ........................................ 427,967 724,670
Less: allowance for loan losses ....................................... 940,150 767,475
------------------------------
Loans, net ..................................................... 89,559,011 76,227,953
Bank premises and equipment, net (Note 4) ............................. 3,135,784 3,028,098
Accrued interest and other assets ..................................... 2,080,598 1,730,580
Intangible assets ..................................................... 138,384 140,460
Other real estate ..................................................... 107,789 149,795
------------------------------
TOTAL ASSETS ............................................................ $ 149,953,202 $ 124,416,634
==============================
LIABILITIES:
Domestic Deposits:
Non-interest bearing deposits ....................................... $ 20,710,241 $ 14,675,828
Interest bearing deposits ........................................... 109,181,088 94,112,851
------------------------------
Total deposits .................................................... 129,891,329 108,788,679
Other borrowed funds (Note 5) ......................................... 4,471,214 2,279,294
Accrued interest and other liabilities ................................ 823,343 710,857
------------------------------
Total liabilities ................................................. 135,185,886 111,778,830
------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 1)
STOCKHOLDERS' EQUITY (NOTE 1):
Preferred stock authorized 1,000,000 shares of $5 par;
None issued nor outstanding .........................................
Common stock authorized 5,000,000 shares of $5 par,
751,558 and 741,822 shares issued in 1998
and 1997, respectively .............................................. 3,757,790 1,816,525
Additional paid-in capital ............................................ 731,661 2,052,158
Retained earnings ..................................................... 10,017,937 8,685,313
------------------------------
Total ............................................................. 14,507,388 12,553,996
Accumulated other comprehensive income
(net of deferred income taxes) (Note 6) ............................. 260,000 84,000
Treasury stock, at cost (Note 1) ...................................... (72) (192)
------------------------------
Total stockholders' equity ........................................ 14,767,316 12,637,804
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 149,953,202 $ 124,416,634
==============================
</TABLE>

-23-

<PAGE>

See Notes to Consolidated Financial Statements
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans ........................................ $ 7,531,903 $ 6,462,812 $ 5,421,051
Interest on investment securities:
US Treasury securities .......................................... 405,229 583,566 664,440
Obligations of other US government
agencies and corporations ..................................... 1,442,403 1,271,288 1,216,544
Obligations of states and political subdivisions (tax-exempt)... 370,571 216,027 183,183
Other securities ................................................ 187,208 87,259 54,442
Interest on deposits in banks ..................................... 179,432 177,221 115,601
------------------------------------------
Total interest income ..................................... 10,116,746 8,798,173 7,655,261
------------------------------------------
Interest Expense:
Interest on deposits .............................................. 4,341,667 3,753,657 3,198,198
Interest on borrowed funds ........................................ 110,656 34,145 47,102
------------------------------------------
Total interest expense .................................... 4,452,323 3,787,802 3,245,300
------------------------------------------
Net interest income ......................................... 5,664,423 5,010,371 4,409,961

Provision for loan losses (Note 3) ............................ 270,000 190,000 125,000
------------------------------------------
Net interest income after provision for loan losses ......... 5,394,423 4,820,371 4,284,961

Other Income (Note 7) ............................................... 784,864 676,731 500,271
Other Expenses (Note 8) ............................................. (3,608,956) (3,205,301) (2,627,512)
------------------------------------------
Income before taxes ................................................. 2,570,331 2,291,801 2,157,720

------------------------------------------
Provision for income taxes (Notes 1 and 6) .......................... 710,000 684,000 660,000
------------------------------------------
Net income .......................................................... $ 1,860,331 $ 1,607,801 $ 1,497,720
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising during period ............ $ 176,000 $ 81,000 $ (62,000)
------------------------------------------
Comprehensive income ................................................ $ 2,036,331 $ 1,688,801 $ 1,435,720
==========================================
Earnings per share (Notes 1, 11 and 12):
Basic ............................................................... $ 2.50 $ 2.17 $ 2.02
==========================================
Diluted ............................................................. $ 2.25 $ 2.04 $ 1.99
==========================================
Basic shares outstanding ............................................ 744,247 741,616 740,398
==========================================
Diluted shares outstanding .......................................... 826,606 787,965 752,046
==========================================
</TABLE>

See Notes to Consolidated Financial Statements

-24-

<PAGE>

Page 25

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Accumulated
Common Additional Other
Treasury Stock Paid-in Retained Comprehensive
Stock $5 Par Capital Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Balance, December 31, 1995 ..... ($486) $ 1,743,870 $1,559,336 $ 6,154,547 $ 65,000 $ 9,522,267
Net income ..................... 1,497,720 1,497,720
Stock dividend $0.37 per
share, plus cash in lieu of
fractional shares ............ 32,585 208,613 (259,377) (18,179)
Sale of stock from treasury 50 50
Unrealized holding losses
on investment securities ..... (94,000) (94,000)
Deferred tax asset ............. 32,000 32,000
------------------------------------------------------------------------------------
Balance, Dceember 31, 1996 ..... ($436) $ 1,776,455 $1,767,949 $ 7,392,890 $ 3,000 $10,939,858
Net income ..................... 1,607,801 1,607,801
Stock dividend $0.44 per
share, plus cash in lieu of
fractional shares ............ 33,210 259,074 (315,378) (23,094)
Issuance of common stock ....... 6,860 25,135 31,995
Sale of stock from treasury .... 244 244
Unrealized holding gains
on investment securities ..... 124,000 124,000
Deferred tax liability ......... (43,000) (43,000)
------------------------------------------------------------------------------------
Balance, December 31, 1997 ..... ($192) $ 1,816,525 $2,052,158 $ 8,685,313 $ 84,000 $12,637,804
Net income ..................... 1,860,331 1,860,331
Stock dividend $0.71 per
share, plus cash in lieu of
fractional shares ............ 52,570 445,767 (527,707) (29,370)
Stock split .................... 1,841,240 (1,841,240) 0
Issuance of common stock ....... 47,455 74,976 122,431
Sale of stock from treasury .... 120 120
Unrealized holding gains
on investment securities ..... 265,000 265,000
Deferred tax liability ......... (89,000) (89,000)
------------------------------------------------------------------------------------
Balance, December 31, 1998 ..... ($72) $ 3,757,790 $ 731,661 $10,017,937 $260,000 $14,767,316
====================================================================================
</TABLE>

See Notes to Consolidated Financial Statements

-25-

<PAGE>

Page 26

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 1,860,331 $ 1,607,801 $ 1,154,077
Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation and amortization .................................... 329,912 284,748 140,758
Provision for loan losses ........................................ 270,000 190,000 65,000
Increase (decrease) in deferred income taxes ..................... (100,000) 58,000 (57,123)
Changes in operating assets and liabilities:

Increase (decrease) in accrued interest income and other assets ... (350,299) (380,868) (193,817)

Increase in accrued interest expense and other liabilities ........ 170,486 119,884 13,600

NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................................. 2,180,430 1,879,565 1,122,495
---------------------------------------------
INVESTING ACTIVITIES:
Purchase bank premises and equipment ............................... (393,241) (615,241) (309,602)
Decrease (increase) in other real estate ........................... 42,006 (149,795) 69,618
Purchase of securities "available for sale" ........................ (16,664,841) (3,723,722) (4,155,304)
Decrease (increase) in mortgage-backed securities
"available for sale"............................................... (2,769,115) (3,731,563)
Sales of securities "available for sale" ........................... 3,755,046
Redemptions of securities "available for sale" ..................... 2,360,237 2,512,206 2,871,501
Purchase of securities "held to maturity" .......................... (2,213,060) (9,703,703) (6,660,973)
Redemptions of securities "held to maturity" ....................... 10,458,545 7,747,916 4,873,223
Decrease (increase) in mortgage-backed securities
"held to maturity" ............................................... 505,749 (980,226) (778,779)
Increase in loans to customers ..................................... (13,601,058) (15,007,728) (6,502,044)
Increase in deposits in banks ...................................... (3,192,139) (443,345) (878,293)
Premium paid on core deposits ...................................... (164,579)
---------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES ............................................. (25,466,917) (20,340,155) (11,635,232)
---------------------------------------------
FINANCING ACTIVITIES:

Increase in deposits before interest credited ...................... 17,454,097 14,567,265 7,255,032
Increase in borrowed funds ......................................... 2,191,920 666,134 1,487,393
Interest credited to deposits ...................................... 3,648,553 3,166,016 1,833,276
Cash dividends paid ................................................ (29,370) (23,094) (8,178)
Decrease in treasury stock ......................................... 120 244 50
Issuance of common stock ........................................... 122,432 31,995 --
---------------------------------------------

NET CASH PROVIDED BY
FINANCING ACTIVITIES ............................................. 23,387,752 18,408,560 10,567,573
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................... 101,265 (52,030) 54,836
CASH AND CASH EQUIVALENTS, January 1 ................................ 2,514,202 2,566,232 1,793,476
---------------------------------------------
CASH AND CASH EQUIVALENTS, December 31 .............................. $ 2,615,466 $ 2,514,202 $ 1,848,312
=============================================
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .......................................................... $ 996,759 $ 993,280 $ 600,664
Income taxes ...................................................... $ 780,000 $ 765,553 $ 474,000
Non-cash investing and financing activities:
Unrealized gains (losses) on securities ........................... $ 176,000 $ 81,000 $ (169,000)
Stock dividend .................................................... 498,337 292,284 110,398
</TABLE>

See Notes to Consolidated Financial Statements

-26-

<PAGE>

Grange National Banc Corp. and Subsidiary
Notes to Financial Statements

1. Summary of Significant Accounting Policies:

The following summary of significant accounting policies is presented for
the reader to obtain a better understanding of the Company's financial
statements and related financial data included in this report. The accounting
and reporting policies and practices of the Company conform to generally
accepted accounting principles within the banking industry.

Business and Principles of Consolidation:

Grange National Banc Corp. (Company) and its subsidiary the Grange National
Bank (Bank) provide banking services to domestic customers primarily in
northeastern Pennsylvania. The consolidated financial statements include the
accounts of the Company and its bank subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.

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 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.

Investment Securities:

The Company follows the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). In accordance with
SFAS No. 115 the Company classifies each debt and equity security as held to
maturity or available for sale. Investments classified as held to maturity are
reflected at amortized cost. Investments classified as available for sale are
reflected at fair market value. Realized gains or losses securities are included
in earnings. Unrealized gains and losses on available for sale securities are
excluded from earnings and reflected, net of income taxes as other comprehensive
income and in a separate component of stockholders' equity as accumulated other
comprehensive income until realized. These unrealized gains and losses are the
only component of comprehensive income. Upon purchase of securities the Company
specifically designates which securities are classified as "available for sale"
and "held to maturity".

-27-

<PAGE>

Amortization of premiums and accretion of discounts are recognized as
adjustments to interest income. Gains or losses on disposition are based on the
net proceeds and the adjusted carrying value of the securities using the
specific identification method.

Loans and Allowance for Loan Losses:

Loans are stated at face value, net of unearned discount and the allowance
for loan losses. Unearned discount on consumer loans is recognized as income
over the terms of the loans by a method that approximates the simple interest
method. Interest on other loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
operating expenses. Loan losses and recoveries are charged or credited to the
allowance for loan loss account at the time incurred. The provision for loan
losses and related allowance of loan losses are based upon management's
continual evaluation of the current loan portfolio and prior loan loss
experience. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.

The bank has adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan Income Recognition and Disclosures," in its evaluation
of the loan portfolio. SFAS 114 requires that certain impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's original effective interest rate. As a practical expedient, impairment
may be measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.

Premises and Equipment:

Building and office equipment are stated at cost less accumulated
depreciation computed on the straight line method. Costs incurred for routine
maintenance and repairs are expensed currently. The estimated depreciable lives
used in computing depreciation are as follows:

Buildings and improvements 7 to 50 years
Equipment and furniture 5 to 20 years

National banking law restricts the investment in bank premises to the amount of
a bank's capital stock. However, in certain circumstances, and with regulatory
approval, investment in bank premises can be as much as 50% of the stockholders'
equity. The ratio of investment in bank premises to stockholders' equity at
December 31, 1998 was within the approved 50% limit and no regulations have been
violated.

-28-

<PAGE>

Advertising Costs:

The Company follows the policy of charging advertising cost to expense as
incurred. During 1998 and 1997, advertising costs amounted to $103,000 and
$129,000, respectively.

Intangible Assets:

Intangible assets are included in the other assets and are being amortized
over a period of fifteen years using the straight line method. Amortization for
1998 and 1997 was $17,025 each.

Other Real Estate:

Other real estate consists of properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair market value based on appraised value at
the date of foreclosure. Loan losses arising from the acquisition of such
properties are charged against the allowance for loan losses.

Treasury Stock:

Treasury stock is shown at cost and consists of six and sixteen shares of
common stock in 1998 and 1997, respectively.

Pension Plan:

The Bank's pension plan is an Employee Stock Ownership Plan with 401(k)
Provisions ("KSOP") which covers substantially all employees. The Plan, which is
a type of stock bonus plan, is a plan of deferred compensation in which Company
contributions are used to provide participating employees with stock in Grange
National Banc Corp. The KSOP also provides that participants may make
contributions to the Plan on a before-tax basis, pursuant to provisions found
under Section 401(k) of the Internal Revenue Code. Participants may elect to
defer up to 15% of their current compensation and the Company may match up to
$1.00 for each $1.00 that is deferred. The Company contributed $16,848, $12,982
and $4,498 as matching contribution to employee deferrals during 1998, 1997 and
1996. The Company also made an Employer Optional Contribution to the Plan of
$77,820, $71,139 and $56,147 during 1998, 1997 and 1996, which represents 6% of
gross salaries for each year.

Cash and Cash Equivalents:

The Company considers cash and due from banks as cash and cash equivalents
for purposes of the Statements of Cash Flows.

-29-

<PAGE>

Income Taxes:

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently payable and deferred
taxes related primarily to the temporary differences between the financial
reporting and tax basis of an asset or liability. The temporary differences
relate principally to the use of different depreciation methods for financial
statement and income reporting purposes, resulting in differences in asset basis
due to accumulated depreciation on bank premises and equipment, accretion of
discounts on financial basis of securities, allowances for loan losses and
unrealized holding gains and losses on available for sale securities which are
not included in taxable income.. Deferred taxes represent future consequences of
the differences which will either be taxable or deductible in the year the
assets and liabilities are recovered or settled. Under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," deferred
income taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The income tax expense (or benefit) is the difference
between the deferred tax asset or liability calculated for each period.

The Company and its subsidiary file a consolidated federal income tax
return.

Earnings Per Share:

Effective for 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.

Restrictions on Cash and Due From Bank Accounts:

The Bank is required to maintain average balances with various
correspondent banks. The amount of those balances for the year ended December
31, 1998 was approximately $20,000.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities:

The Financial Accounting Standards Board issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which the Company has adopted for 1997. The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial components approach that focuses on
control.

-30-

<PAGE>

Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provided consistent
standards for distinguishing transfers of financial assets that are sales from
transfers from secured borrowings.

This Statement provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitization, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities.

The adoption of the SFAS No. 125 standards did not have a material effect
on operating results for 1998 or 1997.

Financial Instruments with Off-Balance Sheet Risk:

The Company is a 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 and standby
letters of credit. Those instruments involve to varying degrees elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract or notional amounts of those
instruments express the extent of involvement the Company has in particular
classes of financial instruments.

Company exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company may require
collateral or other security to support financial instruments with off-balance
sheet risk. These commitments at December 31 are as follows (in thousands):

Contract or Notional Amount
Financial instruments whose contract 1998 1997
amounts represent credit risk: ---- ----

Commitments to extend credit............ $4,020 $2,676
Standby letters of credit............... $463 $49

Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount

-31-

<PAGE>

of collateral obtained if deemed necessary is based on management's credit
assessmant of the counterparty.

Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.

Concentrations of Credit:

All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. All such
customers are depositors of the Bank. Investments in municipal securities
involve governmental entities within Pennsylvania. The concentrations of credit
by type are set forth in Note 3. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Commercial and
standby letters of credit were granted primarily to commercial borrowers. The
Bank, as a matter of policy, does not extend credit to any single borrower or
group of related borrowers in excess of $2,000,000, unless secured by bank
deposits or partially guaranteed by an agency of the federal government.

Regulatory Matters:

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies and undergoes periodic examinations by such
regulatory authorities. 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 Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts of capital to total "risk weighted"
assets. At December 31, 1998 the Bank is required to have minimum Tier 1 and
Total Capital ratios of 4% and 8% respectively. The Bank's actual ratios at that
date were 15.40% and 15.97% respectively. The Bank's leverage ratio at December
31, 1998 was 10.55%. As of the most recent examination, federal regulators
categorized the Bank as well capitalized within regulatory criteria. Since that
notification, there are no conditions or events that management believes would
change the Bank's category.

Dividends are paid by the Company from its assets which are mainly provided
by dividends from the Bank. However, certain regulatory restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the form
of cash dividends, loans or advances. As

-32-

<PAGE>

of December 31, 1998, the Bank had retained earnings of $9,661,000 of which
under federal regulations, the Bank's extension of credit to its parent company
must be on the same terms and conditions as extensions of credit to
nonaffilliates. The maximum amount the Bank can loan to the Company is limited
to 20% of its capital and surplus. Such extensions of credit, with limited
exceptions, must be fully collateralized.

Line of Credit:

At December 31, 1998 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $47,636,000 at a variety
of available terms.

Comprehensive Income:

In 1997, the Financial Accounting Standards Board issued statement No. 130
- -- "Reporting Comprehensive Income," which is effective for years beginning
after December 15, 1997. This statement establishes standards for reporting and
displaying of comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to report a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. Prior to the issuance of
this statement, some of those changes in equity were displayed in a statement
that reports the results of operations, while others were included directly in a
statement of financial position. The 1997 financial statements have been
restated where applicable to reflect the adoption of SFAS No. 130.

2. Investment Securities:

The amortized cost and estimated fair value of investments in debt
securities are as follows:

<TABLE>
<CAPTION>
1998

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury notes ......................... $ 5,762 $ 124 $ 5,886
U.S. government agencies and corporations .. 15,469 92 ($10) 15,551
Municipal bonds ............................. 7,965 169 8,134
Other securities ............................ 662 18 680
------------------------------------------------------
Total available for sale ................. $29,858 $ 604 ($10) $30,251
======================================================
Held to maturity:
U.S. government agencies and corporations ... $10,728 $ 178 ($68) $10,838
Municipal bonds ............................. 2,985 50 3,035
Other securities ............................ 2,741 68 (5) 2,804
------------------------------------------------------
Total held to maturity ................... $16,454 $ 296 ($73) $16,677
======================================================
</TABLE>

-33-

<PAGE>

1997
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury notes ......................... $ 6,545 $ 64 ($ 7) $ 6,602
Obligations of other U.S. government
agencies or corporations .................. 3,669 40 3,709
Municipal bonds ........................... 2,167 23 (1) 2,189
Other securities ............................ 493 9 502
------- ------- ------- -------
Total available for sale ................. $12,874 $ 136 ($ 8) $13,002
======= ======= ======= =======
Held to maturity:
U.S. government agencies and corporations ... $18,905 $ 109 ($ 47) $18,967
Municipal bonds ............................. 4,181 23 (6) 4,198
Other securities ............................ 2,120 31 2,151
------- ------- ------- -------
Total held to maturity ................... $25,206 $ 163 ($ 53) $25,316
======= ======= ======= =======
</TABLE>

The amortized cost and estimated fair value of debt securities at December
31, 1998 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

Available For Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing within one year .... $ 1,256 $ 1,264 $ 1,070 $ 1,076
Maturing in one to five years 11,582 11,848 12,436 12,615
Maturing in five to ten years 11,497 11,595 2,484 2,517
Maturing after ten years .... 4,861 4,864 464 469
No set maturity ............. 662 680
---------------------------------------------------------------
TOTAL .................. $29,858 $30,251 $16,454 $16,677
===============================================================
</TABLE>

-34-

<PAGE>

3. Loans and Allowance for Loan Losses:

Major classifications of loans at December 31 are as follows:

(In thousands) 1998 1997
----- ----
Real estate mortgages:
Agricultural ........................ $ 1,323 $ 1,441
Residential, 1 - 4 family ........... 48,731 41,239
Residential, multi-family ........... 747 687
Nonfarm, nonresidential properties... 14,076 9,598
-----------------
Total real estate mortgages .... 64,877 52,965
Agricultural loans .................... 268 285
Commercial loans ...................... 13,653 12,702
Municipal loans ....................... 2,043 1,789
Consumer loans ........................ 9,950 9,955
Overdrafts ............................ 136 24
-----------------
Gross loans ...................... 90,927 77,720
Less: Unearned income ................ 428 725
Allowance for loan losses ...... 940 767
-----------------
Loans, net ................ $89,559 $76,228
=================

Nonaccrual loans at December 31, 1998 and 1997, were $205,000 and $136,000,
respectively.

The Company adopted SFAS No. 114 effective January 1, 1995. The adoption of
SFAS No. 114 did not have a material effect on the financial condition or
operating results of the Company. At December 31, 1998 and 1997 the recorded
investment in loans that were considered impaired under SFAS No. 114 was
$421,000 and $290,000, respectively. No transfers to loan loss were made in 1998
or 1997 for any impaired loans. The average recorded investment in impaired
loans during the years ended December 31, 1998 and 1997 was approximately
$301,000 and $287,000 respectively. Interest payments received on impaired loans
are applied to principal; otherwise, these receipts are recorded as interest
income. For the years ended December 31, 1998 and 1997, the Company recognized
interest income on impaired loans of $27,000 and $18,000. The interest that
would have been earned in accordance with the original terms is approximately
$44,000 and $29,000 respectively.

Changes in the allowance for loan losses for the years ended December 31
were as follows:

(In thousands) 1998 1997 1996
---- ---- ----
Balance, January 1 ............ $ 767 $ 623 $ 532
Provision charged to operations 270 190 125
Loans charged off ............. (102) (51) (41)
Recoveries .................... 5 5 7
-----------------------------
Balance, December 31 .......... $ 940 $ 767 $ 623
=============================

-35-

<PAGE>

4. Premises and Equipment:

Premises and equipment are summarized as follows:

Accumulated
Gross Book Amortization Net Book
December 31, 1998: Value & Depreciation Value
---------- -------------- --------
Land ..................... $ 440,082 $ 440,082
Buildings ................ 2,660,782 $ 780,539 1,880,243

Furniture and equipment... 2,279,561 1,464,102 815,459
------------------------------------------
Total ............... $5,380,425 $2,244,641 $3,135,784
==========================================
December 31, 1997:
Land ..................... $ 440,082 $ 440,082
Buildings ................ 2,515,143 $ 688,675 1,826,468
Furniture and equipment... 2,021,578 1,260,030 761,548
------------------------------------------
Total ............... $4,976,803 $1,948,705 $3,028,098
==========================================

Depreciation and amortization were applied as follows:

1998 1997 1996
----- ----- ----
Premises ................. $ 89,840 $ 80,364 $ 66,297
Furniture and equipment... 240,072 187,359 124,100
------------------------------------
Total ............... $329,912 $267,723 $190,397
====================================

The Bank has non-cancelable operating leases on the building for its
Edwardsville and Back Mountain Offices. The aforementioned leases have been
treated as operating leases in the accompanying financial statements. Rental
expense for 1998 was $134,000. Minimum future obligations under non-cancelable
operating leases in effect at December 31, 1998 are as follows:

1999 $149,200
2000 149,200
2001 125,950
2002 112,000
2003 and thereafter 663,250
----------
Total $1,199,600
==========
5. Other Borrowed Funds

Other borrowed funds include interest-bearing demand notes payable to the
U.S. Treasury for Treasury collections made by the Bank. Remittances of amounts
collected are made upon demand. The year end balance due was $104,000 in 1998
and $750,000 in 1997.

The Bank enters into repurchase agreements with customers which amounted to
$1,024,000 in 1998 and $1,172,000 in 1997.

-36-

<PAGE>

The Bank has a line of credit with the Federal Home Loan Bank for
$45,630,000 which could be utilized for various operating purposes. Borrowings
under this line of credit are secured by qualified assets (primarily investment
securities). Interest paid on these short term borrowings varies based on
interest rate fluctuations. The outstanding balance of which was zero at
December 31, 1998.

The Federal Home Loan Bank of Pittsburgh has loaned the Bank $440,000 to
fund the Bank's Affordable Housing Program. These loans are amortized over 25
years, at 4%, payable monthly and due in ten years. The Bank has also borrowed
two term loans for a total of $3,000,000, with ten year maturities and five year
calls. The interest rates on these loans range form 4.76% to 5.63%. At the call
date and thereafter, the FHLB has the option to convert the loan to a variable
rate. The Bank can pay the loan off without penalty if the FHLB decides to
convert the loan to a variable rate. The year end balance due the Federal Home
Loan Bank was $3,342,649 in 1998 and $357,041 in 1997. The FHLB loans mature as
follows:

1999 2000 2001 2002 2003 and beyond
---- ---- ---- ---- ---------------
$12,878 $13,159 $12,118 $304,495 $3,000,000

6. Income Taxes:

The components of the federal income tax provisions are as follows:

1998 1997 1996
---- ---- ----
Currently payable ......... $ 810,000 $ 749,000 $ 701,000
Deferred portion (benefits) (100,000) (65,000) (41,000)
-----------------------------------------
Total ................ $ 710,000 $ 684,000 $ 660,000
=========================================

The sources of the net deferred income tax liability (asset) in other
liabilities (assets) for the years ended at December 31 were as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----

<S> <C> <C>
Depreciation .................................................. $ 96,000 $ 85,000
Accretion of discounts on securities .......................... 15,000 40,000
Unrealized gains on available for sale investment securities... 133,000 44,000
Accrued employee stock incentive .............................. (26,000)
Allowance for loan losses ..................................... (270,000) (210,000)
-------------------------
Net deferred tax (asset) ................................. ($ 52,000) ($ 41,000)
=========================
</TABLE>

-37-

<PAGE>

A reconciliation of income tax expense at the federal statutory rate and the
effective federal income tax rate is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----

<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate.. $ 874,000 34.00% $ 779,000 34.00% $ 733,000 34.00%
Tax-exempt income
from investments .......... (112,000) (4.36) (64,000) (2.79) (53,000) (2.50)
Tax-exempt income
from loans ................ (42,000) (1.63) (30,000) (1.31) (18,000) (0.80)
Other ....................... (10,000) (0.39) (1,000) (0.05) (2,000) (0.10)
----------------------------------------------------------------
Total .................. $ 710,000 27.62% $ 684,000 29.85% $ 660,000 30.60%
================================================================
</TABLE>

7. Other Income:

Other income for the years ended December 31, consists of the following:

1998 1997 1996
---- ---- ----
Service charges and fees ............. 225,564 $ 163,813 $ 141,357
Service charges on deposit accounts... 387,629 366,050 292,382
Gain on sale of securities ........... 23,118
Gain (loss) on sale of real estate.... (24,961) (21,488)
Other ................................ 196,632 123,750 88,020
-----------------------------------
Total other income .............. $ 784,864 $ 676,731 $ 500,271
===================================

8. Other Expenses:

Other expenses for the years ended December 31, consists of the following:

1998 1997 1996
---- ---- ----
Salaries and employee benefits .... $1,835,224 $1,622,546 $1,367,510
Occupancy expenses ................ 408,073 363,422 241,019
Furniture and equipment expenses... 326,283 275,013 241,886
Other operating expenses .......... 1,039,376 944,320 777,097
----------------------------------------
Total other expenses ......... $3,608,956 $3,205,301 $2,627,512
========================================

9. Related Party Transactions:

During the ordinary course of business, loans are made to officers,
directors, and their related interests. These transactions are made on
substantially the same terms and at those rates prevailing at the time for
comparable transactions with others.

-38-

<PAGE>

A summary of this loan activity is listed below:

1998 1997 1996
---- ---- ----
Balance, January 1 .... $ 1,269,719 $ 997,070 $ 1,107,115
Additions ............. 428,024 427,289 252,281
Amounts collected ..... (146,590) (154,640) (362,326)
Amounts charged off....
-----------------------------------------------
Balance, December 31... $ 1,551,153 $ 1,269,719 $ 997,070
===============================================

10. Grange National Banc Corp. (Parent Company Only) Financial Statements:

BALANCE SHEETS, DECEMBER 31 1998 1997
---- ----
ASSETS
Cash ............................. $ 10,587 $ 4,660
Investment in bank subsidiary .... 14,398,938 12,301,438
Securities "available for sale"... 44,400 34,400
Land and buildings ............... 519,683 499,363
----------------------------
TOTAL ASSETS ............ $14,973,608 $12,839,861
============================

LIABILITIES
Notes payable, bank subsidiary.... $198,192 $198,457
Other liabilities................. 8,100 3,600
----------------------------
Total liabilities.......... $206,292 $202,057
----------------------------
STOCKHOLDERS' EQUITY
Preferred stock authorized
1,000,000 shares of $5 par:
None issued
Common stock authorized 5,000,000
shares of $5 par; 751,552 and
726,610 shares issued and
outstanding in 1998 and 1997,
respectively ....................... 3,757,790 1,816,525
Additional paid-in capital ........... 731,661 2,052,158
Retained earnings .................... 10,017,937 8,685,313
Unrealized holding gains (losses)
on investment securities (net of
deferred income taxes) ............. 260,000 84,000
Less: Treasury stock, at cost ....... (72) (192)
----------------------------
Stockholders' equity ......... 14,767,316 12,637,804
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....... $ 14,973,608 $ 12,839,861
=============================

-39-

<PAGE>

<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary .................. $ 74,370 $ 133,094 $ 18,179
Dividends from other securities ................. 982 832 195
Interest on deposits
Other income ..................................... 4,221 600
------------------------------------------
Total income ....................... 79,573 134,526 18,374
------------------------------------------
OPERATING EXPENSES:
Interest expense ................................ 17,229 8,996 3,182
Other operating expense ......................... 8,082 2,789 312
------------------------------------------
Total operating expenses ........... 25,311 11,785 3,494
------------------------------------------
Income before undistributed income of subsidiary... 54,262 122,741 14,880
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY ...................................... 1,806,069 1,485,060 1,482,840
------------------------------------------
NET INCOME ........................................ $1,860,331 $1,607,801 $1,497,720
==========================================
</TABLE>

<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED, DECEMBER 31 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................... $ 1,860,331 $ 1,607,801 $ 1,497,720
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation ................... 7,827 2,023
Equity in undistributed income of subsidiary ... (1,806,069) (1,485,060) (1,482,840)
-----------------------------------------------
Net cash provided by operating activities 62,089 124,764 14,880
-----------------------------------------------
INVESTING ACTIVITIES:
Increase in buildings and land ..................... (28,677) (194,845) (53,176)
Purchase securities "available for sale" ........... (19,900)
Investment in Bank subsidiary ...................... (122,431) (31,995)
-----------------------------------------------
Net cash used in investing activities ..... (151,108) (246,740) (53,176)
-----------------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable ........................ 265 116,860 56,246
Increase in other liabilities ...................... 1,500 600
Sale of treasury stock ............................. 120 244 50
Issuance of common stock ........................... 122,431 31,995
Dividends to stockholders .......................... (29,370) (23,094) (18,179)
-----------------------------------------------
Net cash provided by (used in)
financing activities ..................... 94,946 126,605 38,117
-----------------------------------------------
INCREASE (DECREASE) IN CASH ....................... 5,927 4,629 (179)
CASH BALANCE, JANUARY 1............................. 4,660 31 210
-----------------------------------------------
CASH BALANCE, DECEMBER 31........................... $ 10,587 $ 4,660 $ 31
===============================================
</TABLE>

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<PAGE>

11. Stockholder's Equity

Stock Split - Retroactive Effect on Financial Statements:

In July 1998, the Board of Directors of the Company voted a two-for-one
split of the Company's common stock, to be effected in the form of a stock
distribution, payable to shareholders of record as of July 30, 1998. The
financial statements have been revised to give retroactive effect of the stock
split as if the additional shares had been outstanding for all periods.

Stock Options:

In January 1994, the Board of Directors adopted an Employee Stock Option
Plan in which stock options may be granted to all officers and key employees of
the Company. The aggregate number of shares which may be issued upon exercise of
the options under the plan is 20,000. Options are exercisable up to one-third in
the second year after the date of grant, up to two-thirds in the third year
after the date of grant and up to 100% in the fourth year after the date of
grant, with options expiring at the end of ten years after the date of grant.

The Board of Directors also adopted a Stock Option Plan for non-employee
Directors which will be available to all non-employee members of the Board of
Directors. The aggregate number of shares which may be issued upon exercise of
the options under the Director Plan is 20,000 shares and are exercisable in part
from time to time beginning one year after the date of grant and expiring ten
years thereafter. Effective April 1, 1994, options to purchase 1,000 shares of
stock were automatically granted to each non-employee Director under this plan
expiring April 1, 2004.

The Board of Directors adopted an additional Stock Option Plan (the "Plan")
in November 1995, subject to shareholder approval, covering the employees and
directors. The Plan authorizes the grant of options to purchase not more than
55,000 shares of common stock under the Plan. Options granted under the Plan are
intended to be either incentive stock options or nonstatutory stock options. As
of February 29, 1996, options for 50,160 shares of common stock having an
exercise price of $32.50 were outstanding and 4,840 shares of common stock were
available for future option grants under the Plan. Of the 50,160 shares of
common stock outstanding for options, 36,320 shares of common stock were issued
as incentive stock options. The remaining shares outstanding for options were
granted to each non-employee director equally as nonstatutory stock options.
Pursuant to Section 422 of the Internal Revenue Code, shareholder approval is
required for the incentive stock options to qualify for favorable tax treatment.
Exercise prices of options granted under all plans are current market prices at
time of grant.

-41-

<PAGE>

Weighted
Non-Employee average
Employee Director Exercise
Year ended December 31, 1996 Stock Options Stock Options Prices
------------- ------------- ------
Outstanding 1995 ............... 92,514 43,680 $14.86
Lapsed ......................... (3,460)
Adjustment for stock dividend... 2,074 956
Outstanding .................... 94,588 41,176 $14.68
Year ended December 31, 1997
Outstanding 1996 ............... 94,588 41,176 $14.68
Granted ........................ 16,720
Exercised ...................... (686) (2,058)
Adjustment for stock dividend 1,864 658
Outstanding .................... 95,766 56,622 $15.13
Year ended December 31, 1998
Outstanding 1997 ............... 95,766 56,622 $15.13
Granted ........................ 3,000
Exercised ...................... (11,361) (500)
Adjustment for stock dividend... 961 1,133
Outstanding .................... 88,366 57,255 $15.00

The Company measures stock based compensation costs using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the stock
option plans been determined based on the fair value at the grant date for
awards in 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:

1998 1997
---- ----
Net income - as reported $1,860,000 $1,608,000
Net income - pro forma $1,822,000 $1,481,000
Basic income per share - as reported $ 2.50 $ 2.17
Basic income per share - pro forma $ 2.45 $ 2.00
Diluted income per share - as reported $ 2.25 $ 2.04
Diluted income per share - pro forma $ 2.20 $ 1.86

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 2.0% for 1998 and 1997; risk-free interest rate
of 5.96% and 6.34% for 1998 and 1997 respectively; expected lives of 10 years
for 1998 and 1997, which is the option term; and volatility of 23.00% and 5.00%
for 1998 and 1997 respectively.

-42-

<PAGE>

Stock Dividends:

The Company has declared stock dividends in December and June of 1998,
December and June of 1997 at the following rates $0.40, $0.31, $0.23, $0.21,
respectively, with fractional shares paid in cash. The Company issued 7,141 and
6,746 shares of common stock in conjunction with these dividends. Accordingly,
amounts equal to the fair market value (based on quoted market prices as
adjusted) of the additional shares issued have been charged to retained earnings
and credited to common stock and additional paid-in capital. Earnings per common
share, weighted average shares outstanding, and all stock option activity have
been restated to reflect the stock dividends.

Preferred Stock:

The Company authorized 1,000,000 shares of preferred stock at $5 par value.
At December 31, 1998 no shares were issued or outstanding.

12. Earnings Per Share

The following table sets forth the computation of basic and diluted
earnings per share:

1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $1,860,331 $1,607,801 $1,497,720
----------------------------------------

Denominator:
Denominator for basic earnings
per share - weighted average shares 744,247 741,616 740,398

Effect of dilutive securities:
Employee stock options 82,359 56,618 21,891
----------------------------------------

Dilutive potential common shares
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 826,606 798,234 762,289
========================================

Basic earnings per share $2.50 $2.17 $2.02
Diluted earnings per share $2.25 $2.04 $1.99
</TABLE>

13. Fair Value of Financial Instruments:

The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair

-43-

<PAGE>

value estimates are made at a specific point in time based on the type of
financial instrument and relevant market information.

Because no quoted market price exists for a significant portion of the
Company's financial instruments, the fair values of such financial instruments
are derived based on the amount and timing of future cash flows, estimated
discount rates, as well as management's best judgement with respect to current
economic conditions. Many of the estimates involve uncertainties and matters of
significant judgement and cannot be determined with precision.

The fair value information provided is indicative of the estimated fair
value of those financial instruments and should not be interpreted as an
estimate of the value of Grange National Banc Corp. taken as a whole. The
disclosures do not address the value of recognized and unrecognized
non-financial assets and liabilities or the value of future anticipated
business.

The following methods and assumptions were used to estimate the fair values
of significant financial instruments at December 31, 1998 and 1997:

Cash and Due From Banks:

The carrying amounts of cash and due from banks approximate fair value.

Interest Bearing Deposits:

Carrying amounts of variable rate or demand deposits approximate fair
value. The fair value of fixed rate or fixed term interest bearing deposits are
estimated based on discounting future cash flows using current rates.

Securities:

Fair values of securities are based on quoted market prices.

Loans:

For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values for
mortgage, consumer, commercial real estate and commercial loans are estimated by
discounting future cash flows using interest rates currently being offered with
similar terms to borrowers with similar credit quality.

Deposits:

The fair value of deposits with no stated maturity; such as, non-interest
bearing demand deposits, variable rate savings, money market and checking
accounts is equal to the carrying amount payable on demand. Fair value of
certificates of deposit are estimated by discounting estimated future cash flows
using current rates offered for deposits of similar maturities.

-44-

<PAGE>

Other:

The estimated fair values of accrued interest receivable, accrued interest
payable, debt (principally short term including treasury tax and loan deposits),
and other assets and liabilities are deemed to be equal to the amounts
recognized in the consolidated statements of financial position.

The following table presents the carrying amounts and estimated fair values
of financial instruments at December 31:

1998 1997
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
--------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .......................... $ 2,615 $ 2,615 $ 2,514 $ 2,514
Interest bearing deposits ........................ 5,610 5,610 2,418 2,415
Investment securities ............................ 46,706 46,886 38,208 38,318
Loans, net ....................................... 89,559 94,078 76,228 74,407
Accrued interest receivable and other assets ..... 2,081 2,081 1,731 1,731

Financial liabilities:
Deposit liabilities .............................. 129,891 131,202 108,789 108,253
Other borrowed funds ............................. 4,471 4,477 2,279 2,279
Accrued interest payable and other liabilities... 823 823 711 711
</TABLE>

Summary of Quarterly Results of Operations

First Second Third Fourth
In thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1998
- ----
Interest income.................... $2,359 $2,457 $2,589 $2,712
Net interest income................ 1,320 1,367 1,434 1,543
Provision for loan losses.......... 75 50 75 70
Other income....................... 189 170 201 229
Other expenses..................... 830 862 920 1,002
Net income......................... 414 430 463 553
Net income per share:
Basic......................... $0.57 $0.59 $0.63 $0.71
Diluted....................... $0.51 $0.53 $0.56 $0.65

-45-

<PAGE>

First Second Third Fourth
In thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1997
- ----
Interest income ......... $1,983 $2,147 $2,298 $2,370
Net interest income ..... 1,135 1,228 1,310 1,337
Provision for loan losses 30 30 55 75
Other income ............ 133 167 188 189
Other expenses .......... 731 788 798 888
Net income .............. 362 389 436 420
Net income per share:
Basic .............. $ 0.50 $ 0.54 $ 0.55 $ 0.58
Diluted ............ $ 0.47 $ 0.51 $ 0.54 $ 0.52

The above gives retroactive effect to stock dividends and stock splits

Price Range of Common Stock and Dividends:

The Company's Common Stock is traded in the market. Prior to the stock
offering in 1994 the stock was not actively traded. The market prices are the
prices at which shares have been sold by stockbrokers to the Company's
knowledge. The following firm is known to make a market in the Common Stock of
Grange National Banc Corp.

Hopper Soliday & Company, Inc.
1825 Oregon Pike
Lancaster, PA 17601
(717) 560-3000

As of March 17, 1998 there were approximately 855 shareholders of record.

<TABLE>
<CAPTION>
1998 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Bid............................ $43.50 $38.00 $30.00 $30.62
Ask............................ $47.50 $39.00 $31.00 $31.00
Stock Dividends per Share...... $0.405 None $0.31 None

<CAPTION>
1997 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Bid............................ $27.50 $21.25 $20.75 $20.00
Ask............................ $28.00 $21.75 $21.25 $21.00
Stock Dividends per Share...... $0.23 None $0.21 None

<CAPTION>
1996 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Bid............................ $20.00 $18.25 $16.75 $15.88
Ask............................ $21.00 $18.75 $17.25 $16.38
Stock Dividends per Share...... $0.20 None $0.17 None
</TABLE>

The above are historical amounts as adjusted for the effects of a two for one
stock split on July 30, 1998.

-46-

<PAGE>

Stock Transfers: Shareholder Services:
Mildred Grose, Assistant Vice-President Philip O. Farr, Comptroller
P.O. Box 40 198 E. Tioga St.
Meshoppen, Pa. 18630 Tunkhannock, Pa. 18657
(717) 833-2131 (717) 836-2100

Offices

<TABLE>
<S> <C>
Laceyville Lawton
Kevin Huyck, Branch Manager Yvonne Nuss, Branch Manager
(570) 869-1522 (570) 934-2178

Meshoppen Bowman's Creek
Mildred Grose, AVP and Br. Mgr. Paula C. Coleman, Asst. Cashier and Br. Mgr.
(570) 833-2131 (570) 298) 2163

Tunkhannock Edwardsville
Richard D. Stark, Vice President and Br. Mgr. Donald Werts, Asst. Cashier and Br. Mgr.
(570) 836-2100 (570) 283-4462

Little Meadows Towanda
Lorraine Corwin, Br. Mgr Karen Glossenger, Branch Manager
(570) 623-2297 (570) 265-4711

Back Mountain Pine Mall
L. Lee Posten, Asst. Cashier and Br. Mgr. Debra D. Hannon, Branch Manager
(570) 696-6958 (570) 208-1500
</TABLE>

On the Internet
Web Site: www.grangebank.com E-Mail: [email protected]

Officers

Robert C. Wheeler, Chairman of the Board

John W. Purtell, Vice Chairman

Thomas A. McCullough, President

Sally A. Steele, Secretary of the Corporation

Melvin E. Milner, Vice President

Joseph I. Killeen, Vice President

Richard D. Stark, Vice President

Philip O. Farr, Comptroller

-47-

<PAGE>

Directors

Brian R. Ace,
Owner, Laceyville Hardware

Thomas C. Burns
Retired; Dentist until 1994

Edward A. Coach
Certified Public Accountant

Thomas A. McCullough
President and Chief Executive Officer
of the Bank and the Company since 1991

W. Kenneth Price
Co-owner of Ken Mar Home Furnishings

John W. Purtell
President, S.F. Williams Inc.,
automobile dealership

Sally A. Steele
Attorney

R. Levi Tyler
Dairy Farmer

Robert C. Wheeler
Retired; Chief Executive Officer of
The Bank and Company until 1990

-48-

<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM OUR DECEMBER 31, 1998 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,610
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 30,225
<INVESTMENTS-HELD-FOR-SALE> 16,481
<INVESTMENTS-CARRYING> 16,678
<INVESTMENTS-MARKET> 90,499
<LOANS> 940
<ALLOWANCE> 149,953
<TOTAL-ASSETS> 129,891
<DEPOSITS> 471
<SHORT-TERM> 823
<LIABILITIES-OTHER> 4,000
<LONG-TERM> 0
0
4,489
<COMMON> 10,278
<OTHER-SE> 149,953
<TOTAL-LIABILITIES-AND-EQUITY> 7,532
<INTEREST-LOAN> 2,406
<INTEREST-INVEST> 179
<INTEREST-OTHER> 10,117
<INTEREST-TOTAL> 4,342
<INTEREST-DEPOSIT> 4,452
<INTEREST-EXPENSE> 5,664
<INTEREST-INCOME-NET> 270
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 3,609
<EXPENSE-OTHER> 2,570
<INCOME-PRETAX> 2,570
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 176
<NET-INCOME> 2,036
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.25
<YIELD-ACTUAL> 4.72
<LOANS-NON> 205
<LOANS-PAST> 10
<LOANS-TROUBLED> 109
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 767
<CHARGE-OFFS> 102
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 940
<ALLOWANCE-DOMESTIC> 940
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>