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2011 Year in Review

Founded in 1902, Penn Security Bank

& Trust Company is a wholly-owned subsidiary of Penseco Financial Services Corporation with headquarters located at 150 North Washington Avenue in Scranton, Pennsylvania. We maintain 12 full-service banking locations throughout Lackawanna, Luzerne, Monroe and Wayne Counties.

The Bank offers a wide range of personal and business loan and deposit products as well as trust, investment and brokerage services. As a principal member of MasterCard? & Visa? and a direct member of Discover, the Bank maintains an in-house full-service merchant services department providing credit and debit card processing for our business customers. We also issue MasterCard? & Visa? credit cards and MasterCard? debit cards.

We will continue to focus on our basic beliefs of helping our customers achieve their financial goals, create a work environment where our employees can develop professionally and help to make our local communities better places to live and work. We will do this by focusing on our core values and company vision as we work to become the premier financial services company in Northeastern Pennsylvania as measured by quality, earnings and growth.

Strength You Can Bank On

Board of Directors

Seated left to right: Emily S. Perry, Retired Insurance Account Executive, Community Volunteer Richard E. Grimm, Executive Vice President, Treasurer Craig W. Best, President and CEO D. William Hume, Chairman of the Board of Directors Sandra C. Phillips, Penn State Master Gardener, Community Volunteer

Standing left to right: P. Frank Kozik, Secretary, CEO of Scranton Craftsmen, Inc. Russell C. Hazelton, Retired Captain, Trans World Airlines Steven L. Weinberger, President of G. Weinberger Company Robert W. Naismith, Ph.D., Chairman of JuJaMa, Inc. James B. Nicholas, President of D. G. Nicholas Company James G. Keisling, Treasurer of Northeast Architectural Products, Inc. Joseph G. Cesare, M.D., Orthopedic Surgeon, President of Scranton Orthopedic Specialists

Missing from photo: Robert J. Mellow, Retired State Senator for the Commonwealth of Pennsylvania

Financial Highlights

Net Income Earnings Per Share Dividends Per Share Total Capital Total Deposits Total Assets ROA ROE

2011

$10,705 $3.27 $1.68 $129,000 $720,518 $924,674 1.15% 8.48%

2010

$11,722 $3.58 $1.68 $121,922 $691,032 $916,087 1.32% 9.74%

2009

$8,372 $2.80 $1.68 $117,397 $645,434 $883,327 1.04% 7.93%

2008

$8,613 $4.01 $1.66 $73,642 $424,725 $628,967 1.40% 11.89%

2007

$6,698 $3.12 $1.58 $69,715 $416,533 $580,793 1.15% 9.75%

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2011 Year in Review

D. William Hume and Craig W. Best

Dear Shareholders,

Penn Security's financial performance for 2011 continued to be strong as our earnings, asset quality and capital ratios all remained in the top 25th percentile of financial institutions in our peer group. Earnings for 2011 totaled $10.7 million and our return on average assets (ROA) stood at 1.15% which is very strong when measured against banking industry standards. However, the 2011 earnings were $1.0 million less the 2010 earnings.

Total revenues reached $45.0 million but were 1.1% lower than 2010 revenues of $45.5 million. Net-interest income also declined by $1.0 million in fiscal year 2011 and totaled $32.3 million. These decreases were impacted by the extremely low interest rate environment that prompted many customers to refinance loans to take advantage of lower interest rates. Non-interest income, excluding a one-time $500,000 gain on an asset recovery, was flat at $12.2 million for both 2010 and 2011, as increases in merchant income and debit card revenue were offset by declines in brokerage revenue and service charges on deposits.

Non-interest expense increased by $324,000 or 1.1% in 2011 and totaled $28.8 million. Increases in credit management expenses coupled with higher regulatory and compliance expenses represented the majority of this increase. These costs were partially offset by a decrease in FDIC insurance premiums.

Northeastern Pennsylvania continues to work through the economic downturn that began in the middle of 2008. The slowdown in business activity, high unemployment, declining real estate values and historically low rates will put pressure on our margin and our earnings. The strong financial performance Penn Security has achieved during this economic slowdown is a testament to the dedication and hard work of our employees. Our employees' constant focus on asset quality, improving earnings and managed growth will need to continue for our company to deliver a high level of earnings.

QUALITY??Our primary focus is to maintain asset quality while still providing our community businesses with the loans they need to expand their operations. In 2011, we added staff to our lending and credit management areas. These credit professionals were able to grow our commercial and municipal loans by 13% while reducing our non-performing loans from .66% of total

loans in 2010 to .50% of total loans in 2011. Our focus on asset quality will continue in 2012. Constant review of our loan portfolio allows us to better recognize declining trends before they become problems. This enables us to help our customers work through this challenging economic period.

Maintaining the appropriate level of capital is important to the quality of our balance sheet. In 2011, our total capital increased 5.8% to $129.0 million compared to $122.0 million in 2010. Our capital to asset ratio of 13.95% stands as one of the higher ratios in our industry. A sound capital base provides flexibility when reviewing market opportunities and is added protection for the payment of a strong dividend.

EARNINGS??The slowdown in the economy and corresponding low rate environment continue to put pressure on our margin as refinanced loans and matured investments are replaced by lower yielding assets. Balance sheet restructuring and quality growth are the long-term solutions to stabilizing our margin. In the short term, aggressive expense management is necessary to maintain top tier earnings performance.

GROWTH??Growth of our checking, savings and money market deposits was very strong with a 14.7% increase in 2011. Our checking account relationships grew 3.0% in 2011 as we continued implementing our new account acquisition plan, our customer service standards and our branch network revitalization initiative.

Last year we completely remodeled our East Scranton Office. We also plan to have our new office at the corner of Davis Street and Birney Avenue in Scranton completed by the third quarter of 2012. This new office will give greater visibility and convenience to our customers. Once this office is opened, we will be able to reduce expenses in our South Side Office.

In May of this past year, Edwin J. Butler retired from our Board of Directors. His retirement marked the end of a 40 year career with Penn Security Bank. Our Board, management and employees are truly grateful for his dedication and service and wish him the best in his retirement.

The next few years will continue to be challenging for our industry and our company. High unemployment, a depressed real estate market and historically low rates will stress our margin. Our employees' dedication to serving our customers while focusing on asset quality, earnings improvement and managed growth are key to continuing our strong performance in the coming years.

Sincerely yours,

Craig W. Best President & CEO

D. William Hume Chairman of the Board

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Let's talk

mortgages...

Deborah A. Wright Vice President

Mortgage Loan Officer NMLS ID# 801229

Let's talk

mortgages...

Diane J. Condran Mortgage Loan Officer

NMLS ID# 801191

Debbie has been assisting and

Diane has over twenty-five years of

working hard for her clients since

experience in residential and small

1987. She is responsible for taking

business lending. In addition, she

Bank Highlights

care of all of her client's financial needs. This includes, but is not limited to, new home purchases,

has held several managerial positions within her field.

construction loans, and refinances.

Diane will maintain offices in both

Moscow and Old Forge. She will

Debbie is based at Penn Security's

be serving clients in the Pocono

East Scranton Office Renovations Completed Central City Office and serves clients in Lackawanna County.

Region: East Stroudsburg, Gouldsboro, Moscow & Mount Pocono;

Southern Lackawanna Region: Old

During

2011,

renovations

at

our

East

Scranton

Office

completed

the final phase Forge & Taylor; Luzerne Duryea, Pittston & Wilkes

BoRaefrrgeiao. n:five-part

capital

improvement

plan.

The

masonry work on the exterior of the bank was cleaned and the stone veneer was power washed. In addition, a clear coat of

preservative was placed on the floral filigrees that adorn the top of the building and five new arch top windows replaced the old

Strength You Can Bank On

Strength You Can Bank On

energy inefficient and opaque glass windows. | 800 327 0394

| 800 327 0394

A new customer drive-up window was installed, the parking lot repaved, sidewalks were replaced and "green space" was

incorporated into the project in the form of flower beds, ornamental trees and hedges. The drive-up window was a welcomed

addition for our customers who no longer have to leave their car to conduct their business. The entire building fa?ade was fitted

with up-lighting which accents the stone and arch work on the building. The new lighting is most impressive at night and is a

beacon for the renaissance that is taking place in this neighborhood.

The completion of all renovations has been welcomed by our customers and neighbors. The project was managed by the

bank's Facilities Manager, with some of the work completed by the bank's Facilities Team.

Mortgage Loan Officers Engage Customers

Penn Security Bank implemented a Residential Mortgage Initiative to help meet the ever changing needs of our customers. The initiative focused on hiring full-time mortgage loan officers who work with our branch network and local Realtors?. These mortgage loan officers provide added convenience for our customers. They meet with customers at realtor offices, the customer's home, or the customer's place of business to take mortgage applications on laptop computers.

This initiative helped us to be more competitive by reducing mortgage processing time and providing a higher level of service to our customers. The implementation of this initiative supports our core values of engaging our customers and making things as easy as possible for them while helping them to meet their financial goals.

Community Commitment

Our Support of Dress for Success? Lackawanna Continues

Early in 2011, Penn Security's Charitable Foundation provided a grant to Dress for Success? Lackawanna to support the organization's Professional Women's Group. Dress for Success? Lackawanna is a non-profit organization dedicated to promoting the economic independence of disadvantaged women by providing professional attire and a network of support to help them thrive in the workplace and in life.

Women making the transition from unemployment to the workforce face many challenges, from understanding corporate culture to handling personal finances, often without any support systems in place to help them navigate this daunting change.

The mission of the Professional Women's Group is to provide the network of employed Dress for Success? clients a partnership of support, practical information and inspiration to achieve self-defined success in their career and life.

Bonnie L. Baker, Penn Security Bank's Vice President of Residential Loan Underwriter and Loan Operations Manager, assisted by Christine Donlan from the United Credit Bureau were the featured speakers for the November 2011 Professional Women's Group meeting. Information provided during the meeting focused on establishing/repairing credit and how to apply for credit.

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