Penseco Financial Services (PFNS) PRE 14A Preliminary proxy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

x	Preliminary Proxy Statement
¨	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
¨	Definitive Proxy Statement
¨	Definitive Additional Materials
¨	Soliciting Material Pursuant to Rule 14a-12
PENSECO FINANCIAL SERVICES CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x	No fee required.
¨	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
	(1)	Title of each class of securities to which transaction applies:
	(2)	Aggregate number of securities to which transaction applies:
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)	Proposed maximum aggregate value of transaction:
	(5)	Total fee paid:
¨	Fee paid previously with preliminary materials.
¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

PENSECO FINANCIAL SERVICES CORPORATION

150 North Washington Avenue

Scranton, Pennsylvania 18503

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 1, 2012

NOTICE IS HEREBY GIVEN that the 2012 Annual Meeting of Shareholders (“Annual Meeting”) of Penseco Financial Services Corporation (the “Company”) will be held at 2:00 P.M., local time, on May 1, 2012 at the Hilton Scranton and Conference Center, 100 Adams Avenue, Scranton, Pennsylvania to consider and vote on the following:

1. The election of three directors to the board of directors of the Company, each to serve until the 2016 annual meeting of shareholders and until his or her successor is duly elected and qualified;

2. The election of one director to the board of directors of the Company, to serve until the 2015 annual meeting of shareholders and until his or her successor is duly elected and qualified;

3. A proposal to amend the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws;

4. A proposal to approve, on an advisory basis, the compensation of our named executive officers;

5. A proposal to ratify the appointment of McGrail, Merkel, Quinn & Associates as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2012; and

6. Such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

NOTE: The Board of Directors is not aware of any other business to come before the Annual Meeting.

Shareholders of record of the common stock of Penseco Financial Services Corporation at the close of business on February 17, 2012 are entitled to vote at the Annual Meeting and any adjournment or postponement of the meeting. A list of shareholders entitled to vote at the Annual Meeting will be available at our offices at 150 North Washington Avenue, Scranton, Pennsylvania, for a period of five days prior to the Annual Meeting and will also be available at the Annual Meeting.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS

FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 1, 2012

This proxy statement, the enclosed proxy card, and our 2011 Annual Report including the Company’s 2011 audited consolidated financial statements and as filed with the U.S. Securities and Exchange Commission, or the “SEC,” are available at http://wwwcfpproxy.com/6609.

/s/ Craig W. Best

Craig W. Best

President and Chief Executive Officer

March 30, 2012

Scranton, Pennsylvania

IMPORTANT: The prompt return of proxies will save us the expense of further requests for proxies in order to ensure a quorum. A self-addressed envelope is enclosed for your convenience. No postage is required if mailed in the United States.

PENSECO FINANCIAL SERVICES CORPORATION

PROXY STATEMENT

GENERAL INFORMATION

This proxy statement is being furnished in connection with the solicitation of proxies beginning on or about March 30, 2012 by the Board of Directors of Penseco Financial Services Corporation, referred to as “we,” “Penseco” or the “Company,” which is a Pennsylvania business corporation headquartered at 150 North Washington Avenue, Scranton, Pennsylvania 18503, to be voted at our 2012 Annual Meeting of Shareholders, referred to as the “Annual Meeting.”

Penseco is the holding company for Penn Security Bank and Trust Company, or the “Bank.”

The Annual Meeting will be held at the Hilton Scranton and Conference Center, 100 Adams Avenue, Scranton, Pennsylvania on May 1, 2012 at 2:00 P.M., local time.

This proxy statement, the enclosed proxy card and the Company’s 2011 Annual Report are being mailed to shareholders of record on or about March 30, 2012.

INFORMATION ABOUT VOTING

Who Can Vote at the Meeting

You are entitled to vote the shares of Penseco Financial Services Corporation common stock that you held as of the close of business on February 17, 2012 at the Annual Meeting. As of the close of business on February 17, 2012, there were 3,276,079 shares of Company common stock outstanding.

Ownership of Shares; Attending the Meeting

You may own shares of Penseco in one of the following ways:

• Directly, in your name as the shareholder of record;

• Indirectly, through a broker, bank or other holder of record in “street name”; or

• Indirectly, through the Penn Security Bank and Trust Company Employee Stock Ownership Plan, or “ESOP.”

If your shares are registered directly in your name, you are the holder of record of these shares and we are sending these proxy materials directly to you. As the holder of record, you have the right to give your proxy directly to us or to vote in person at the Annual Meeting.

If you hold your shares in street name, your broker, bank or other holder of record is sending these proxy materials to you. As the beneficial owner, you have the right to direct your broker, bank or other holder of record how to vote on your behalf by filling out a voting instruction form that accompanies your proxy materials. Your broker, bank or other holder of record may allow you to provide voting instructions by telephone or by the Internet. Please see the voting instruction form provided by your broker, bank or other holder of record that accompanies this proxy statement. If you hold your shares in street name, you will need proof of ownership to be admitted to the meeting. (For example, a recent brokerage statement or letter from your bank or broker.) If you want to vote your shares of Penseco common stock held in street name in person at the Annual Meeting, you must obtain a written proxy in your name from the broker, bank or other holder of record of your shares.

If you hold your shares in an ESOP account, you will receive a single voting instruction card for the ESOP that reflects all shares you may vote under the ESOP. Under the terms of the ESOP, the ESOP trustee votes all shares held by the ESOP, but each ESOP participant may direct the trustee how to vote the shares of common stock allocated to his or her account. The ESOP trustee will not vote shares for which no voting instructions are received.

Quorum and Vote Required

Quorum.We will have a quorum present and will be able to conduct the business at the Annual Meeting if the holders of a majority of the shares of our common stock outstanding and entitled to vote as of the record date are present at the meeting, either in person or by proxy.

Votes Required for Proposals.At the Annual Meeting, shareholders will be asked to consider and vote on at least five proposals.

In the elections of directors, you may vote in favor of all the nominees for director, withhold votes as to all nominees, or withhold votes as to specific nominees. With respect to the election of directors, shareholders have cumulative voting rights, meaning you are entitled to cast in the aggregate a number of votes equal to the number of shares owned multiplied by the number of directors to be elected, and you may cast the whole number of your votes for any one nominee, or distribute them among the nominees in any way you choose. Shareholders may exercise their right to cumulative voting by attaching to their proxy card instructions indicating how many votes their proxy should give to each nominee. The nominees receiving the highest number of votes up to the number of directors to be elected to each class shall be elected. The proxy holders named on the accompanying proxy will vote for the Board’s nominees unless the shareholder has withheld his or her vote from some or all of the nominees. The proxy holders may exercise discretionary authority to cumulate votes in the election of directors by distributing the votes they are authorized to cast among the Board’s nominees in order to elect the largest possible number of them and, to the extent possible, in order to cast the same number of votes for each Board nominee.

With respect to the proposal to amend the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws, you may vote for the proposal, against the proposal, or abstain from voting. For this proposal, you are entitled to one vote for each share of common stock you held as of the record date. Pursuant to the Pennsylvania Business Corporation Law of 1988, as amended, the amendment to the articles of incorporation will be approved if it receives the affirmative vote of a majority of votes cast at the Annual Meeting.

With respect to the proposal to approve, on an advisory basis, the compensation of our named executive officers, you may vote for or against the approval of the compensation as disclosed in this proxy statement, or abstain from voting. For this proposal, you are entitled to one vote for each share of common stock you held as of the record date. In accordance with our bylaws, the proposal will be deemed approved if it receives the affirmative vote of a majority of shares represented, in person or by proxy, at the Annual Meeting.

With respect to the proposal to ratify the appointment of McGrail, Merkel, Quinn & Associates as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2012, you may vote for the proposal, against the proposal, or abstain from voting. For this proposal, you are entitled to one vote for each share of common stock you held as of the record date. In accordance with our bylaws, the affirmative vote of a majority of shares represented, in person or by proxy, at the Annual Meeting is required to ratify the appointment of the independent registered public accounting firm.

Effect of Not Casting Your Vote. If you hold your shares in street name, it is critical that you instruct your bank or broker how to vote. Recent rule changes have further limited the ability of your bank or broker to vote your uninstructed shares on a discretionary basis. Therefore, if you hold your shares in street name and you do not instruct your bank or broker how to vote, your bank or broker will not be permitted to vote your shares in the election of directors, on any matter related to executive compensation, or on other non-discretionary matters, and may elect not to vote your shares on other matters. A “broker non-vote” occurs when a broker submits a proxy that does not indicate a vote for some of the proposals because the beneficial owners have not instructed the broker on how to vote on such proposals. Brokers are permitted to vote uninstructed shares with respect to certain uncontested matters, including the proposal to ratify the appointment of our independent registered public accounting firm.

2

Broker non-votes are considered “present,” and as a result, will have the same effect as a vote against each proposal for which the affirmative vote of a majority of shares represented at the Annual Meeting is required. Broker non-votes are not considered to be “votes cast,” and, as a result, have no effect on the outcome of the elections of directors or any matter that is subject to approval upon the affirmative vote of a majority of votes cast.

How We Count Votes.If you return a valid proxy or attend the meeting in person, we will count your shares for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes, if any, also will be counted for purposes of determining the existence of a quorum.

Because the director nominees receiving the highest number of votes up to the number of directors to be elected to each class will be elected in the elections of directors, votes that are withheld will have no effect on the outcomes of the elections. Abstentions are considered to be present and, as a result, will have the same effect as a vote against each proposal for which the affirmative vote of a majority of shares represented at the Annual Meeting is required. Abstentions are not considered to be “votes cast,” and, as a result, have no effect on the outcome of any matter that is subject to approval upon the affirmative vote of a majority of votes cast. If any other business properly comes before the Annual Meeting, it will be approved if it receives the affirmative vote of a majority of shares represented, in person or by proxy, at the Annual Meeting, unless the subject matter is one upon which a different vote is required by express provision of law or by our articles of incorporation or bylaws.

Voting By Proxy

The Company’s Board of Directors is sending you this proxy statement in connection with its solicitation of proxies to request that you allow your shares of Company common stock to be represented at the Annual Meeting by the persons named on the enclosed proxy card. All shares of Company common stock represented at the Annual Meeting by properly executed and dated proxy cards will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our Board of Directors.

The Board of Directors recommends that you vote:

• FORthe election of each of the Board’s director nominees to serve in the Class of 2016;

• FOR the election the Board’s director nominee to serve in the Class of 2015;

• FORthe proposal to amend the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws;

• FORthe proposal to approve, on an advisory basis, the compensation of our named executive officers; and

• FOR the proposal to ratify the appointment of McGrail, Merkel, Quinn & Associates as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2012.

If any matters not described in this proxy statement are properly presented at the Annual Meeting, the persons named on the proxy card will use their judgment to determine how to vote your shares. This includes a motion to adjourn or postpone the meeting in order to solicit additional proxies. We do not know of any other matters to be presented at the Annual Meeting.

You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy you must either advise the Secretary of the Company in writing before your common stock has been voted at the Annual Meeting, deliver a later dated proxy, or attend the meeting and vote your shares in person. Attendance at the Annual Meeting will not itself constitute revocation of your proxy.

3

CORPORATE GOVERNANCE

General

We periodically review, revise and adopt new corporate governance policies and procedures in pursuit of the highest standards of ethical conduct, to report results with accuracy and transparency, and to maintain full compliance with the laws, rules and regulations that govern our operations.

The Board of Directors, which is elected by the shareholders, is our ultimate decision-making body, except with respect to those matters reserved to the shareholders. The Board selects our senior management team, which is charged with the day-to-day conduct of our business. The Board acts as an advisor and counselor to senior management and ultimately monitors its performance.

Corporate Governance Guidelines

Our common stock is quoted on the OTC Bulletin Board and is not listed on The Nasdaq Stock Market LLC (“Nasdaq”) or other national securities exchange; as such, we are not subject to Nasdaq or other exchange-based corporate governance rules. However, we firmly believe that sound corporate governance is in the best interests of the Company and our stakeholders, including our shareholders and employees.

The operation and mission of the Board is embodied in our Corporate Governance Guidelines, referred to as the “Guidelines,” a copy of which is posted on our website (www.pennsecurity.com). The Guidelines were adopted by the Board to serve as a framework for its oversight responsibilities and we believe they reinforce that the mission of the Board of Directors is to represent the shareholders’ interests in our success through the Board of Director’s active oversight and monitoring of management. Among other matters, the Guidelines:

• Establish that, as a matter of policy, the majority of the directors should be “independent;”

• Confirm that the Board of Directors shall maintain standing committees, including an Audit Committee, Compensation and Benefits Committee, and Nominating and Corporate Governance Committee, and that each of such committees will consist solely of independent directors;

• Provide for an annual evaluation by the Nominating and Corporate Governance Committee of the performance and procedures of the Board, among other reasons, to determine whether the Board and its committees are functioning effectively and in compliance with the Guidelines; and

• Provide that the non-management members of the Board of Directors shall meet without management present at regularly scheduled executive sessions, and that the independent members of the Board shall meet at least semi-annually in executive session.

Board Leadership Structure and Board’s Role in Risk Oversight

The Board of Directors of the Company has determined that the separation of the offices of Chairman of the Board and President and Chief Executive Officer enhances Board independence and oversight. Moreover, the separation of the Chairman of the Board and President and Chief Executive Officer allows the President and Chief Executive Officer to better focus on his responsibilities relating to day-to-day management of the Company, enhancing shareholder value and expanding and strengthening the Company’s franchise while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. Consistent with this determination, D. William Hume serves as Chairman of the Board of the Company and Craig W. Best serves as President and Chief Executive Officer of the Company.

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. The Company faces a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk, legal risk and reputational risk. Management is responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the

4

oversight of risk management. In its risk management oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board meets regularly with management to discuss strategy and risks facing the Company. In addition, during 2009, the senior level position of Chief Risk Officer was created and filled. Senior management attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters. The Chairman of the Board and independent members of the Board work together to provide strong, independent oversight of the Company’s management and affairs through its standing committees and, when necessary, special meetings of independent directors.

Primary responsibility for areas of risk oversight is allocated among our standing committees as follows.

Committee	Primary Areas of Risk Oversight
Audit Committee	Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters.
Nominating and Governance Committee	Risks and exposures associated with leadership, succession planning and corporate governance.
Compensation Committee	Risks and exposures associated with executive compensation programs and arrangements, including incentive plans.

Committees of the Board of Directors

The following table identifies our standing committees and their members as of December 31, 2011. The Board has determined that all members of each committee are independent in accordance with Nasdaq’s listing requirements. The Board’s Audit, Compensation and Benefits and Nominating and Corporate Governance Committees each operate under a written charter that is approved by the Board of Directors. Each committee reviews and reassesses the adequacy of its charter at least annually. The charters of all three committees are available on our website, www.pennsecurity.com.

Director	Audit Committee			Compensation and Benefits Committee			Nominating and Corporate Governance Committee
Russell C. Hazelton.		X
D. William Hume								X	*
James G. Keisling		X			X
P. Frank Kozik		X			X
Robert J. Mellow (1)		X
Robert W. Naismith					X	*
James B. Nicholas								X
Emily S. Perry					X			X
Sandra C. Phillips								X
Steven L. Weinberger		X	**					X
Number of Meetings in 2011		9			7			9

* Denotes Chairperson

** Denotes Interim Chairperson

(1) Resigned from the Board effective March 15, 2012.

5

Audit Committee. The primary purposes of the Audit Committee are to: oversee management’s preparation of financial reports and other financial information for submission to any governmental or regulatory body, the public, or other users; oversee management’s maintenance of internal controls and procedures for financial reporting, accounting and financial reporting processes generally, and the internal and independent audits of the Company’s financial statements; assist the Board in its oversight of the Company’s compliance with legal and regulatory requirements, including those requirements relating to financial controls and financial reporting, and such other requirements as may be established from time to time by the Board; evaluate the independence and oversee the performance of the Company’s independent public accountants; facilitate effective communication among the Board, management and the Company’s independent public accountants; and assist the Board in risk assessment and risk management.

The Board of Directors has determined that the Audit Committee does not have an “audit committee financial expert” as that term is defined in the SEC’s rules and regulations. The Company believes that Directors Hazelton, Keisling, Kozik and Weinberger, who currently comprise the Company’s audit committee, are qualified to carry out all of the duties and responsibilities imposed on the audit committee under the federal securities laws. Mr. Hazelton, who has served as a director of the Bank since 1977, has developed a familiarity with public company accounting and financial reporting matters as a result of his extensive service on the Company’s and Bank’s Board of Directors. Messrs. Kozik and Weinberger are each responsible for overseeing the day-to-day operations of Scranton Craftsmen, Inc. and G. Weinberger Company, respectively, and have therefore developed a strong understanding regarding corporate finance and accounting matters that enables them to assist the Company’s audit committee in fulfilling its duties and responsibilities. Mr. Keisling has experience regarding corporate finance and accounting matters through his position as the Treasurer of Northeast Architectural Products, Inc. and his prior service on the boards of other public companies, which enables him to serve as an effective member of the audit committee. In May of 2011, Mr. Weinberger was appointed to serve as the Interim Chairman of the Company’s audit committee.

Compensation and Benefits Committee. The responsibilities of the Compensation and Benefits Committee include reviewing and recommending to the Board compensation policies and practices for the Company’s employees, including our chief executive officer and other named executive officers; reviewing and recommending to the Board performance criteria for employees, and evaluating the performance of employees; reviewing and recommending to the Board salary, bonus, and other benefits, direct and indirect, of the Company’s employees; reviewing periodically the operation of the Company’s compensation programs to determine whether they are properly coordinated, achieving their intended purposes and whether they comport with the Company’s compensation philosophy; administering the Company’s compensation programs, including equity incentive programs, for all employees; overseeing risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans, and reviewing and evaluating the Company’s compensation policies and practices of compensating its employees, including non-executive officers, as they relate to risk management practices and risk-taking incentives; and reviewing and recommending to the Board the appropriate structure and amount of compensation for the Company’s directors.

Nominating and Corporate Governance Committee. The role of the Nominating and Corporate Governance Committee is to develop, and recommend to the Board for approval, the Company’s corporate governance guidelines and other governance policies, including the succession plan for the chief executive officer of the Company; recommend, for the Board’s selection, nominees for director of the Company and its subsidiaries; solicit recommendations from directors, management, and other appropriate third parties for potential Board member candidates and collect and analyze information regarding their suitability; review and respond to director nominations received from shareholders of the Company; and assist the Board in determining the composition of the Board and its committees, and of the board of directors and committees of the Company’s subsidiaries.

Director Compensation

The Company’s outside directors are compensated through a combination of retainers and meeting fees. Directors who are also employees of the Company or Bank do not receive additional compensation for their service on the Board of Directors. The level and mix of director compensation are reviewed by the Compensation and Benefits Committee on a periodic basis to ensure consistency with the objectives of the Company’s overall compensation philosophy. Specifically, in reviewing the level and mix of director compensation, the committee

6

considers the advice of our compensation consultant, which is based, in part, on its review of peer group compensation at comparable sized institutions. The Company’s Chief Executive Officer does not provide any determinations regarding the amount or form of director compensation.

2011 Director Compensation

The following table sets forth information concerning the compensation received by individuals who served as non-employee directors during the year ended December 31, 2011. During 2011, directors did not receive any perquisites.

Name	Fees Earned or Paid in Cash ($)		All Other Compensation ($)			Total ($)
Edwin J. Butler		12,350		—			12,350
Joseph G. Cesare, M.D.		33,400		—			33,400
Russell C. Hazelton		34,150		—			34,150
D. William Hume		49,700		—			49,700
James G. Keisling		45,650		—			45,650
P. Frank Kozik		37,900		—			37,900
Robert J. Mellow(1)		35,500		—			35,500
Robert W. Naismith, Ph.D.		39,350		—			39,350
James B. Nicholas		46,350		—			46,350
Emily S. Perry		41,650		—			41,650
Sandra C. Phillips		37,050		—			37,050
Jerry J. Weinberger		20,350		107,254	(2)		127,604
Steven L. Weinberger		42,850		—			42,850

(1) Resigned from the Board effective March 15, 2012.

(2) Represents a $17,004 retainer received in 2011 for services as General Counsel for the Company and the Bank and $90,250 Old Forge director payout.

Cash Retainer and Meeting Fees for Non-Employee Directors.The following table sets forth the applicable retainers and fees that were, or are expected to be, paid to our non-employee directors for their service on our Board of Directors during the fiscal years ending December 31, 2011 and 2012.

	2012		2011
Annual Retainer	$	15,000	$	15,000
Fee per Board Meeting:(1)
Regular Meeting		1,000		1,000
Special Meeting		1,000		1,000
Fee per Committee Meeting(2)		350		350

(1) The Chairman of the Board receives a fee of $1,250 per Board meeting.

(2) The Interim Chairman of the Audit Committee receives a fee of $550 per Committee meeting attended, and the Chairman of the Compensation and Benefits Committee and the Chairman of the Nominating and Governance Committee each receive a fee of $450 per Committee meeting attended.

Meetings of the Board of Directors

During 2011, the Board of Directors held 17 meetings.Each of the directors attended at least 75% of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served.

7

Director Attendance at the Annual Meeting

Our Guidelines set forth our expectation that all of our directors will attend annual meetings of our shareholders. Twelve of our directors attended our 2011 annual meeting of shareholders.

Employee Code of Ethics

To aid in its oversight of our management and employees, the Board of Directors has adopted a Code of Ethical Conduct applicable to all of our employees, including our principal executive officer and principal financial officer, and the employees of the Bank, our wholly owned subsidiary. The Code of Ethical Conduct is designed to enumerate the expectations of the Board of Directors for the conduct of our employees in carrying out our mission. The Code of Ethical Conduct requires that such individuals carry out their jobs in an honest and ethical manner, in compliance with laws, avoiding conflicts of interest, while implementing and maintaining our public communication and disclosure reporting systems. A copy of the Code of Ethical Conduct is posted on our website (www.pennsecurity.com).

In addition to the compliance reporting mechanisms set forth in the Code of Ethical Conduct, the Audit Committee of the Board has also implemented procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls and auditing matters, including a mechanism for the confidential, anonymous submission by our employees to a third party of concerns regarding questionable accounting or auditing matters.

8

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

No shareholder owns of record or is known by the Board of Directors to be the beneficial owner of more than 5% of our outstanding common stock.

The following table sets forth the information concerning the number of shares of Company common stock beneficially owned as of March 20, 2012 by each director or nominee for director, by the executive officers named in theSummary Compensation Table set forth below and by all directors and executive officers as a group. To the Company’s knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite his or her name.

Name	Amount and Nature of Beneficial Ownership (1)			Percent of Common Stock Outstanding (2)
Craig W. Best		6,425	(3)		*
Joseph G. Cesare, M.D.		139,498	(4)		4.3
Richard E. Grimm		3,122	(5)		*
Russell C. Hazelton		14,876	(6)		*
D. William Hume		5,510	(7)		*
James G. Keisling		49,305	(8)		1.5
P. Frank Kozik		20,060	(9)		*
Greg D. Misterman		772	(10)		*
Robert W. Naismith		40,446	(11)		1.2
James B. Nicholas		12,339	(12)		*
Emily S. Perry		5,607	(13)		*
Sandra C. Phillips		74,460	(14)		2.3
Patrick M. Scanlon		2,823	(15)		*
Steven L. Weinberger		36,777	(16)		1.1
All Directors and Executive Officers as a Group (21 individuals)		483,664	(17)		14.8	%

* Less than 1% of the outstanding shares of Common Stock or less than 1% of the voting power.

(1) The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC and include securities as to which the individual has, or shares, voting or investment power or has the right to acquire beneficial ownership of within 60 days after February 17, 2012. Beneficial ownership may be disclaimed as to certain of the securities.

(2) Based on 3,276,079 shares of Company common stock outstanding and entitled to vote as of the close of business on February 17, 2012.

(3) Includes 2,500 shares in a self-directed IRA and 343 shares allocated to Mr. Best’s ESOP account, with respect to which Mr. Best shares voting power, and 3,581 shares subject to restricted stock awards, over which Mr. Best has voting power and shares investment power.

(4) Includes 16,093 shares owned jointly by Mr. Cesare and his wife, 44,849 shares owned by Mr. Cesare’s wife and 76,177 shares owned by Tedesco Corp., over which Mr. Cesare’s wife has investment control.

(5) Includes 780 shares owned jointly by Mr. Grimm and his wife, and 2,338 shares allocated to Mr. Grimm’s ESOP account, with respect to which Mr. Grimm shares voting power.

(6) Includes 8,724 shares owned jointly by Mr. Hazelton and his wife, 800 shares owned by Mr. Hazelton’s wife and 960 shares in a self-directed IRA.

(7) Includes 1,989 shares owned jointly by Mr. Hume and his wife, 100 shares in a self-directed IRA owned by Mr. Hume’s wife and 3,421 shares in a self-directed IRA.

(8) Includes 1,400 shares owned jointly by Mr. Keisling and his wife, 29,132 shares in a self-directed IRA and 18,073 shares in custodial accounts.

(9) Includes 9,000 shares owned by Mr. Kozik’s wife.

9

(10) Includes 625 shares held in a self-directed IRA, and 147 shares allocated to Mr. Misterman’s ESOP account, with respect to which Mr. Misterman shares voting power.

(11) Includes 21,564 shares owned jointly by Dr. Naismith and his wife, 300 shares owned by Dr. Naismith’s wife and 18,582 shares in a self-directed IRA.

(12) Includes 2,500 shares owned by the Estate of Margaret B. Nicholas, for which Mr. Nicholas is Co-Executor and Beneficiary, 5,300 shares in a self-directed IRA, 1,000 shares owned by Mr. Nicholas’s wife and 3,539 shares held in trust accounts.

(13) Includes 3,087 shares owned jointly by Mrs. Perry, her husband and her children and 1,070 shares in a self-directed IRA.

(14) The shares are held in trust accounts.

(15) The shares are allocated to Mr. Scanlon’s ESOP account, with respect to which Mr. Scanlon shares voting power.

(16) Includes 950 shares held in a trust account, 750 shares in a self-directed IRA and 27,626 shares held in the following companies of which Mr. Weinberger has an interest in: Harold Weinberger Inc, J Weinberger Partners and G Weinberger Co.

(17) Includes all of the 76,159 shares held in the ESOP, over which an executive officer, as plan administrator, shares voting power (including shares allocated to our directors’ and executive officers’ respective ESOP accounts, with respect to which each applicable director and executive officer shares voting power).

10

MANAGEMENT

Following is information regarding our executive officers other than Craig W. Best, President and Chief Executive Officer, and Richard E. Grimm, Executive Vice President. Information regarding Messrs. Best and Grimm, both of whom are directors, is included under the heading “Directors Continuing in Office,” beginning on page 14, and additional information regarding the compensation of our name executive officers is included under the heading “Executive Compensation,” beginning on page 29.

William J. Calpin, Jr., Senior Vice President, Trust Services Division Head, age 62. Mr. Calpin has held his current position since October 2007. Prior to that he served as Senior Vice President, Trust Services management for seven years. He has eleven years of service at Penn Security. Mr. Calpin announced his retirement on March 2, 2012 effective April 30, 2012.

Robert P. Heim, Senior Vice President, Operations Division Head, age 57. Mr. Heim has held his current position since October 2007. Prior to that, he served as Director of Internal Audit for 16 years. He has 36 years of service at Penn Security.

Michael L. Jake, Senior Vice President, Chief Risk Officer, age 59. Prior to the merger of Old Forge Bank into the Bank in April 2009, he was Chief Financial Officer at Old Forge Bank for 15 years.

Andrew A. Kettel, Jr., Executive Vice President, Private Banking Division Head, age 62. Mr. Kettel has held his current position since October 2007. From 2004 to October 2007, he served as Head of our Retail Branch Operations. He has 41 years of service at Penn Security.

Michael M. Kilroy, Senior Vice President, Human Resources Division Head, age 53. Mr. Kilroy has held his current position since October 2010. Prior to joining Penn Security, he was Executive Vice President, Human Resources, PNC Financial Services for 13 years.

Greg D. Misterman, Executive Vice President, Chief Credit Officer, and Credit Division Head, age 53. Mr. Misterman has held his current position since March 2012. Prior to that, he served as Executive Vice President, Chief Lending Officer, Corporate Lending Division Head for five years. Prior to that, he served as Senior Vice President, Corporate Banking at Steuben Trust Company, from 2005 to January 2007, and as Vice President and Manager, Managed Assets Department, Partners Trust Company, from 2002 to 2005.

Patrick M. Scanlon, Senior Vice President, Finance Division Head, Controller and Treasurer, age 54. Mr. Scanlon has held his current position since February 2007. Prior to that, he served as Controller for 17 years. He has 36 years of service at Penn Security.

Lynn M. Peters Thiel, Senior Vice President, Retail Banking Division Head, age 51. Ms. Thiel has held her current position since December 2011. Prior to that, she served as Senior Vice President, Planning & Development Division Head for five years and as Vice President & Compliance Officer for six years. She has eleven years of service at Penn Security.

Karen L. Thomas, Senior Vice President, Marketing Manager, age 65. Ms. Thomas has held her current position since November 2007. Prior to joining Penn Security, she was Marketing Director at Pennstar Bank for 23 years.

James M. Tobin, Senior Vice President, Charge Card Manager, age 56. Mr. Tobin has held his current position since May 2010 and, prior to that, served as Vice President, Charge Card Manager. He has 34 years of service at Penn Security.

Thomas P. Tulaney, Executive Vice President, Chief Lending Officer, Corporate Lending Division Head, age 51. Mr. Tulaney has held his current position since March 2012. Prior to that, he served as Executive Vice President, Deputy Chief Lending Officer for 11 months. Prior to joining Penn Security, he was Senior Executive Vice President, Commercial Sales Division Manager, First National Community Bank for 17 years.

Edward R. Walsh, Senior Vice President, Asset Recovery and Loan Review Officer, age 63. Mr. Walsh has held his current position since June 2011 and, prior to that, served as Vice President, Asset Recovery and Loan Review Officer. He has six years of service at Penn Security.

11

ITEMS TO BE VOTED ON BY SHAREHOLDERS

Proposal 1–Election of Directors: Class of 2016

Proposal 2–Election of Director: Class of 2015

The Company’s Board of Directors currently consists of twelve members, and is divided into four classes, which are intended to be as nearly equal in number as possible. We typically refer to these classes by the year in which the term of the class expires (the Class of 2012, the Class of 2013, the Class of 2014 and the Class of 2015). Due to reductions in the number of directors constituting the entire Board over the past few years, the classes have become unbalanced. To ensure that our classes of directors are as nearly equal in number as possible, we have nominated three directors to be elected at the Annual Meeting to the Class of 2016, and one director to be elected to the Class of 2015. The election will result in each of our classes of directors being comprised of three directors. The directors elected at the Annual Meeting to the Class of 2016 will serve approximately four years, until the 2016 annual meeting of shareholders and until their successors are elected and qualify. The director elected at the Annual Meeting to the Class of 2015 will serve approximately three years, until the 2015 annual meeting of shareholders and until his or her successor is elected and qualifies. The incumbent directors in the Classes of 2013, 2014 and 2015 will continue to serve until the annual meeting of shareholders for the year in which their respective terms expire, and until their successors are elected and qualify.

The Board of Directors has nominated Joseph G. Cesare, M.D., Robert W. Naismith, Ph.D. and Emily S. Perry for election to the Board as the Class of 2016, each to hold office until the 2016 annual meeting of shareholders and until his or her successor is elected and qualifies. The Board of Directors has nominated Russell C. Hazleton for election to the Board as a member of the Class of 2015, to hold office until the 2015 annual meeting of shareholders and until his successor is elected and qualifies. The Board’s nominees for the Classes of 2015 and 2016 are currently members of our Board of Directors.

The Board has determined that each of the directors, except for Craig W. Best and Richard E. Grimm, is independent under our Corporate Governance Guidelines and Nasdaq listing standards. In making its determination, the Board took into account the loan and deposit relationships that our directors, their family members and affiliated businesses maintain with the Bank; certain mechanical contracting services provided by G. Weinberger Company, a corporation of which Steven L. Weinberger is an owner and the President; and certain advisory board referral and corporate secretary fees paid to Sandra C. Phillips and P. Frank Kozik, respectively.

Unless you indicate on your proxy card that your shares should not be voted for certain nominees, the Board of Directors intends that the proxies solicited by it will be voted for the election of all of the Board’s nominees. If any nominee is unable to serve, the persons named on the proxy card would vote your shares to approve the election of any substitute proposed by the Board of Directors. Alternatively, the Board may adopt a resolution to reduce the size of the Board. At this time, the Board of Directors knows of no reason why any nominee might be unable to serve.

The Board of Directors recommends that you vote “FOR” the election of each of its nominees.

12

Information regarding the Board of Directors’ nominees and the directors continuing in office is provided below.

Nominees for Election of Class of 2016 Directors

Name	Age	Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
Joseph G. Cesare, M.D. (1)	74	The Company has concluded that Dr. Cesare is qualified to serve as a director of the Company as a result of his prior experience serving on the Board of Directors of Old Forge Bank. Dr. Cesare served as a director of Old Forge Bank from 2005 until April 1, 2009, when Old Forge Bank was acquired by the Company. During this time, Dr. Cesare developed a detailed understanding of the business of Old Forge Bank and financial institutions in general that contributed to the successful integration of the operations of Old Forge Bank and the Bank and will enable him to successfully serve the Company on a going forward basis. Additionally, Dr. Cesare is President of Scranton Orthopedic Specialists and has been practicing in the community since 1974 as an orthopedic surgeon. Dr. Cesare’s strong ties to the community, through his medical practice, provides the Board of Directors with valuable insight regarding the local business and consumer environment.	2009	None
Robert W. Naismith, Ph.D.	67	The Company has concluded that Dr. Naismith is qualified to serve as a director of the Company as a result of his substantial company management experience, particularly within the region in which the Bank conducts its business, including his previous experience in the financial and securities industry. Dr. Naismith is Chairman of JuJaMa, Inc., a web based software company which provides networking software to the conference industry. The company is located in Scranton, Pennsylvania. He also has serves as Chairman and Chief Executive Officer of Roosevelt Capital Partners, LLC, an investment company also located in Scranton, Pennsylvania. Through his oversight of these companies, Dr. Naismith is able to obtain insight regarding business to business trends and the local and national business environment that is valuable to the Board of Directors in its oversight of the Bank’s operations. Dr. Naismith has served on the Board of Directors of the Bank since 1988.	1988	None
Emily S. Perry	72	The Company has concluded that Ms. Perry is qualified to serve as a director of the Company as a result of her insurance background, extensive community activities and familiarly with the operations of the Bank. Ms. Perry is a former insurance account executive which provided her with relevant experience, such as customer service and consideration of client financial needs, in an industry that complements the financial services provided by the Bank. In addition, through her participation in various community activities such as the Scranton Public Library and Arc of Northeastern Pennsylvania, Ms. Perry serves as a liaison between the Bank and the local community and provides the Board of Directors with additional opportunities to further the Company’s charitable efforts. Ms. Perry has also served on the Board of Directors of the Bank since 1983, which has enabled her to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Board.	1983	None

13

Nominees for Election: Class of 2015

Name	Age	Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
Russell C. Hazelton	77	The Company has concluded that Mr. Hazelton is qualified to serve as a director of the Company as a result of his familiarity with the operations of the Bank. Mr. Hazelton has served on the Board of Directors of the Bank since 1977, which has enabled him to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board of Directors.	1977	None

Directors Continuing in Office

Class of 2013

Name	Age		Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since		Directorship of Other Public Companies
Richard E. Grimm		64	Executive Vice-President. The Company has concluded that Mr. Grimm is qualified to serve as a director of the Company as a result of his leadership and familiarity with the operations of the Bank. Mr. Grimm has been employed by the Bank since 1979 and has served as Executive Vice President, Treasurer of the Bank since 1994. In addition, Mr. Grimm has served as the head of the Bank’s Credit Division since 2006, during which time he has been primarily responsible for managing and overseeing all matters related to the Bank’s credit quality. Mr. Grimm’s employment with the Bank and his service as a director of the Bank since 1994 has enabled him to gain experience in the financial services industry and a knowledge of the operations of the Bank that is valuable to the Company’s Board of Directors. On March 7, 2012, Mr. Grimm announced that he will retire from his positions as an officer of the Company and the Bank effective June 1, 2012, but will remain on the boards of directors of both the Company and the Bank.		1994	None
James B. Nicholas		60	The Company has concluded that Mr. Nicholas is qualified to serve as a director of the Company as a result of his substantial small company management experience, particularly within the region in which the Bank conducts its business, and his familiarity with the operations of the Bank. Mr. Nicholas is the President of D.G. Nicholas Co., a wholesale auto parts company located in Scranton, Pennsylvania. Through his oversight of D.G. Nicholas Co., Mr. Nicholas is able to obtain insight regarding the local business and consumer environment that is valuable to the Board of Directors in its oversight of the Company’s and Bank’s operations. Mr. Nicholas has also served on the Board of Directors of the Bank since 1981, which has enabled him to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board of Directors.		1981	None

14

Name	Age	Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
Sandra C. Phillips	69	The Company has concluded that Ms. Phillips is qualified to serve as a director of the Company as a result of her service on the Abington Advisory Board of the Bank, extensive community activities and familiarity with the Bank’s operations. Ms. Phillips has served on the Bank’s Abington Advisory Board, which is designed to, among other things, refer businesses and consumers to the Bank, provide feedback to the Bank in response to its marketing efforts, and assist in the recruiting of qualified individuals to fill open Bank positions, since 1984. In addition, through her participation in various community activities, such as the Parliamentary Law Club of Scranton and the Countryside Conservancy, Ms. Phillips serves as a liaison between the Bank and the local community and provides the Board of Directors with additional opportunities to further the Company’s charitable efforts. Ms. Phillips has also served on the Board of Directors of the Bank since 1994, which has enabled her to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board of Directors.	1994	None

Class of 2014

Name	Age		Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
Craig W. Best		51	The Company has concluded that Mr. Best is qualified to serve as a director of the Company as a result of his leadership and prior experience in the banking industry. Mr. Best has served as President and Chief Executive Officer of the Company and the Bank since 2006. Prior to that time, Mr. Best served as Chief Operating Officer of First Commonwealth Bank, a $6.2 billion financial services institution headquartered in Indiana, Pennsylvania, from July 2000 to December 2005. During his employment with First Commonwealth Bank, Mr. Best was responsible for overseeing the day to day operations of all lines of business and administrative functions for First Commonwealth Bank. Before serving as Chief Operating Officer of First Commonwealth Bank, Mr. Best was President of NBOC, a $1.0 billion division of First Commonwealth Bank. This collective experience, along with his. knowledge of all aspects of the Company’s and the Bank’s business through his position as President and Chief Executive Officer, uniquely qualify Mr. Best for service on the Company’s Board of Directors.	2006	None
D. William Hume		85	The Company has concluded that Mr. Hume is qualified to serve as a director of the Company as a result of his prior banking experience and familiarity with the operations of the Bank. Mr. Hume was employed by the Bank from 1980 to 1999, when he retired as Senior Vice President and Assistant Secretary, and he has served as a director since 1991. During his employment with the Bank, Mr. Hume was responsible for developing and overseeing implementation of documented procedures and controls for bank operations, which enabled him to gain experience in the financial services industry and a knowledge of the operations of the Bank that is valuable to the Company’s Board of Directors.	1991	None

15

Name	Age	Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
James G. Keisling	64	The Company has concluded that Mr. Keisling is qualified to serve as a director of the Company as a result of his substantial small company management experience, specifically in the region in which the Bank conducts its business, and previous service as a director of the Bank and other public companies. Mr. Keisling is the Treasurer of Northeast Architectural Products, Inc., a manufacturer of hardscape masonry products located in Archbald, Pennsylvania. Through his employment with Northeast Architectural Products, Inc., Mr. Keisling is able to obtain insight regarding the local business and consumer environment that is valuable to the Board of Directors in its oversight of the Company’s and Bank’s operations. Mr. Keisling has also served on the Board of Directors of the Bank since 1984, which has enabled him to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board. In addition, Mr. Keisling has served as a director of CPG International, Inc., a public company that manufactures plastic sheets products, from 2006 to 2008, and Vycom Corp., a public company that manufactures plastic sheets products, from 2006 to 2008. Through his service as a director of these companies, Mr. Keisling also provides the Company’s Board of Directors with valuable experience regarding public company oversight.	1984	None

Class of 2015

Name	Age	Principal Occupation for Past Five Years and Qualification to Serve as Director	Director Since	Directorship of Other Public Companies
P. Frank Kozik	72	Secretary. The Company has concluded that Mr. Kozik is qualified to serve as a director of the Company as a result of his substantial small company management experience, specifically within the region in which the Bank conducts its business, and his familiarity with the operations of the Bank. Mr. Kozik is the Chief Executive Officer of Scranton Craftsmen, Inc., a corporation dealing in iron and pre-cast concrete products located in Throop, Pennsylvania. Through his position with Scranton Craftsmen, Inc., Mr. Kozik is able to obtain insight regarding the local business and consumer environment that is valuable to the Board of Directors in its oversight of the Company’s and Bank’s operations. Mr. Kozik has also served on the Board of Directors of the Bank since 1981, which has enabled him to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board of Directors.	1981	None

16

Steven L. Weinberger 64 The Company has concluded that Mr. Weinberger is qualified to serve as a director of the Company as a result of his substantial small company management experience, particularly within the region in which the Bank conducts its business, and his familiarity with the operations of the Bank. Mr. Weinberger is the President of G. Weinberger Company, a mechanical contracting company located in Old Forge, Pennsylvania. Through his oversight of G. Weinberger Company, Mr. Weinberger is able to obtain insight regarding the local business and consumer environment that is valuable to the Board of Directors in its oversight of the Company’s and Bank’s operations. Mr. Weinberger has also served on the Board of Directors of the Bank since 1999, which has enabled him to develop a knowledge of the operations of the Company and the Bank that is beneficial to the Company’s Board of Directors. 1999 None

(1) Pursuant to the Agreement and Plan of Merger, dated as of December 5, 2008, by and between the Company, the Bank and Old Forge Bank, the Company agreed to take all actions necessary to cause three former Old Forge Bank directors to be appointed to the Board. As a result, upon the Company’s acquisition of Old Forge Bank, Joseph G. Cesare, M.D. was appointed and subsequently elected by the Company’s shareholders to serve on the Board. The other two former Old Forge Bank directors who served on the Board, Jerry J. Weinberger and Robert J. Mellow, are no longer on the Board.

17

Proposal 3–To amend the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws.

Subject to the approval of shareholders at the Annual Meeting, on February 21, 2012, our Board unanimously approved an amendment to the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws. If the proposal is approved by the shareholders, it will not be effective for this Annual Meeting, but for elections of directors after the effective date of the amendment. The text of the proposed amendment to the articles of incorporation, as well as the text of the conforming changes to the bylaws, are set forth as Appendix A to this Proxy Statement and are incorporated by reference.

Under applicable Pennsylvania law, cumulative voting is available in elections of directors unless otherwise provided in the Company’s articles of incorporation. Cumulative voting means that in elections of directors, each shareholder is entitled to cast a total number of votes equal to the number of shares held, multiplied by the number of directors to be elected, and may cast the whole number of votes for any one nominee, or distribute them among the nominees. This type of voting right could enable a shareholder, or a group of shareholders, representing a minority of the shares to cumulate enough votes to elect one or more directors.

If the proposal is adopted by the shareholders and cumulative voting is discontinued, each shareholder would have one vote per share for each director to be elected. Each of the Company’s directors would thereby be elected not only by a plurality of the vote, but also a plurality of the shares.

Our Board believes that each one of our directors should represent the interests of at least a plurality of the shares. As noted above, with cumulative voting in effect, it would be possible for a shareholder or group of shareholders holding a smaller number of shares, whose interests and goals may not be consistent with those of shareholders generally, to elect a director to the Board in place of one of the Board’s nominees. The Board believes that a director who is not nominated by the Board but elected by such a minority shareholder or shareholder group for their minority benefit could be disruptive and could impair the efficient management of the Company to the detriment of shareholders generally. If cumulative voting is discontinued, a director could only be elected with relatively wide support among shareholders. For these and other reasons, the Board believes that the proposed amendment is in the best interests of the Company and its shareholders.

You should note that elimination of cumulative voting in the election of directors could, under certain circumstances, make it more difficult for a shareholder who acquires a substantial number of shares to obtain representation on the Board. To the extent that it impedes the ability of a shareholder to obtain representation on the Board, the proposed amendment might render more difficult any attempt by a minority holder or group of holders of a significant number, but less than a majority, of voting shares to monitor, change, or influence the management or policies of the Company, and might be viewed as perpetuating management and having an anti-takeover effect.

In addition to the current proposal, the Company has other provisions in its articles of incorporation and bylaws which could be viewed as having anti-takeover effects, including a provision requiring advance notice for shareholder nominations of directors, a classified Board, a supermajority (75%) vote required to approve a merger, consolidation, liquidation or the sale of substantially all of the assets of the Company, provisions giving the Board broad discretion to address takeover attempts; and a requirement that the vote of 75% of the Company’s shares shall be required to amend the supermajority requirements for merger, etc. Such measures have been adopted in furtherance of the Board’s current policy of building shareholder value by remaining independent. The Company’s management has no present plans to adopt any other change to its articles of incorporation, bylaws or other governmental documents that may have an anti-takeover effect.

The current proposal is not made in response to an effort by a minority shareholder or group of shareholders to obtain representation on the Board or to acquire greater influence in the management of the Company’s business, nor is the Company aware of any such efforts. Further, it is not in response to any attempt to acquire control of the Company, nor is the Company aware of any such attempt.

The affirmative vote of a majority of the votes cast at the Annual Meeting is required for approval of the amendment to the articles of incorporation.

The board of directors unanimously recommends that shareholders vote “For” this proposal to amend the Company’s articles of incorporation in order to discontinue cumulative voting in elections of directors, and to make conforming changes to the Company’s bylaws.

18

Proposal 4 — Advisory Vote on Company’s Executive Compensation Program

As we did at our 2011 annual meeting of shareholders, we are asking our shareholders to vote, on an advisory basis, on the compensation of our named executive officers as described in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives our shareholders the opportunity to express their views on the compensation of our named executive officers.

Even though this say-on-pay vote is advisory and therefore will not be binding on the Company, the Compensation and Benefits Committee and the Board value the opinions of our shareholders. Accordingly, to the extent there is a significant vote against the compensation of our named executive officers, we will consider our shareholders’ concerns and the Compensation and Benefits Committee will evaluate what actions may be necessary or appropriate to address those concerns.

Our executive compensation program is designed to attract, reward, and retain key employees, including our named executive officers, who are critical to our success. Under this program, our named executive officers are rewarded for the achievement of specific short-term and long-term goals that enhance shareholder value. Shareholders are urged to read the “Compensation Discussion and Analysis” and “Executive Compensation” sections of this Proxy Statement for greater detail about our executive compensation programs, including information about the fiscal year 2011 compensation of our named executive officers.

We are asking our shareholders to indicate their support for the compensation of our named executive officers as described in this Proxy Statement by voting in favor of the following resolution:

“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”

The Board unanimously recommends a vote “FOR” the proposal to approve, on an advisory basis, the compensation of our named executive officers, by the adoption of the foregoing resolution.

19

Proposal 5 — Ratification of Independent Registered Public Accounting Firm

The Audit Committee of the Board of Directors has appointed McGrail, Merkel, Quinn & Associates, as our independent registered public accounting firm for the fiscal year ending December 31, 2012. McGrail, Merkel, Quinn & Associates served as our independent registered public accounting firm for the fiscal year ended December 31, 2011. Representatives of the firm are expected to be present at the Annual Meeting and will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

The Board of Directors recommends that you vote “FOR” the ratification of the appointment of McGrail, Merkel, Quinn & Associates as the Company’s independent registered public accounting firm for 2012.

Audit Fees.The following table sets forth the fees billed to us for the fiscal years ending December 31, 2011 and 2010, respectively, by McGrail, Merkel, Quinn & Associates.

	Year Ended December 31,
	2011		2010
Audit Fees(1)	$	122,329	$	133,938
Audit-Related Fees(2)		29,800		29,800
Tax Fees(3)		10,100		23,545
All Other Fees(4)		—		6,180
Total	$	162,229	$	193,463

(1) Audit fees consist of fees for professional services rendered for the audit of our financial statements and review of financial statements included in our quarterly reports and services normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements.

(2) Audit-related fees consist of fees for audits of employee benefit plans and student loans.

(3) Tax fees consist of compliance fees for the preparation of the Company’s original tax returns and the final tax returns for Old Forge Bank (during 2010). Tax service fees also include fees relating to other tax advice, tax consulting and tax planning.

(4) All other fees for 2010 consist of agreed upon procedures related to the Company’s indirect automobile loan portfolio and consulting related to the Old Forge Bank merger.

Policy on Pre-Approval of Services by the Independent Registered Public Accounting Firm.The Audit Committee has adopted policies and procedures relating to the approval of audit, audit-related, tax services and other services to be performed by our independent registered public accounting firm. Pursuant to these policies, all services to be performed by our independent registered public accounting firm must be approved by the Audit Committee in advance. During the year ended December 31, 2011, all audit and non-audit services were approved, in advance, by the Audit Committee in compliance with these procedures.

20

REPORT OF AUDIT COMMITTEE

The Audit Committee has reviewed the Company’s audited financial statements as of and for the year ended December 31, 2011, and met separately with management and McGrail, Merkel, Quinn & Associates, independent registered public accountants, to discuss those financial statements. Management has represented to us that the financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.

Management has primary responsibility for preparation of our financial statements and the overall reporting process, including our system of internal controls. The independent registered public accountants audit the annual financial statements prepared by management; express an opinion as to whether those financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company’s in conformity with accounting principles generally accepted in the United States of America; and discuss with us their independence and any other matters they are required to discuss with us or that they believe should be raised with us.

The Audit Committee has received from and discussed with McGrail, Merkel, Quinn & Associates the written disclosure and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committee) as adopted by the Public Company Accounting Oversight Board in Rule 3600T. These items relate to the firm’s independence from the Company and its management. The Audit Committee also discussed with McGrail, Merkel, Quinn & Associates any matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA,Professional Standards, Vol. 1. AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

Based on these reviews and discussions, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC. The Audit Committee has also approved the selection of the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2011.

Members of the Audit Committee of Penseco Financial Services Corporation

Russell C. Hazelton

James G. Keisling

P. Frank Kozik

Steven L. Weinberger, Interim Chairman

Date: March 30, 2012

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act or the Exchange Act that might incorporate this proxy statement or future filings with the SEC, in whole or in part, the above report shall not be deemed to be “soliciting material” or “filed” with the SEC and shall not be deemed to be incorporated by reference into any such filing.

21

COMPENSATION DISCUSSION AND ANALYSIS

Our Executive Compensation Program

Our executive compensation program is designed to attract, reward, and retain key employees, including our named executive officers, who are critical to our success. Under this program, our named executive officers are rewarded for the achievement of specific short-term and long-term goals that enhance shareholder value. The following highlights our approach to executive pay:

Pay for Performance: We seek to pay for superior performance, both in achieving short-term goals and continuing to build a growing and sustainable financial institution on a long-term basis.

Meaningful Portion of Executive Officer Pay Tied to Performance: Our compensation program currently relies principally on four primary elements: base compensation or salary; cash, performance-based short-term compensation; long-term incentive compensation for eligible participants pursuant to our 2008 Long-Term Incentive Plan; and employee benefits, including retirement plans and health and welfare plans. While our compensation program has the aforementioned primary elements, the cash performance-based compensation constitutes a meaningful portion of the total potential compensation for our named executive officers. In fiscal 2011, for example, approximately 65% of our Chief Executive Officer’s potential compensation (and approximately 10% of his actual compensation) was performance-based. Similarly, approximately 20% of our other named executive officers’ potential compensation (and over 4% of their actual compensation) was performance-based.

Limited all other Compensation:In line with our pay for performance philosophy, we have limited all other forms of compensation to our named executive officers.

Prudent Management of Compensation Risk:The overall balance of short-term and long-term focus, cash versus equity awards, the presence of a clawback provision in our President and Chief Executive Officer’s employment agreement (see “Employment Agreement” below), the pay for performance focus inherent in all these programs, and the careful monitoring of the executive pay program through diligent governance by the Compensation and Benefits Committee all serve to minimize the inherent risk, however minimal, in the design and administration of these programs.

Our Executive Compensation Philosophy

Our executive compensation philosophy starts from the premise that the success of Penseco Financial Services Corporation depends, in large part, on the dedication and commitment of the people we place in key operating positions to drive our business strategy. We strive to satisfy the demands of our business model by providing our senior management team of named executive officers with reasonable and meaningful incentives tied to the successful implementation of challenging performance goals consistent with our corporate objectives. We recognize that the Company operates in a competitive environment for talent. Therefore, our approach to compensation considers the full range of executive compensation elements that enable us to pay for performance and to compare favorably with our peers as we work to attract, retain and motivate key personnel. We base our compensation decisions on the following principles:

• Meeting the Demands of a Competitive Market for Talent – Our goal is to compensate our employees at competitive levels that position us as the employer of choice among our peers who provide similar financial services in the markets we serve.

• Driving Superior Performance – We structure compensation around the attainment of Company-wide, business unit and individual performance goals that correlate to a positive impact to our bottom line and motivate these individuals to achieve short-term and long-term goals that enhance shareholder value.

• Reflecting our Business Philosophy – Our approach to compensation reflects our core values and the way we do business in the communities we serve. Those core values include hard work, wise and prudent planning, respect for employees, customers or shareholders, and a close ongoing partnership with the communities that we serve.

22

The Compensation and Benefits Committee also takes into account corporate considerations (including internal equity and affordability), competitive practices and trends, regulatory requirements, and the skills and experience of the executive in designing the compensation programs. We believe that we can meet the objectives of our executive compensation philosophy by achieving a balance among these elements that is competitive with our industry peers and creates appropriate incentives for our management team. To achieve this balance, the Compensation and Benefits Committee of our Board of Directors has consulted with Robert Jones, an independent compensation consultant and the CEO of Innovative Compensation and Benefits Concepts Consulting, LLC, as well as review survey data for peer institutions to help us benchmark our compensation program and our financial performance to our peers. See “Role of Compensation Consultant” and “Peer Group Analysis” below.

Base Compensation.The salaries of our named executive officers are reviewed at least annually to assess our competitive position and make any necessary adjustments. Our goal is to maintain salary levels for our named executive officers at a level generally consistent with the median base pay received by those in comparable positions at our better-performing peers. To further that goal, we obtain peer group information from a variety of sources. See “Peer Group Analysis” below.We also evaluate salary levels at the time of promotion or other change in responsibilities or as a result of specific commitments we make when an officer is hired. Individual performance, Company performance against pre-set objectives, and retention risk are also carefully considered as part of our annual assessment.

Cash Performance-Based Compensation. The Compensation and Benefits Committee of the Board of Directors authorizes cash incentives for our named executive officers based on the terms of our cash performance-based program which rewards the attainment of annual company-wide financial objectives at specified levels in the areas of core earnings, revenue, efficiency, growth and asset quality and individual performance relative to the specific tasks we expect an employee to accomplish during the year. Our objective is to drive superior annual performance at both the company and individual levels to the highest attainable levels by establishing performance thresholds that must be met to earn incentive awards. Targets for the Chief Executive Officer are set by the Compensation and Benefits Committee, and targets for our other named executive officers are typically set by the Compensation and Benefits Committee upon the recommendation of our Chief Executive Officer. Targets are typically communicated to officers during the first quarter of the year, and achievement of targets is evaluated by the Compensation and Benefits Committee after year end. In 2011, target bonuses for our named executive officers were set at twenty percent of base salary, with ten percent based on company performance and ten percent based on individual performance.

Long-Term Incentive Compensation.The Compensation and Benefits Committee authorizes equity awards under our 2008 Long-Term Incentive Plan. We believe that incentives and stock-based awards help to focus employees on the long-term objectives of building additional shareholder value and promoting our success, will align employees’ interests with stockholders’ interests and that the 2008 Long-Term Incentive Plan will help to attract, reward, and retain valued employees and directors. In order to achieve these objectives, a restricted stock award, having a five year vesting condition, was granted to Mr. Best in 2011 based on 2010 performance.

Role of the Compensation and Benefits Committee

We rely on the Compensation and Benefits Committee to develop our executive compensation program and to monitor the success of the program in achieving the objectives of our compensation philosophy. The committee, which consists of five independent directors, is also responsible for the administration of our compensation programs and policies, including the administration of our annual cash and long-term stock-based incentive programs, as well as our tax-qualified retirement plans, including our Employee Stock Ownership Plan, or “ESOP,” our 401(k) Deferred Compensation and Profit Sharing Plan, or “401(k) Plan,” and our Employee’s Pension Plan (which has been frozen since June 2008). The committee reviews and approves all compensation decisions relating to our executive officers. The compensation of our Chief Executive Officer and the other named executive officers are set by the committee. The Chief Executive Officer attends the Compensation and Benefits Committee meetings at the invitation of the committee, but does not participate in any discussions on his own compensation.

The Compensation and Benefits Committee operates under the mandate of a formal charter that establishes a framework for the fulfillment of the committee’s responsibilities. A copy of the charter of the Compensation and Benefits Committee is posted on our website (www.pennsecurity.com). The committee reviews the charter at least annually to ensure that the scope of the charter is consistent with the committee’s expected role. Under the charter, the committee is charged with general responsibility for the oversight and administration of our compensation program.

23

The level and mix of director compensation is reviewed by our Compensation and Benefits Committee on a periodic basis to ensure consistency with the objectives of the Company’s overall compensation philosophy. Specifically, in reviewing the level and mix of director compensation, the committee considers third party recommendations which review peer group compensation at comparable sized institutions.

Role of Compensation Consultants

Our Compensation and Benefits Committee has worked with Robert Jones, the CEO of Innovative Compensation and Benefits Concepts Consulting, LLC, an independent consultant, to help us benchmark our compensation program against our peers and to ensure that our program is consistent with prevailing best practices and current trends in our industry. We paid Mr. Jones $12,360.44 in the aggregate for his services during the 2011 fiscal year.

Role of Management

Our Chief Executive Officer, in conjunction with representatives of the Compensation and Benefits Committee, develops recommendations regarding the appropriate mix and level of compensation for our named executive officers. The recommendations consider the objectives of our compensation philosophy and the range of compensation programs authorized by the Compensation and Benefits Committee with considerable weight assigned to short-term and long-term performance objectives, such as earnings, revenue, asset quality, efficiency ratio, execution of long term strategic plan and growth objectives.

The Chief Executive Officer attends Compensation and Benefits Committee meetings at the invitation of the committee and attended seven such meetings during the year ended December 31, 2011. During the fiscal year ended December 31, 2011, our Compensation and Benefits Committee accepted the Chief Executive Officer’s recommendations regarding the compensation of our other named executive officers as a result of individual performance, as well as Company performance based on the committee’s independent evaluation of factors relating to earnings, revenue, asset quality, efficiency ratio, execution of long term strategic plan and growth objectives. Our Chief Executive Officer does not participate in Compensation and Benefits Committee discussions relating to the determination of his compensation. The Chief Executive Officer’s performance is annually reviewed by our Compensation and Benefits Committee, which considers input from a third-party compensation consultant in preparation for the review and deciding upon the Chief Executive Officer’s compensation package.

Peer Group Analysis

A critical element of our compensation philosophy and a key driver of specific compensation decisions for our management team is the comparative analysis of our compensation mix and levels relative to a peer group of publicly-traded banks and thrifts. We firmly believe that the cornerstone of our compensation program is the maintenance of competitive compensation program relative to the companies with whom we compete for talent. In 2011, our peer group was reviewed with the assistance of our compensation consultant on the basis of several factors, including geographic location, size, operating characteristics, and financial performance, and remained the same as the peer group used in 2010, with the exception of the removal of Comm Bancorp Inc.

24

Our independent consultant utilized two peer groups. As set forth in Table 1 below, the first peer group is a larger 35-company Pennsylvania peer group of organizations with approximately one-half to twice the assets of the Company. And, as set forth in Table 2 below, the second peer group consists of the eight financial institutions with approximately one-half to twice the assets of the Company and within an approximately one-hour driving radius of the Company.

Table 1: Larger State-Wide Peer Group

ABINGTON BANCORP INC	FIRST NATIONAL COMMUNITY BANCORP INC.
ACNB CORP	FOX CHASE BANCORP INC.
AMERISERV FINANCIAL INC/PA	FRANKLIN FINANCIAL SERVICES CORP.
BRYN MAWR BANK CORP.	HARLEYSVILLE SVGS FINANCIAL CORP.
CITIZENS & NORTHERN CORP.	MALVERN FEDERAL BANCORP INC.
CITIZENS FINANCIAL SERVICES INC.	MID PENN BANCORP INC.
CNB FINANCIAL CORP/PA	NORWOOD FINANCIAL CORP.
CODORUS VALLEY BANCORP	ORRSTOWN FINANCIAL SERVICES INC.
DIMECO INC.	PARKVALE FINANCIAL CORP.
DNB FINANCIAL CORP.	PENNS WOODS BANCORP INC.
ENB FINANCIAL CORP.	PRUDENTIAL BANCORP INC OF PENNSYLVANIA
ESB FINANCIAL CORP.	QNB CORP.
ESSA BANCORP, INC.	REPUBLIC FIRST BANCORP INC.
FIDELITY BANCORP INC/PA	ROYAL BANCSHARES/PA
FIRST CHESTER COUNTY CORP.	TF FINANCIAL CORP.
FIRST KEYSTONE CORP.	TOWER BANCORP INC.
FIRST KEYSTONE FINANCIAL INC.	VIST FINANCIAL CORP.

Table 2: Regional Peer Group

DIMECO INC.

ESSA BANCORP, INC.

FIDELITY D & D BANCORP INC.

FIRST KEYSTONE CORP.

FIRST NATL CMNTY BANCORP INC.

NORWOOD FINANCIAL CORP.

PEOPLES FINANCIAL SERVICES CORP.

Severance and Change in Control Benefits

We recognize that an important consideration in our ability to attract, retain and motivate key personnel is our ability to minimize the impact on our management team of the possible disruption associated with our exploration of strategic opportunities. Accordingly, we believe that it is in the best interest of the Company and its shareholders to provide our key personnel with reasonable financial arrangements in the event of termination of employment following a change in control or involuntary termination of employment for reasons other than cause so that they are able to focus fully on the merits of any potential change in control situation without undue concern for the loss of their jobs. Our Chief Executive Officer, who has an employment agreement, has a provision in his agreement that provides for certain benefits in the event of voluntary or involuntary termination following a change in control. These provisions are described in the “Other Potential Post-Termination Benefits” section below. In addition, the employment agreement contains provisions which provide for certain severance benefits in the event we terminate the Chief Executive Officer’s employment for reasons other than cause. These provisions are also described in the “Employment Agreement” section hereof along with estimates of the severance and change in control benefits provided to the Chief Executive Officer.

The named executive officers other than our Chief Executive Officer are covered by the severance policy applicable to our employees generally. That policy provides for certain severance benefits which are based on, among other things, length of service. This severance policy does not provide any different or additional benefits in the event of a change in control.

Many of the plans that we maintain and in which our named executive officers participate, including our 2008 Long-Term Incentive Plan, the Executive Deferred Compensation Plan and the Excess Benefit Plan include provisions which accelerate vesting or payment of benefits upon a change in control and are described in the “Other Potential Post-Termination Benefits” section below.

25

Retirement Benefits; Employee Welfare Benefits

During 2011, we offered our employees, including our named executive officers, several tax-qualified retirement plans. Our primary retirement benefit vehicles are our 401(k) Plan and our ESOP. Our ESOP allows participants to accumulate a retirement benefit in Company stock at no cost to the participants. Our Employee’s Pension Plan, a defined benefit pension plan, was previously offered but was amended in June 2008, at which time benefit accruals ceased. Certain of our named executive officers have accumulated benefits under our Employee’s Pension Plan.

We also provide our Chief Executive Officer with certain retirement benefits under an Excess Benefit Plan. This plan originally provided Mr. Best with additional benefits in excess of those accrued under Employee’s Pension Plan due to the limit on compensation contained in Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, referred to as the “Code,” and is now being administered to provide benefits in excess of those accrued under the 401(k) Plan and ESOP. We believe that this benefit is consistent with the benefits provided to similarly-situated officers of institutions in our peer group.

We also maintain an Executive Deferred Compensation Plan, under which we make contributions to certain of our named executive officers, the Deferred Compensation Plan #2, under which we will make certain contributions for Mr. Best in accordance with his employment agreement, and a Postretirement Life Insurance Plan, which is available to all employees in accordance with its terms. In addition to retirement programs, we provide our employees, including our named executive officers, with coverage under medical, dental, vision, life insurance and disability plans.

Perquisites

We provide certain of our officers, including our Chief Executive Officer, with limited perquisites similar to those provided to executives employed by our peers consisting of country and dining club memberships and automobiles. The perquisites are intended to further the officers’ abilities to promote the business interests of the Company in our markets and to reflect competitive practices for similarly situated officers employed by our peers. The Company provides a split-dollar term life insurance arrangement for the Chief Executive Officer (see additional discussion below under “Employment Agreement”). We have reviewed competitive norms for these elements in our local and larger peer groups to determine our competitiveness. These perquisites are not a large part of the overall compensation package, but we feel that they provide certain executive officers with additional tools to help to further the Bank’s strategic mission. The Company also maintains bank owned life insurance (BOLI) on the lives of Messrs. Scanlon, Grimm and Cohen, with split-dollar arrangements that would pay the individual’s estate $25,000 in the event that he died during his employment.

Our 2011 Compensation Program

Salary Levels and Adjustments

The base salaries paid to our named executive officers are set forth below in theSummary Compensation Table. We believe that the base salaries paid to our executive officers during 2011 achieve our executive compensation objectives, compare favorably to our peer group and are within our target of providing a base salary near the market median.

Effective January 2011, adjustments to our executive base salaries were made based on an analysis of current market pay levels of peer companies and in published surveys. In addition to the pay levels of our peer group, factors taken into account in making any changes for 2011 included the contributions made by the executive officer, the performance of the executive officer against pre-established short-term and long-term goals, the role and responsibilities of the executive officer and the relationship of the executive officer’s base pay to the base salary of our other executives. The Board has approved 2012 base salaries for our named executive officers, which range from no increase to a 3.2% increase from 2011 base salaries.

26

Non-Equity Incentive Awards

Subject to the final approval of the Company’s full Board of Directors, the Compensation and Benefits Committee evaluated 2011 Company and individual performance relative to goals, determined achievement relative to targets, and authorized payment of non-equity incentive awards. Fifty percent (50%) of each named executive officer’s total 2011 non-equity incentive award was based on attainment of corporate performance goals (relating to core earnings, core revenue, core efficiency rating, loan growth, deposit growth and asset growth), while the remaining 50% of the non-equity incentive award for each named executive officer was based on attainment of certain individual goals specific to the business objectives related to the areas managed by such named executive officer. The Chief Executive Officer recommends the corporate and individual goals for each named executive officer. The Chief Executive Officer’s non-equity incentive award was targeted at 35% of his base salary, and the other named executive officers’ equity incentive awards were each targeted at 20% of their respective base salaries. The Committee determined the payout to the Chief Executive Officer. The Committee, based on recommendations of the Chief Executive Officer, determined the payouts to the other named executive officers. All payments for 2011 non-equity incentive awards were approved and will be paid in April 2012. Additional details regarding the threshold, target and maximum payouts are set forth in the “2011 Grants of Plan-Based Awards” on page 30, and actual payouts are included in the “Summary Compensation Table” on page 29.

Long-Term Incentive Award

In addition to our non-equity incentive award program, our Chief Executive Officer participates in our long-term incentive award program, the terms of which are set forth in Mr. Best’s amended and restated employment agreement. Issuance of long-term incentive awards is based on the Company’s performance as reflected in two metrics: core earnings per share and asset growth. If the Company performs at or above certain threshold levels (as determined in accordance with the terms set forth in Mr. Best’s employment agreement) for each of these metrics, then Mr. Best will be entitled to receive certain long-term incentive awards, up to a maximum amount set forth in his employment agreement. In 2011, the Company’s performance did not meet the threshold levels for either of the performance metrics, and as a result, Mr. Best did not receive any long-term incentive award.

Results of 2011 Say-on-Pay Vote

At our 2011 annual meeting of shareholders, our shareholders strongly supported the compensation of our named executive officers, with approximately 66.9% of the shares represented at the meeting and approximately 95.6% of the votes cast being cast for the approval of our named executive officers’ compensation, as disclosed in the proxy statement for the 2011 annual meeting. As a result of the support of our shareholders, the results of the 2011 say-on-pay proposal did not significantly impact subsequent determinations regarding our compensation policies and decisions.

27

COMPENSATION AND BENEFITS COMMITTEE REPORT

The Compensation and Benefits Committee has reviewed and discussed with management the Compensation Discussion and Analysis that is required by the rules established by the SEC. Based on such review and discussions, the Compensation and Benefits Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement. See“Compensation Discussion and Analysis.”

Compensation and Benefits Committee of the Board of Directors of Penseco Financial Services Corporation

Robert W. Naismith, Ph.D., Chairman

James G. Keisling

P. Frank Kozik

Emily S. Perry

Date: March 30, 2012

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act or the Exchange Act that might incorporate this proxy statement or future filings with the SEC, in whole or in part, the above report shall not be deemed to be “soliciting material” or “filed” with the SEC and shall not be deemed to be incorporated by reference into any such filing.

28

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information for the years ended December 31, 2011, 2010 and 2009, concerning the compensation of our principal executive officer, principal financial officer and the Company’s other three most highly compensated executive officers (or executive officers of its subsidiaries) whose compensation was $100,000 or more and who were serving as such on December 31, 2011. No named executive officers received perquisites in excess of $10,000 during the year ended December 31, 2011.

Name and Principal Position	Year		Salary ($)		Stock Awards ($)(1)		Option Awards ($)		Non-equity Incentive Plan Compensation ($)(2)		Change in Pension  Value and Nonqualified Deferred Compensation Earnings ($)(3)		All Other Compensation ($)(4)		Total ($)
Craig W. Best President and Chief Executive Officer		2011 2010 2009		247,863 247,863 242,267		55,635 —   75,808		—   —   —		43,376 61,817 84,573		13,327 7,138 2,056		134,282 16,114 20,434		494,485 332,932 425,138
Patrick M. Scanlon SVP, Finance Division Head, Controller and Treasurer		2011 2010 2009		113,550 111,018 107,778		—   —   —		—   —   —		1,700 15,895 20,000		40,405 28,073 9,045		7,496 10,033 9,474		163,151 165,019 146,297
Richard E. Grimm Executive Vice President(5)		2011 2010 2009		183,802 183,762 180,231		—   —   —		—   —   —		9,064 12,750 20,000		83,646 67,184 31,261		22,890 24,960 23,792		299,401 288,656 255,284
Greg D. Misterman EVP, Chief Credit Officer and Credit Division Head		2011 2010 2009		156,952 150,449 140,354		—   —   —		—   —   —		15,675 12,665 15,680		—   —   —		10,177 11,519 10,493		182,804 174,663 167,553
Stanley H. Cohen Former SVP and Retail Division Head(6)		2011 2010 2009		154,877 158,164 158,014		—   —   —		—   —   —		3,931 14,450 —		—   —   —		10,160 10,808 11,372		168,968 183,422 169,386

(1) On March 15, 2011, Mr. Best was granted a restricted stock award under the 2008 Long-Term Incentive Plan for performance in the fiscal year ended December 31, 2010. The award, having an aggregate grant date fair value of $55,635, was for 1,428 shares based on the closing price per share of our stock on the date of grant for 2010 performance. Mr. Best received a restricted stock award on March 6, 2009 (for performance in the fiscal year ended December 31, 2008), having an aggregate grant date fair value of $75,808, for 2,153 shares based on the closing price per share of our stock on the date of grant. Both of these awards are subject to a vesting period of five years. The rabbi trust initially utilized in connection with the 2009 restricted stock award will be terminated. Please see Note 17 to the Company’s audited financial statements for the year ended December 31, 2011 for a description of the assumptions used in determining the value of such awards.

(2) Represents the dollar value of annual cash bonuses earned during the fiscal year.

(3) Represents the aggregate change in the actuarial present value of accumulated benefits under the Employees’ Pension Plan from the plan measurement date used for financial statement reporting purposes with respect to the prior completed fiscal year to the plan measurement date used for financial statement reporting purposes with respect to the covered fiscal year, plus earnings on balances in the Executive Deferred Compensation Plan and Executive Deferred Compensation #2.

29

(4) Details of the amounts reported in the “All Other Compensation” column for 2011 are provided in the table below:

	Mr. Best		Mr. Scanlon		Mr. Grimm		Mr. Misterman		Mr. Cohen
401(k) Plan-Employer Match		1,712		1,915		5,897		5,088		5,080
401(k) Plan-Safe Harbor Contribution		7,350		3,883		6,006		5,089		5,080
Executive Deferred Compensation Plan and Executive Deferred Compensation Plan #2 -Company Contribution (1)		121,375		1,698		10,987		—		—
ESOP Contribution		—		—		—		—		—
Excess Benefit Plan		3,845		—		—		—		—

(1) The Executive Deferred Compensation Plan #2 is an account-based deferred compensation arrangement contemplated by the amendment and restatement of Mr. Best’s employment agreement on January 3, 2011. Pursuant to the agreement, the Executive Deferred Compensation Plan #2 provides Mr. Best an opportunity to defer base salary and bonus compensation and requires the Company to make contributions to Mr. Best’s account in the amount of $61,375 on or around the time his employment agreement was amended and restated, followed by credits of $60,000 each August 1 beginning in 2011 and ending in 2014, subject to Mr. Best’s continued employment. Notional interest will be credited to such deferred amounts and Mr. Best’s account will be distributed upon his retirement or other separation from service, or upon his death or a change in control if earlier.

(5) Mr. Grimm announced his retirement on March 7, 2012 effective June 1, 2012. Mr. Grimm will remain on the Board of Directors.

(6) Mr. Cohen announced his retirement on December 23, 2011 effective February 28, 2012.

2011 Grants of Plan-Based Awards

The following table provides information concerning grants of plan-based awards made to our named executive officers during the year ended December 31, 2011.

Name	Grant Date	Estimated Future Payouts Under Non-Equity Incentive Plan Awards
		Threshold ($)		Target ($)		Maximum ($)
Craig W. Best	March 2011		—		86,752		86,752
Patrick M. Scanlon	March 2011		—		22,510		22,510
Richard E. Grimm	March 2011		—		36,752		36,752
Greg D. Misterman	March 2011		—		30,090		30,090
Stanley H. Cohen	March 2011		—		31,632		31,632

Includes the fiscal 2011 threshold, target and maximum payouts designated under our annual cash bonus program. For a discussion of the terms of our annual cash bonus program and the amounts earned thereunder by the named executive officers during fiscal 2011, see “— Compensation Discussion and Analysis — Non-Equity Incentive Awards” above.

30

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

We have an employment agreement with our Chief Executive Officer, Craig W. Best, which is described below under the heading, “Employment Agreement.” His employment agreement controls, and his prior employment agreement controlled, many aspects and decisions with respect to his compensation. We entered into a separation agreement with our Retail Division Head, Stanley D. Cohen, which is described below under the heading, “Separation Agreement.” We do not have employment or separation agreements with any of our other named executive officers.

Employment Agreement

On January 3, 2011, the Company and the Bank entered into an amended and restated employment agreement with our President and Chief Executive Officer, Craig W. Best (the “Employment Agreement”).

The Employment Agreement provides for an initial annual base salary of $247,268, which is subject to annual review by the Bank’s board of directors; in the event of an across-the-board salary reduction affecting all of the Company’s management employees, the Board may decrease Mr. Best’s base salary. The Employment Agreement also provides that Mr. Best will be eligible to:

• receive an annual cash bonus equal to a percentage of his base salary, which percentage will be determined by the Board from time to time;

• participate in certain deferred compensation plans, including the Deferred Compensation Plan #2; and

• participate in our long-term incentive or equity-based compensation plans.

Under the Employment Agreement, the Company agrees to purchase and maintain a term life insurance policy with a death benefit of $500,000 payable upon Mr. Best’s death. The Company also agrees to provide Mr. Best with the use of an automobile, along with reasonable insurance and maintenance costs, as well as reimbursement for country and dining club memberships and reasonable business expenses.

The Employment Agreement provides that any “excess annual incentive cash payments” and “excess long-term incentive awards” (each as defined in the Employment Agreement) paid to Mr. Best are subject to clawback provisions in the incentive plans pursuant to which the Board may request reimbursement for such payments from Mr. Best in the event that the Bank’s financial statements are the subject of a restatement that is required by applicable law.

Mr. Best’s employment is on an “at will” basis, and each of the Company, the Bank and Mr. Best may terminate the Employment Agreement on substantially the same terms as set forth in the Prior Agreement. Under the Employment Agreement, and in the event that Mr. Best’s employment is terminated without “Cause” (as defined in the Employment Agreement), the Company and the Bank are obligated to, among other things, make monthly payments to Mr. Best for two (2) years following the termination equal to the sum of 1/12th of Mr. Best’s base salary at the time of termination and 1/12th of the bonus payment that Mr. Best was then eligible to receive (each such monthly payment a “Salary Continuation Payment”); in the event that Mr. Best is terminated in connection with a Change of Control (as defined in the Employment Agreement), he will be entitled to Salary Continuation Payments for a period of three (3) years following termination. The Employment Agreement provides for adjustments to the timing of severance payments due to Mr. Best to comply with certain provisions of the Internal Revenue Code, including Section 409A thereof. Payment of severance under the Employment Agreement is in each case contingent upon Mr. Best’s execution and delivery of a release agreement to the Company and the Bank.

The Employment Agreement contains customary confidentiality and restrictive covenant provisions. For a period of 12 months following termination of employment for any reason, Mr. Best has agreed that he will not: (1) solicit customers, potential customers or suppliers for or on behalf of a competing business (as defined under the agreement); (2) recruit employees of the Bank or Company for a competing business; or (3) serve as a director, officer, employee or investor in a competing business.

31

In addition, Mr. Best agrees to participate in, and comply with, the Bank’s Executive Stock Ownership Guidelines, pursuant to which he is required to own shares of the Company with a value equal to three times his base salary within four (4) years of the date of adoption of these guidelines, which coincides with the effective date of the Employment Agreement; the guidelines provide that, in the event that Mr. Best is not in compliance therewith at the end of the allotted four (4) year compliance period, all future bonuses payable to him will be paid in stock of the Company unless and until he becomes compliant with the guidelines.

Separation Agreement

On December 23, 2011, the Company and the Bank entered into a Separation Agreement with Stanley D. Cohen, Senior Vice President, Retail Bank Division Head pursuant to which Mr. Cohen would voluntarily resign his position with the Company and the Bank effective February 28, 2012. The Separation Agreement provides for the payment of Mr. Cohen’s current rate of base salary ($154,877) through August 1, 2012; he will be entitled to receive a lump-sum payment of $5,000 (or alternatively elected outplacement services); and will, to the extent he elects benefits continuation coverage under COBRA, receive the Company’s normal contribution of such benefits through August 1, 2012 (collectively, the “Separation Payments”). As a condition to receive the Separation Payments, Mr. Cohen has executed customary waivers and releases of claims for the benefits of the Company and the Bank and has entered into a non-solicitation agreement with the Company and the Bank pursuant to which he agrees not to solicit customers or employees of the Company and the Bank for a period of two years after the effective date of resignation.

32

Outstanding Equity Awards at Fiscal Year End

The following table sets forth information concerning equity awards outstanding as of December 31, 2011.

	Option Awards								Stock Awards
Name	Number of Securities Underlying Unexercised Options (Exercisable)(1)		Number of Securities Underlying Unexercised Options (Unexercisable)(1)		Option Exercise Price		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested  (#)(2)		Market Value of Shares or Units of Stock That Have  Not Vested ($)(2)
Craig W. Best		10,000		—	$	43.00		01/02/2016
		5,100		3,400		37.50		02/28/2018
										2,153		80,738
										1,428		53,513

(1) Represents outstanding stock appreciation rights. Mr. Best was awarded 10,000 stock appreciation rights, or “SARs,” on January 3, 2006, pursuant to his then-current employment agreement and a stock appreciation rights agreement. These SARs vested annually at a rate of 2,000 per year over a five year period, and became fully vested on January 3, 2011. Mr. Best was also awarded 8,500 SARs on February 29, 2008, under the 2008 Long-Term Incentive Plan. These SARs vest annually at a rate of 1,700 per year over a five year period.

(2) Represents restricted stock awards under the 2008 Long-Term Incentive Plan. Awards are subject to a vesting period of five years. Market value is based on a closing price of $37.50 per share of our common stock on December 31, 2011.

Pension Benefits

The following table sets forth information concerning our plans that provide for payments or other benefits at, following, or in connection with, retirement for each of the named executive officers.

Name	Plan Name	Number of Years  of Credited Service (#)(1)		Present Value  of Accumulated Benefit ($)(2)		Payment During Last Fiscal Year ($)(3)
Craig W. Best	Employee’s Pension Plan		6		51,506		—
Patrick M. Scanlon	Employee’s Pension Plan		36		216,024		—
Richard E. Grimm	Employee’s Pension Plan		33		671,032		—
Greg D. Misterman	Employee’s Pension Plan		2		—		—
Stanley H. Cohen	Employee’s Pension Plan		2		—		—

(1) Represents the number of years of service credited to the executive officer under the plan, computed as of the same pension plan measurement date used for financial statement reporting purposes with respect to the registrant’s audited financial statements for the last completed fiscal year.

(2) Reflects the actuarial present value of the named executive officer’s accumulated benefit under the plan(s), computed as of the same pension plan measurement date used for financial statement reporting purposes with respect to the registrant’s audited financial statements for the last completed fiscal year.

(3) Represents the dollar amount of any payments and benefits paid to the named executive officer during the registrant’s last completed fiscal year.

33

The information in the foregoing table relates to our Employee’s Pension Plan, a qualified defined benefit retirement plan. As of June 2008, no further benefits are being accrued in this plan. The plan provided for fixed benefits payable for life upon retirement at the age of 65, based on length of service and compensation levels as defined in the plan. Plan assets of the trust fund are invested and administered by the Trust Department of the Bank. The information in the table has been determined using interest rate and mortality rate assumptions consistent with those used in the Company’s financial statements. Our named executive officers participate in the Employee’s Pension Plan on the same basis as all other employees and receive only those benefits that are available to all other employees.

Non-Qualified Deferred Compensation

The following table sets forth non-qualified deferred compensation contributions during the year ended December 31, 2011.

Name	Executive Contributions in 2011 ($)		Company Contributions in 2011 ($)(1)		Aggregate Earnings  in 2011($)(2)		Aggregate Withdrawals/ Distributions ($)		Aggregate Balance at December 31, 2011 ($)
Craig W. Best(3)		—		3,845		—		—		19,859
Craig W. Best		—		121,375		3,246		—		151,510
Patrick M. Scanlon		—		1,698		3,156		—		33,426
Richard E. Grimm		—		10,987		4,768		—		110,360
Greg D. Misterman		—		—		—		—		—
Stanley H. Cohen		—		—		—		—		—

(1) Represents Company contributions under the Executive Deferred Compensation Plan and Executive Deferred Compensation Plan #2, which contributions are included in “All Other Compensation” in theSummary Compensation Tableset forth above.

(2) Represents earnings on balances in the Executive Deferred Compensation Plan and Executive Deferred Compensation #2.

(3) Represents Company contributions under the Excess Benefit Plan, which contributions are included in “All Other Compensation” in theSummary Compensation Tableset forth above.

Excess Benefit Plan. The Bank maintains an Excess Benefit Plan for Craig W. Best, originally adopted as of January 3, 2006. This plan originally provided Mr. Best with additional benefits in excess of those accrued under Employee’s Pension Plan due to the limit on compensation contained in Section 401(a)(17) of the Code, and is now being administered to provide benefits in excess of those accrued under the 401(k) Plan and ESOP. The plan provides Mr. Best with benefits in an amount which is equivalent to the excess, if any, of the amount he would have been entitled to receive under the 401(k) Plan and ESOP if those plans were administered without regard to the limitations required by Section 401(a)(17) of the Code and any regulations thereunder, over the amount he is entitled to receive under those plans for the applicable plan year. The Excess Benefit Plan is intended to be an unfunded excess benefit plan.

The benefit described above is to be computed as of the date of Mr. Best’s separation from service. The accrued benefit will become payable if Mr. Best separates from service with the Bank for any reason. If a change in control of the Bank (as defined in the Excess Benefit Plan) occurs, the accrued benefit at the date of the change in control shall be valued and payable according to the provisions set forth below as if the change in control constituted a separation from service.

Mr. Best, or his beneficiaries, will be entitled to receive, by virtue of his separation from service, a distribution in an aggregate amount equal to his accrued benefit. The actuarial equivalent of his accrued benefit will be distributed in a single lump sum payment within five days following the date that is six months after the date Mr. Best separates from service.

34

If Mr. Best dies before terminating his employment with the Bank and before the commencement of payments under the Excess Benefit Plan, the actuarial equivalent of the entire value of his accrued benefit will be paid, in a single lump sum, within sixty days following the date of his death, to his designated beneficiaries.

If Mr. Best’s employment had terminated on December 31, 2011, his accrued benefit under the Excess Benefit Plan would have been $19,859.

Executive Deferred Compensation Plan.During 2008, the Company established an Executive Deferred Compensation Plan for the benefit of Mr. Best and a select group of executives, including Mr. Grimm and Mr. Scanlon, who were adversely impacted by the freezing of the Employee’s Pension Plan and establishment of the 401(k) Plan. The Executive Deferred Compensation Plan is an unfunded arrangement for the benefit of participants.

Other Potential Post-Termination Benefits

Payments Made Upon Termination for Cause.Under Mr. Best’s employment agreement, we may terminate Mr. Best’s employment for cause (as defined in the agreement) at any time. If Mr. Best is terminated for cause, Mr. Best will receive only accrued compensation and vested benefits through his termination date.

Payments Made Upon Termination Without Cause or For Good Reason.In accordance with the terms of his amended and restated employment agreement, which was entered into as of January 3, 2011, upon voluntary termination by Mr. Best without good reason (as defined in the agreement), Mr. Best will receive only accrued compensation and vested benefits through his termination date. Upon involuntary termination by the Company without cause or voluntary termination by Mr. Best with good reason (constructive termination), Mr. Best will receive his accrued compensation and other benefits through his termination date, along with a severance payment equal to 24 months of payments based upon base salary and average annual bonus, payment of health insurance premiums for 24 months (for executive and his dependents) and $30,000 in outplacement assistance to be paid by us to a firm selected by Mr. Best. In addition, the Company will pay the applicable premium otherwise payable for COBRA continuation coverage for Mr. Best, his spouse and dependents for a period of 24 months following termination. If the Company terminated Mr. Best’s employment without cause on December 31, 2011, the severance payment due under his employment agreement (based solely on Mr. Best’s then current cash compensation, without regard to future base salary adjustments or bonuses) would have been $687,144.

Payments Made Upon Disability or Death.Mr. Best’s employment agreement provides that, upon termination due to his death or disability, Mr. Best will receive only accrued compensation and vested benefits through his termination date.

Payments Made Upon a Change in Control.In accordance with the terms of his amended and restated employment agreement, if we terminate Mr. Best without cause or Mr. Best terminates for good reason within 12 months of a change in control, he will receive, in addition to previously accrued compensation and benefits, monthly severance payments for 3 years following termination equal to the sum of 1/12th of Mr. Best’s base salary at the time of termination and 1/12th of the bonus payment that Mr. Best was then eligible to receive. In addition, the Company will pay the applicable premium otherwise payable for COBRA continuation coverage for Mr. Best, his spouse and dependents for a period of 36 months following termination. Mr. Best will immediately vest in all outstanding stock-based compensation awards upon termination in connection with a change in control.

Generally, under Section 280G of the Internal Revenue Code, severance payments made in connection with a change in control that equal or exceed three times an executive’s average annual compensation over the five preceding tax years (or period of employment, if less) are considered “excess parachute payments.” Amounts that exceed the Section 280G limit are subject to an excise tax payable by Mr. Best and are non-deductible by us. The employment agreement limits payments to Mr. Best to an amount that will not exceed his Section 280G limit under the Internal Revenue Code.

35

If a change in control had occurred at December 31, 2011, the severance payment due to Mr. Best under his employment agreement (based solely on Mr. Best’s then current cash compensation, without regard to future base salary adjustments or bonuses) would have been $1,003,368, and 3,400 unvested stock appreciation rights with a per share strike price of $43.00 and 5,100 unvested stock appreciation rights with a per share strike price of $37.50 would have become fully vested. The closing market price of the Company’s common stock on December 31, 2011 was $37.50 per share.

The other named executive officers are covered by the Company’s Severance Policy which would make payments, based on length of service and base salary, for any termination without cause including change in control. If the termination had occurred at December 31, 2011 the severance due the officers would be as follows; Mr. Scanlon - $88,804, Mr. Grimm - $124,837, Mr. Misterman - $19,048, Mr. Cohen - $18,775.

36

OTHER INFORMATION RELATING TO DIRECTORS AND EXECUTIVE OFFICERS

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than 10% of our common stock, to file reports of ownership and changes of ownership with the SEC. Executive officers, directors and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) reports they file.

Based solely on our review of the copies of the reports we have received and written representations provided to us from the individuals required to file the reports, we believe that we have no 10% shareholders and that each of our executive officers and directors has complied with applicable reporting requirements for transactions in our common stock during the year ended December 31, 2011, except that one Statement of Changes of Beneficial Ownership on Form 4, relating to a transaction that occurred in March 2011, was not timely filed by Mr. Best.

Certain Relationships and Related Transactions

The Sarbanes-Oxley Act of 2002 generally prohibits loans by public companies to its executive officers and directors, but contains a specific exemption from such prohibition for loans by financial institutions, such as the Bank, to its executive officers and directors in compliance with federal banking regulations, which require that all loans or extensions of credit to executive officers and directors of insured financial institutions be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is therefore prohibited from making any loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public.

The Audit Committee of the Board of Directors periodically reviews a summary of any transactions with our directors and executive officers and with firms that employ directors, as well as other related person transactions, to recommend to the disinterested members of the Board of Directors that the transactions are fair, reasonable and with Company policy and should be ratified and approved. Other than our Audit Committee charter, which provides for the Audit Committee’s review of any transaction between the Company and related parties, and except with respect to our lending policy, we do not maintain written policies or procedures for the review, approval or ratification of certain transactions with related persons. In accordance with banking regulations, however, the entire Board of Directors of the Bank reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans made to such person and his or her related interests exceed the greater of $25,000 or 5% of the Bank’s capital and surplus (up to a maximum of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the Board of Directors.

At December 31, 2011, certain of our directors, nominees, and executive officers or their associates had outstanding loans or commitments from the Bank. These transactions were made in the ordinary course of the Bank’s business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability or present other unfavorable features.

Compensation and Benefits Committee Interlocks and Insider Participants

Directors James G. Keisling, P. Frank Kozik, Robert W. Naismith and Emily S. Perry served as members of the Compensation and Benefits Committee during 2011. No member of the Compensation and Benefits Committee has ever served as an officer or employee of the Company or its subsidiaries. There are no compensation committee interlocks between the Company or its subsidiaries and any other entity involving the Company or its subsidiaries or any such entity’s executive officers or directors. The Bank has made, and expects to continue to make in the future, loans to the Company’s directors, including members of the Compensation and Benefits Committee, and their family members and to firms, corporations and other entities in which they and their family members maintain interests. For more information, see “—Certain Relationships and Related Transactions.”

37

NOMINATING AND CORPORATE GOVERNANCE COMMITTEE PROCEDURES

General

It is the policy of the Nominating and Corporate Governance Committee of the Board of Directors to consider director candidates recommended by shareholders who appear to be qualified to serve on our Board of Directors. The Nominating and Corporate Governance Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Nominating and Corporate Governance Committee does not perceive a need to increase the size of the Board of Directors. In order to avoid the unnecessary use of the Nominating and Corporate Governance Committee’s resources, the Nominating and Corporate Governance Committee will consider only those director candidates recommended in accordance with the procedures set forth below.

Procedures to be Followed by Shareholders

A shareholder who proposes to nominate an individual for election to the Board of Directors at an Annual Meeting must deliver a written notice to the Secretary of the Company within the time frames set forth under “Submission of Business Proposals and Shareholder Nominees” which includes:

1. The name and address of the person recommended as a director candidate;

2. All information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended;

3. The written consent of the person being recommended as a director candidate to be named in the proxy statement as a nominee and to serve as a director if elected;

4. The name and address of the shareholder giving the notice, as it appears on our books;

5. The name and address of the beneficial owner, if any, on whose behalf the nomination is being made;

6. The class and number of shares owned beneficially and of record by such shareholder and such beneficial owner and a representation that such shareholder and beneficial owner intend to appear in person or by proxy at the meeting;

7. If the recommending shareholder is not a shareholder of record, a statement from the record holder verifying the holdings of the shareholder and a statement from the recommending shareholder of the length of time that the shares have been held;

8. A statement from the shareholder as to whether the shareholder has a good faith intention to continue to hold the reported shares through the date of the meeting; and

9. A statement from the recommending shareholder supporting its view that the proposed nominee possesses the minimum qualifications for nominees (if any) and describing the contributions that the nominee would be expected to make to the Board and to the governance of Penseco.

Of those persons who are nominated by a shareholder only those nominated in accordance with these procedures shall be eligible for election as directors at the Annual Meeting.

Process for Identifying and Evaluating Nominees

In selecting director candidates to be nominated for election at an annual meeting, the Nominating and Corporate Governance Committee begins by determining whether the incumbent directors whose terms expire at the meeting desire, and are qualified, to continue their service on the Board. We are of the view that the repeated

38

service of qualified incumbents promotes stability and continuity in the boardroom, giving us the benefit of the familiarity and insight into our affairs that our directors have accumulated during their tenure. Accordingly, it is the policy of the Nominating and Corporate Governance Committee, absent special circumstances, to nominate qualified incumbent directors who continue to satisfy the Committee’s criteria for membership on the Board; who the Committee believes will continue to make important contributions to the Board; and who consent to stand for re-election and, if re-elected, to continue their service on the Board.

If there are Board positions for which the Committee will identify and evaluate non-incumbent directors, it will proceed as follows:

Identification. For purposes of identifying nominees for the Board of Directors, the Nominating and Corporate Governance Committee relies on personal contacts of the committee and other members of the Board of Directors as well as its knowledge of members of the Bank’s local communities. The Nominating and Corporate Governance Committee will also consider director candidates recommended by shareholders in accordance with the policy and procedures set forth above. The Nominating and Corporate Governance Committee may use an independent search firm in identifying nominees. However, the committee did not engage an independent search firm for this purpose during the year ended December 31, 2011.

Evaluation. In evaluating potential nominees, the Nominating and Corporate Governance Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating the candidate under the selection criteria set forth below under the “Minimum Qualifications” section of the proxy statement. In addition, the Nominating and Corporate Governance Committee may conduct a background check and may interview the candidate. Candidates proposed by shareholders are considered under the same criteria except that the Committee may also consider the size and duration of the equity interest of the recommending shareholder in the Company and the extent to which the recommending shareholder intends to continue holding this interest.

Minimum Qualifications

The Nominating and Corporate Governance Committee has not adopted a specific set of minimum qualifications that must be met by nominees. Nominees are selected on the basis of their integrity, experience, achievements, judgment, intelligence, personal character and capacity to make independent analytical inquiries, ability and willingness to devote adequate time to Board duties, and the likelihood of being able to serve on the Board for a sustained period. In evaluating potential director nominees, the Company’s Nominating and Corporate Governance Committee will evaluate an individual’s specific qualities or skills including, but not limited to an individual’s: contributions to the range of talent, skill and expertise of the Board; financial, regulatory and business experience, knowledge of the banking and financial services industries, familiarity with the operations of public companies and ability to read and understand financial statements; familiarity with our market area and participation in and ties to local businesses and local civic, charitable and religious organizations; personal and professional integrity, honesty and reputation; ability to represent the best interests of the Company’s shareholders and the best interests of the Company and Bank; ability to devote sufficient time and energy to the performance of his or her duties; independence under applicable SEC regulations; and current equity holdings in the Company.

The Company’s Nominating and Corporate Governance Committee will also consider any other factors it deems relevant, including diversity, competition, size of the Board of Directors, and regulatory disclosure obligations. The Nominating and Corporate Governance Committed will also consider the extent to which a candidate helps the Board of Directors reflect the diversity of the Company’s shareholders, employees, customers, and communities. The Committee also considers factors such as global experience, experience as a director of a public company, and knowledge of relevant industries.

In addition, prior to nominating an existing director for re-election to the Board of Directors, the Committee will consider and review an existing director’s Board and committee performance and his or her satisfaction of any minimum qualifications established by the Committee.

39

SUBMISSION OF PROPOSALS AND SHAREHOLDER NOMINATIONS

We must receive proposals that shareholders seek to include in the proxy statement for our 2013 annual meeting of shareholders no later than November 30, 2012. If next year’s annual meeting is held on a date more than 30 calendar days before or after May 1, 2013, a shareholder proposal must be received by a reasonable time before we begin to print and mail our proxy solicitation for such annual meeting. Any shareholder proposals will be subject to the requirements of the proxy rules adopted by the SEC.

The Company’s bylaws provide that, in order for a shareholder to make nominations for the election of directors or proposals for business to be brought before the annual meeting, a shareholder must deliver notice of such nominations and/or proposals to the Corporate Secretary not less than 60 days or more than 90 days prior to May 1, 2013. However, if the date of the Company’s annual meeting is more than 30 days before or more than 60 days after May 1, 2013, notice must be received not less than 60 days nor more than 90 days prior to the annual meeting date or no later than 15 days after public announcement of the date of the annual meeting. A copy of the bylaws may be obtained from the Company.

SHAREHOLDER COMMUNICATIONS

In order to provide our shareholders and other stakeholders with a direct and open means of communication to the Board of Directors, the Board has adopted the following procedures for communications to our Board of Directors or individual directors.

• Shareholders and other interested persons may communicate with the Board or the non-management Directors as a group by writing to the Chairman of the Board, c/o Penseco Financial Services Corporation, 150 North Washington Avenue, Scranton, Pennsylvania 18503. The correspondence should specify the intended recipient.

• All communications received in accordance with these procedures will be reviewed initially by the Chairman of the Board, who will relay all such communications to the appropriate director or directors unless the Chairman of the Board determines that the communication:

• Does not relate to our business or affairs or the functioning or constitution of the Board or any of its committees;

• Relates to routine or insignificant matters that do not warrant the attention of the Board;

• Is an advertisement or other commercial solicitation or communication;

• Is frivolous or offensive; or

• Is otherwise inappropriate for delivery to directors.

The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board or one or more of its committees and whether any response to the person sending the communication is appropriate. Any such response will be made through the Chairman of the Board and only in accordance with our policies and procedures and applicable laws and regulations relating to the disclosure of information.

40

MISCELLANEOUS

We will pay the cost of this proxy solicitation. We will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of our common stock. In addition to soliciting proxies by mail, our directors, officers and regular employees may solicit proxies personally, by email or by telephone without receiving additional compensation.

Our Annual Report to Shareholders has been mailed to persons who were shareholders as of the close of business on February 17, 2012. Any shareholder who has not received a copy of the Annual Report may obtain a copy by writing to the Secretary of the Company. The Annual Report is not to be treated as part of the proxy solicitation material or as having been incorporated in this proxy statement by reference.

Whether or not you plan to attend the Annual Meeting, please vote by marking, signing, dating and promptly returning the enclosed proxy card in the enclosed envelope.

BY ORDER OF THE BOARD OF DIRECTORS
	/s/ Craig W. Best
	Craig W. Best
	President and Chief Executive Officer

March 30, 2012

Scranton, Pennsylvania

41

Appendix A

Proposed Amendment to Articles of Incorporation:

A new Article ELEVENTH of the Articles of Incorporation of Penseco Financial Services Corporation shall be added, and shall read in its entirety as follows:

ELEVENTH: The shareholders of the Corporation shall not have the right to cumulative voting in the election of directors.

Conforming Amendment to the Amended and Restated By-laws:

Article II, Section 2.8 of the Amended and Restated By-laws of Penseco Financial Services Corporation shall be amended, and shall read in its entirety as follows:

Section 2.8. Shareholders shall not have the right to cumulate votes in the election of directors. In the election of directors, each shareholder shall have the right to cast a number of votes equal to the number of shares standing in such shareholder’s name on the books of the Corporation, and shall have the right to cast such number of votes (without cumulation) for each of a number of candidates equal to the number of directors to be elected in such election. The candidates for election as directors receiving the highest numbers of votes cast, even though not a majority of the votes cast, shall be elected.

x PLEASE MARK VOTES
AS IN THIS EXAMPLE REVOCABLE PROXY PENSECO FINANCIAL SERVICES CORPORATION

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF

DIRECTORS OF PENSECO FINANCIAL SERVICES CORPORATION

ANNUAL MEETING OF SHAREHOLDERS

MAY 1, 2012

The shareholder(s) hereby appoint(s) Richard C. Kunkle and Michael L. Jake, or either of them, as proxies, each with the power of substitution, and hereby authorizes them to represent and to vote, as designated on this ballot, all of the shares of Common Stock of Penseco Financial Services Corporation that the shareholder(s) is/are entitled to vote at the Annual Meeting of Shareholders to be held at 2:00 P.M., local time on May 1, 2012, at the Hilton Scranton and Conference Center, 100 Adams Avenue, Scranton, Pennsylvania, and any adjournment or postponement thereof.

The Board of Directors recommends a vote “FOR” the election of the listed director nominees and “FOR” each of the other proposals.

Please be sure to date and sign this proxy card in the box below.		Date
	Sign above

1.	Election of Directors–Class of 2016	For	Withhold All	For All Except
	To elect as directors to the Class of 2016 the nominees listed below.	¨	¨	¨

01) Joseph G. Cesare, M.D. 02) Robert W. Naismith, Ph.D. 03) Emily S. Perry

INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark “For All Except” and write that nominee’s name(s) or number(s) on the line below. To vote cumulatively, mark “FOR” and beside the nominee’s name write the number of votes allocated to the nominee.

2.	Election of Director–Class of 2015	For	Withhold
	To elect as director to the Class of 2015 the nominee listed below.	¨	¨

01) Russell C. Hazelton

		For	Against	Abstain
3.	Amendment to Articles to Discontinue Cumulative Voting	¨	¨	¨
	To amend the articles of incorporation to discontinue cumulative voting in elections of directors, and to conform the bylaws.
		For	Against	Abstain
4.	Say-on-Pay	¨	¨	¨
	To approve, on an advisory basis, the compensation of our named executive officers.
5.	Ratification of Auditors	For	Against	Abstain
	The ratification of the appointment of McGrail Merkel Quinn and Associates as independent registered public accounting firm for the year ending December 31, 2012.	¨	¨	¨

This proxy is revocable prior to its exercise. The shares represented by this proxy when properly executed will be voted in the manner directed herein by the undersigned shareholder(s).IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” THE ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AND “FOR” EACH OTHER PROPOSAL. If any other matters properly come before the meeting, the persons named in this proxy will vote in their discretion. This proxy confers on the proxy holder the power of cumulative voting for the election of directors and the power to vote cumulatively for less than all of the nominees listed in Proposal 1.

PLEASE INDICATE IF YOU PLAN TO ATTEND THIS MEETING. è ¨

¿ Detach above card, sign, date and mail in postage paid envelope provided. ¿

PENSECO FINANCIAL SERVICES CORPORATION

PLEASE ACT PROMPTLY

PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

This Proxy, when properly executed, will be voted as directed by the shareholder(s). If no such directions are made,THIS PROXY WILL BE VOTED “FOR” THE ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AND “FOR” EACH OTHER PROPOSAL.

This Proxy may be revoked by you at any time before it is voted at the Annual Meeting.

Please sign exactly as your name appears on this card. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.

IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.

PROXY MATERIALS ARE AVAILABLE ON-LINE AT:
http://www.cfpproxy.com/6609	6609