-------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 6, 2003
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TO OUR SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that pursuant to its By-Laws and call of its
Directors, the regular meeting of shareholders of the PENSECO FINANCIAL SERVICES
CORPORATION will be held at the Central City Office of Penn Security Bank and
Trust Company located at 150 North Washington Avenue, Scranton, Pennsylvania, on
Tuesday, May 6, 2003, at 2:00 P.M. for the purpose of considering and acting
upon the following matters:
1. Electing three (3) Directors of the Class of 2007 to serve for four
(4) years and until their successors are elected.
2. Whatever other business may be brought before the meeting or any
adjournment thereof.
Only those shareholders of record at the close of business on March 7, 2003
shall be entitled to vote at the meeting. If you do not expect to be personally
present, please sign the enclosed proxy, be sure to date the same, and return at
your earliest convenience in the enclosed, stamped envelope.
BY ORDER OF THE BOARD OF DIRECTORS
P. FRANK KOZIK
Secretary
March 21, 2003
PENSECO FINANCIAL SERVICES CORPORATION
150 North Washington Avenue, Scranton, Pennsylvania 18503
PROXY STATEMENT MAILED MARCH 21, 2003 FOR THE ANNUAL MEETING TO BE HELD TUESDAY,
MAY 6, 2003, AT 2:00 P.M. AT THE CENTRAL CITY OFFICE OF PENN SECURITY BANK AND
TRUST COMPANY LOCATED AT 150 NORTH WASHINGTON AVENUE, SCRANTON, PENNSYLVANIA.
INTRODUCTION
Penn Security Bank and Trust Company (hereinafter, the "Bank") is a
wholly-owned subsidiary of Penseco Financial Services Corporation (hereinafter,
the "Company"). This Proxy Statement, while prepared in connection with the
Annual Meeting of Shareholders of the Company, contains certain information
relating to the Bank which will be identified where appropriate.
REVOCABILITY OF PROXY
Any person giving the proxy herein solicited may revoke it at any time
prior to its being voted at the annual meeting by submitting a later dated
proxy, or by contacting the Secretary, P. Frank Kozik, in writing prior to the
meeting indicating the shareholder's intention to revoke the proxy. Execution of
the accompanying proxy will not affect a shareholder's right to attend the
meeting and vote in person.
PERSON MAKING THE SOLICITATION
The solicitation is made by order of the Board of Directors of the Company,
the cost of which will be borne by the Company. Solicitation is being made
primarily by use of the mail, but the management may solicit proxies by
telephone or personal interview.
VOTING SECURITIES & PRINCIPAL HOLDERS THEREOF
The number of shares of common stock outstanding and entitled to vote at
the annual shareholders' meeting is 2,148,000 as of this date. Only those
shareholders of record at the close of business on March 7, 2003 shall be
entitled to vote. The presence, in person or by proxy, of the holders of a
majority of the total number of outstanding shares and entitled to vote is
necessary to constitute a quorum at the annual shareholders' meeting.
In the election of Directors, each shareholder has cumulative voting rights
and is entitled to cast in the aggregate as many votes as the number of shares
owned, multiplied by the number of Directors to be elected and to cast such
votes for one candidate or to distribute such votes among two or more
candidates. The candidates receiving the highest number of votes up to the
number of Directors to be chosen shall be elected. The proxy permits a
shareholder to vote for or withhold his vote from the election of Directors. The
proxyholders named on the Proxy will vote for the Board's nominees unless the
shareholder has withheld his vote from some or all of the nominees. Such
proxyholders 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
(in the event there is a nominee or nominees other than the Board's nominees),
and, to the extent possible, in order to cast the same number of votes for each
Board nominee. On other matters, each share of stock entitles the owner thereof
to one vote. Abstentions and broker non-votes are not included as votes cast.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its executive officers and persons who own more than ten
percent of a registered class of the Company's common stock (currently there are
no such persons), to file reports of ownership and changes in ownership with
respect to shares of the Company's common stock beneficially owned by them with
the Securities and Exchange Commission and to furnish the Company with copies of
all forms that they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no such forms were required for those persons, the Company believes that during
fiscal 2002 all required reports were filed on a timely basis.
The following table sets forth, as of February 28, 2003, the amount and
percentage of the common stock of the Company beneficially owned by each
Director and all Principal Officers and Directors of the Company as a group. No
shareholder owns 5% or more of the Company's stock.
- 2 -
Name of Individual Amount and Nature Percent of
or Identity of Group of Beneficial Ownership(1) Class
- -------------------- -------------------------- ----------
Edwin J. Butler................................. 21,028(2) .979%
Richard E. Grimm................................ 4,404(3) .205%
Russell C. Hazelton............................. 14,876(4) .693%
D. William Hume................................. 3,760(5) .175%
James G. Keisling............................... 18,452(6) .859%
P. Frank Kozik.................................. 17,116(7) .797%
Robert W. Naismith.............................. 22,452(8) 1.045%
James B. Nicholas............................... 5,568(9) .259%
Emily S. Perry.................................. 2,200(10) .102%
Sandra C. Phillips.............................. 72,000(11) 3.352%
Otto P. Robinson, Jr............................ 87,815(12) 4.088%
Steven L. Weinberger............................ 600 .028%
All Directors and Principal Officers
as a group (23 in group)...................... 287,822 13.400%
(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 Securities and Exchange Commission and may include
securities owned by or for the individual's spouse and minor children and
any other relative who has the same home, as well as securities as to which
the individual has, or shares, voting or investment power or has the right
to acquire beneficial ownership within 60 days after February 28, 2003.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) This total includes 2,132 shares in a self-directed IRA.
(3) This total includes 780 shares owned jointly by Mr. Grimm and his wife and
3,620 shares held by Penn Security Bank under its Employee Stock Ownership
Plan in which Mr. Grimm has a vested interest.
(4) This total 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.
(5) This total includes 489 shares owned jointly by Mr. Hume and his wife, 100
shares in a self-directed IRA owned by Mr. Hume's wife and 3,171 shares in
a self-directed IRA.
(6) This total includes 1,400 shares owned jointly by Mr. Keisling and his
wife, 2,100 shares owned by Mr. Keisling's wife, 4,744 shares in a
self-directed IRA and 9,608 shares in a custodial account.
(7) This total includes 15,996 shares owned jointly by Mr. Kozik and his wife
and 1,000 shares in a self-directed IRA.
(8) This total includes 13,500 shares owned jointly by Dr. Naismith and his
wife and 8,952 shares in a self-directed IRA.
(9) This total includes 758 shares owned by Mr. Nicholas' wife and daughter,
800 shares in a self-directed IRA and 1,600 shares owned by D. G. Nicholas
Company Profit Sharing Plan, for which Mr. Nicholas is Trustee.
(10) This total includes 1,780 shares owned jointly by Mrs. Perry, her husband
and her children.
(11) These shares are held in a grantor trust.
(12) This total includes 9,456 shares owned jointly by Mr. Robinson and his
wife, 24,086 shares owned by Mr. Robinson's wife and children and 7,098
shares held by Penn Security Bank under its Employee Stock Ownership Plan
in which Mr. Robinson has a vested interest.
- 3-
ELECTION OF DIRECTORS
Introduction
Pursuant to Article III of the Company's By-Laws, the Board of Directors
shall consist of not fewer than five (5) or more than fifteen (15) members, with
four (4) classes of Directors, each class being as nearly equal in number as
possible.
Three (3) Directors of the Class of 2007 are to be elected at the Annual
Meeting. Each Director of the Class of 2007 will serve for a term of four (4)
years and until his successor is elected. Unless otherwise instructed, proxy
holders will vote the proxies received by them for the election of the three (3)
nominees named below. Other nominations may be submitted in accordance with
Article II of the Company's By-Laws, which provides that any person intending to
nominate at the annual meeting a candidate or candidates for the Board of
Directors other than those nominated by management must notify the Company by
certified mail, return receipt requested, which notice the Company must be in
receipt of at least forty-five (45) days before said meeting, of his intent to
do so giving the name(s) and address(es) of the person(s) he intends to
nominate. Any solicitation by or on behalf of such candidate is subject to
Federal Securities Laws and must comply therewith. The judge or judges of
election shall not count any votes solicited by or on behalf of any such
candidate in violation of the Federal Securities Laws or for any such candidate
nominated without prior notice thereof having been received by the Company as
required above.
Nominees
The names of the nominees for Directors of the Class of 2007, and the
Directors in the Classes of 2004, 2005 and 2006 who will continue in office
after the Annual Meeting and until the expiration of their respective terms,
together with certain information regarding them, are as follows:
NOMINEES FOR DIRECTOR
Term
Principal Occupation Director Will
Name Age for Past Five Years Since Expire*
- ---- --- ------------------- -------- -------
Class of 2007
- -------------
Edwin J. Butler 76 Mr. Butler retired in September, 1991 and was 1977 2007
Executive Vice-President and Cashier of the Bank.
P. Frank Kozik 63 Secretary (non-active officer). Mr. Kozik is President
of Scranton Craftsmen, Inc., Throop, PA, a corporation 1981 2007
dealing in ornamental and miscellaneous iron and
pre-cast concrete products.
Steven L. Weinberger 55 Mr. Weinberger is Vice-President of G. Weinberger 1999 2007
Company, Old Forge, PA, a mechanical contractor special-
izing in commercial and industrial construction.
It is the intent of the persons named in the proxy to vote for the nominees
listed in the above schedule. Management is not aware of any nominees
unavailable for election. In the event, however, that vacancies occur, such
shares may be voted for substitute nominees, if any, designated by management.
DIRECTORS TO CONTINUE IN OFFICE
Term
Principal Occupation Director Will
Name Age for Past Five Years Since Expire
- ---- --- ------------------- -------- -------
Class of 2004
- -------------
Russell C. Hazelton 68 Mr. Hazelton is a retired Captain for Trans World Airlines. 1977 2004
*If elected at the Annual Meeting
- 4 -
Term
Principal Occupation Director Will
Name Age for Past Five Years Since Expire
- ---- --- ------------------- -------- -------
Class of 2004
- -------------
Robert W. Naismith, 58 Dr. Naismith is Chairman and Chief Executive Officer 1988 2004
Ph.D. of eMedsecurities, Inc. Dr. Naismith formerly was
Managing Director of Healthcare at BlueStone Capital
Partners, New York City.
Emily S. Perry 62 Mrs. Perry is a retired Insurance Account Executive and 1983 2004
a community volunteer.
Class of 2005
- -------------
Richard E. Grimm 54 Executive Vice-President and Treasurer. Mr. Grimm 1994 2005
has served the Bank as Executive Vice-President
and Cashier since 1994.
James B. Nicholas 51 Mr. Nicholas is President of D.G. Nicholas Co., 1981 2005
Scranton, PA, a wholesale Auto Parts Company.
Sandra C. Phillips 60 Mrs. Phillips has served on the Bank's Abington 1994 2005
Advisory Board since 1984. She is active in
various community associations and organizations.
Class of 2006
- -------------
D. William Hume 76 Mr. Hume retired in January, 1999 and was Senior 1991 2006
Vice-President and Assistant Secretary of the Bank at
that time. Previously, Mr. Hume served the Bank as
Executive Vice-President and Cashier.
James G. Keisling 54 Mr. Keisling is CEO of Compression Polymers Corp. 1984 2006
and Vycom Corp., manufacturers of plastic sheet products.
Otto P. Robinson, Jr. 64 President, CEO and General Counsel. Mr. Robinson
is a practicing attorney. Mr. Robinson has since his 1967 2006
election as President in 1975, been devoting most
of his time to banking matters.
BOARD AND COMMITTEE MEETINGS; DIRECTORS' COMPENSATION
The Company has a standing Audit Committee of the Board consisting of
Directors Edwin J. Butler, Russell C. Hazelton, James G. Keisling and P. Frank
Kozik, none of whom are operating officers of the Company. The Company's Board
of Directors has adopted a written charter for the Audit Committee. A copy of
the charter, which sets forth the duties and responsibilities of the Audit
Committee, is attached to this proxy statement as Appendix A. The Board of
Directors of the Company has determined that all members of the Audit Committee
are "independent directors", as defined in Rule 4200 (a) (14) of the National
Association of Securities Dealers, Inc. Meetings of the Audit Committee are held
approximately once each quarter to discuss the quarterly reports of the
Company's Internal Auditor and management's response thereto and report to the
Board thereon. In addition, at one of the meetings, the Audit Committee meets
with the Company's independent external audit firm to discuss the results of the
annual CPA audit. Last year there were four meetings of the Audit Committee.
The Company has a standing Compensation Committee of the Board consisting
of Directors Edwin J. Butler, P. Frank Kozik, Robert W. Naismith, Emily S. Perry
and Otto P. Robinson, Jr. The committee recommends to the Board of Directors the
compensation to be paid to the Executive Officers of the Company as well as
general guidelines for compensation of the employees of the Bank. Two meetings
of the committee were held in 2002.
The Company does not have a standing Nominating Committee of the Board.
- 5 -
The Board of Directors met 29 times in 2002. With the exception of James G.
Keisling , all Directors attended at least 75% of the total of the Board of
Directors meetings and the committee meetings of which they were members.
During 2002, Directors received an annual retainer of $9,000.00 plus
$600.00 for each Board meeting attended and $250.00 for each committee meeting
attended. Directors who are operating officers of the Company do not receive
fees for committee meetings attended.
EXECUTIVE COMPENSATION
The following table sets forth, for fiscal years 2000 through 2002, the
total compensation paid by the Company for services in all capacities to the
Company's Chief Executive Officer and the Company's four most highly compensated
executive officers who received compensation in excess of $100,000.00 for the
fiscal year ended December 31, 2002:
Annual Compensation (1)
-----------------------
Name and All Other
Principal Position Year Salary ($) Bonus($) Compensation($)
- ------------------ ---- ---------- -------- ---------------
Otto P. Robinson, Jr. 2002 227,046.96 22,367.38 4,385.28 (2)
President, CEO & 2001 217,108.26 21,640.00 30,168.66 (3)
General Counsel 2000 215,376.93 9,979.00 14,047.00 (4)
Richard E. Grimm 2002 128,980.60 12,811.81 3,108.98 (2)
Executive Vice-President 2001 123,178.05 12,378.58 3,342.69 (2)
& Treasurer 2000 120,325.49 9,013.00 2,599.30 (2)
Peter F. Moylan 2002 128,065.90 12,642.47 3,085.23 (2)
Executive Vice-President 2001 122,319.29 12,214.96 3,298.55 (2)
& Trust Officer 2000 119,458.13 10,005.00 2,601.80 (2)
William J. Calpin, Jr. 2002 95,645.17 11,401.57 2,347.15 (2)
Senior Vice-President 2001 91,177.98 11,016.00 2,521.14 (2)
Andrew A. Kettel, Jr. 2002 96,970.95 11,400.00 2,376.19 (2)
Senior Vice-President 2001 89,269.85 12,000.00 2,498.85 (2)
(1) Other annual compensation received by Mr. Robinson consisted of the use of a
Bank owned automobile. For each fiscal year disclosed, the aggregate amount of
this perquisite received by Mr. Robinson was less than 10% of his salary and
bonus and is, therefore, not reportable.
(2) "All Other Compensation" consists of a cash contribution to the Employee
Stock Ownership Plan which may be used to purchase shares of the Company's
stock.
(3) "All Other Compensation" consists of a cash contribution to the Employee
Stock Ownership Plan of $4,219.66 which may be used to purchase shares of the
Company's stock and $25,949.00 for Supplemental Benefit Plan described on page
8.
(4) "All Other Compensation" consists of a cash contribution to the Employee
Stock Ownership Plan of $3,215.00 which may be used to purchase shares of the
Company's stock and $10,832.00 for Supplemental Benefit Plan described on page
8.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation program for executive officers is administered
by the Compensation Committee of the Board of Directors ("Committee"). The
Committee makes recommendations to the Board of Directors regarding the
compensation arrangements for executive officers, including the Chief Executive
Officer. The compensation program for the Company's executive officers consists
of a base salary, annual cash bonus, and other perquisites. In 2002, Otto P.
Robinson, Jr., the President and Chief Executive Officer, was the only executive
officer to receive a perquisite, which was the use of a Bank owned automobile.
- 6 -
The Committee determines executive base salaries by level of
responsibility, individual performances and, to a lesser degree, Company
performance, as well as by the need to provide a competitive package that allows
the Company to retain key executives. After reviewing individual performances
for the year and available information on salaries at other financial
institutions of similar size, the Chief Executive Officer makes recommendations
to the Committee concerning the base salaries of other executive officers. Using
the same review process, the Committee makes recommendations to the Board
regarding the Chief Executive Officer.
Annual cash bonuses are intended to focus the efforts of executive officers
on the attainment of specific annual performance goals which will promote the
overall success of the Company. The Chief Executive Officer evaluates other
executive officers in their achievement of specific goals and makes
recommendations to the Committee regarding bonuses to be awarded. The Committee
recommends to the Board the annual bonus for the Chief Executive Officer based
to a large degree upon the financial performance of the Company using such
financial measures as earnings per share, return on average assets and return on
average equity. Mr. Robinson's cash bonus for 2002 resulted from the Company's
favorable performance measures of $3.14 earnings per share, 1.37% return on
average assets and 11.79% return on average equity. The President and Chief
Executive Officer did not participate in the decision by the Board of Directors
relating to his base salary and annual cash bonus.
MEMBERS OF THE COMMITTEE
Robert W. Naismith, Ph.D., Chairman
Edwin J. Butler
P. Frank Kozik
Emily S. Perry
Otto P. Robinson, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the Company employed Otto P. Robinson, Jr. as its President
and Chief Executive Officer. Mr. Edwin J. Butler is a retired officer of the
Bank. Mr. Robinson abstained from all voting regarding his own compensation.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed the audited financial statements for the
year ended December 31, 2002 and has discussed the audited financial statements
with management. The Audit Committee has also discussed with McGrail, Merkel,
Quinn and Associates, the Company's independent accountants, the matters
required to be discussed by Statement on Auditing Standards No. 61 (having to do
with accounting methods used in the financial statements). In addition, the
Audit Committee has received the written disclosures and the letter from
McGrail, Merkel, Quinn and Associates required by Independence Standards Board
Standard No. 1 (having to do with matters that could affect the auditor's
independence), and has discussed with McGrail, Merkel, Quinn and Associates the
independent accountants' independence. Based upon these actions, the Audit
Committee recommended to the Company's Board of Directors that the audited
financial statements be included in the Company's Form 10-K for the year ended
December 31, 2002 for filing with the Securities and Exchange Commission.
Respectfully submitted,
MEMBERS OF THE AUDIT COMMITTEE
Edwin J. Butler, Chairman
Russell C. Hazelton
James G. Keisling
P. Frank Kozik
EMPLOYEE BENEFIT PLANS
Principal officers of the Bank participate in the Bank's employee benefit
programs on the same basis as all other employees and only receive the same
benefits as all other employees.
Penn Security Bank and Trust Company maintains a qualified defined benefit
retirement (Pension) plan for its employees and officers. Directors who are
non-active officers are not included in the plan. In 2002, the Bank contributed
$202,119.00. Under the funding method employed for this plan, the amount of
contribution, payment or accrual in respect of a specified person is not and
cannot readily be separately or individually calculated for the plan.
Remuneration for pension benefit purposes includes all earnings reportable
as IRS Form W-2 wages for Federal income tax withholding purposes. Final Average
Compensation means the average compensation paid to an employee during the five
consecutive calendar years out of the final ten years of service which produces
the highest average.
- 7 -
Estimated Annual Retirement Benefit at Age 65.
Years of Service
Average Annual
Earnings 10 yrs. 20 yrs. 30 yrs. 40 yrs.
- -------------- ------- ------- ------- -------
$ 25,000.00 $ 2,500.00 $ 5,000.00 $ 7,500.00 $ 10,000.00
50,000.00 5,527.80 11,055.60 16,583.40 22,111.20
75,000.00 9,277.80 18,555.60 27,833.43 37,111.20
100,000.00 13,027.80 26,055.60 39,083.40 52,000.20
125,000.00 16,777.80 33,555.60 50,333.40 67,111.20
150,000.00 20,527.80 41,055.60 61,583.40 82,111.20
175,000.00 24,277.80 48,555.60 72,833.40 97,111.20
200,000.00 28,027.80 56,055.60 84,083.40 112,111.20
The above table of estimated annual retirement benefits is representative
of an employee currently age 65 whose salary remained unchanged during his last
five years of employment and whose benefit will be paid for the remainder of his
life. The benefits payable under the plan are subject to the maximum benefit
limitations of Section 401 (a)(17) of the Internal Revenue Code. Benefits based
on normal retirement at age 65 provided for an annual pension equal to 1% of his
Final Average Compensation up to his Covered Compensation, plus 1 1/2% of his
Final Average Compensation in excess of his Covered Compensation per year of
Credited Service, not beyond his normal retirement date, with partial credit for
fractional years. Covered Compensation is determined in accordance with the
Social Security Act as in effect at the time of the employee's final termination
of employment. Covered Compensation is the average annual wage covered under the
Social Security Act throughout the employee's working lifetime. In accordance
with the Social Security Act, maximum Covered Compensation for the year 2002 was
$39,444.00.
The years of creditable service as of December 31, 2002 for Messrs.
Robinson, Grimm, Moylan, Calpin and Kettel were 27, 23, 3, 2, and 31
respectively.
Supplemental Benefit Plan Agreement. Penn Security Bank and Trust Company
has entered into a Supplemental Benefit Plan Agreement (the "Plan") dated
December 28, 1995 with a retroactive effective date of January 1, 1994, with Mr.
Robinson. The purpose of the Supplemental Benefit is to grant additional
benefits in excess of those accrued in the pension plan due to the limit on
compensation contained in Section 401 (a)(17) of the Code. The Plan is intended
to be an unfunded excess benefit plan under Section (3)(36) of the Employee
Retirement Income Security Act of 1974 (ERISA). The Plan provides that if Mr.
Robinson retires from employment with Penn Security Bank and Trust Company at
his Normal Retirement Date, he shall be entitled to receive a benefit equal to
(a) the benefit which would have accrued under the provision of the Pension
Plan, if such Pension Plan were administered without regard to the limitations
under Code Section 401 (a)(17), less, (b) the amount of the Normal Retirement
Benefit which he is entitled to receive under the Pension Plan. If he retired
from employment at his Early Retirement Date, he shall be entitled to receive a
benefit equal to (a) the benefit which would have accrued under the provisions
of the Pension Plan computed in accordance with Section 3.1 to his Early
Retirement Date, less (b) the amount of his Early Retirement Benefit which he
would be entitled to receive under the Plan. If Early Retirement Benefits
commence prior to his Normal Retirement Date, the benefits payable under the
Plan and the Pension Plan shall be actuarially reduced for such early
commencement to the extent provided under the terms of the Pension Plan. If
retirement is after his Normal Retirement Date, he shall be entitled to receive
a benefit equal to (a) the benefit which would have accrued under the provisions
of the Pension Plan, computed in accordance with Section 3.1 to his Deferred
Retirement Date, less, (b) the amount of Deferred Retirement Benefit which he is
entitled to receive under the Pension Plan. In no event will Mr. Robinson be
entitled to receive total benefits from the Plan and the Pension Plan in excess
of the benefit he would have received from the Pension Plan if the limitations
under Code Section 401 (a)(17) were not applicable to the Pension Plan. If Mr.
Robinson terminates employment with Penn Security Bank and Trust Company for any
reason, the Accrued Benefit at the date of termination shall be valued and
payable in an aggregate amount equal to his accrued benefit. Any such payments
will be paid from the Bank's general assets. If a Change of Control of Penn
Security Bank and Trust Company occurs, Mr. Robinson's accrued benefit shall be
valued and payable in accordance with the provisions stated above. "Change of
Control" shall occur when any person other than the Bank obtains ownership or
voting power with respect to greater than 50 percent of the aggregate value or
voting power, as applicable, of the Employer's capital stock.
The Bank's Retirement Profit Sharing Plan includes employees as well as
officers. Directors who are non-active officers are not included in the plan.
Under the plan, amounts voted by the Board of Directors are paid into a fund and
each employee is credited with a share in proportion to his annual compensation.
Upon retirement or death or termination or disability, each employee is paid the
total amount of his credits in the fund in one of a number of optional ways. In
2002, the Bank did not contribute to the Retirement Profit Sharing Plan.
- 8 -
The Bank's Employee Stock Ownership Plan (ESOP), includes employees as well
as officers. Directors who are non-active officers are not included in the plan.
Under the plan, amounts voted by the Board of Directors are paid into the ESOP
and each employee is credited with a share in proportion to his annual
compensation. All contributions to the ESOP are invested in or will be invested
primarily in Penseco Financial Services Corporation stock. In 2002, the Bank
contributed $140,000.00 to the ESOP. Distribution of a participant's stock
account occurs upon retirement or death or disability or termination of
employment.
TRANSACTIONS WITH DIRECTORS AND PRINCIPAL OFFICERS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with Directors, principal
officers, their immediate families, and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others and did not involve more than the normal
risks of collectability or present other unfavorable features. These persons and
firms were indebted to the Bank for loans totaling $4,750,753.98 and
$6,006,575.50 at February 1, 2003 and 2002, respectively. Such loans had a
maximum unpaid balance in the aggregate of $5,499,675.65 and $7,047,864.67
during the years ended December 31, 2002 and 2001, respectively. In addition,
during 2002, the Bank issued a standby letter of credit for the account of a
related party in the amount of $6,352,877.00.
In this Proxy Statement, the term "officer" means the President, Executive
Vice-Presidents, Senior Vice-Presidents, Vice-Presidents, Treasurer, Secretary
and Controller.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following line graph sets forth comparative information regarding the
Company's cumulative shareholder return on its common stock over the last five
fiscal years. Total shareholder return is measured by dividing total dividends
(assuming dividend reinvestment) plus share price change for a period by the
share price at the beginning of the investment period. The Company's cumulative
shareholder return based on an investment of $100 at the beginning of the
five-year period beginning December 31, 1997 is compared to the cumulative total
return of the S & P 500 Index ("S & P 500") and the SNL Securities Northeast
Quadrant Pink Sheet Banks Index ("Pink Banks"), which more closely reflects the
Company's peer group. The yearly points marked on the horizontal axis of the
graph correspond to December 31st of that year.
Period Ending
---------------------------------------------------------------
Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
- -----------------------------------------------------------------------------------------------------
Penseco Financial Services Corp. 100.00 150.03 99.73 80.78 120.35 148.83
S&P 500 100.00 128.55 155.60 141.42 124.63 96.95
SNL Northeast OTC-BB and Pink Banks 100.00 120.59 99.12 86.18 106.48 129.05
- 9 -
AUDITORS
The Board of Directors has selected McGrail, Merkel, Quinn and Associates,
Certified Public Accountants, to conduct an independent audit of the financial
statements of the Company for the year 2002, and it is expected they will be
selected for the year 2003. Representatives of the firm are expected to be
present at the meeting and will have an opportunity to make a statement if they
so desire and will be available to respond to appropriate questions. Mr. Robert
P. Heim was re-elected by the Board of Directors this year to the position of
Director of Internal Audit. Mr. Heim will be present at the annual meeting to
respond to any appropriate questions.
McGrail, Merkel, Quinn and Associates billed the Company and its affiliates
aggregate fees of $47,000.00 for the audit of the Company's annual financial
statements for 2002 and the reviews of the financial statements included in the
Company's Forms 10-Q for 2002. They did not perform any financial information
systems design or implementation services for the Company in 2002. The aggregate
fees for all other services to the Company for 2002 totaled $27,500.00. The
Audit Committee has considered whether the services provided by McGrail, Merkel,
Quinn and Associates covered by the fees other than the audit fees, are
compatible with maintaining McGrail, Merkel, Quinn and Associates' independence
and believes that they are compatible.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Any shareholder proposal submitted for inclusion in the Company's proxy
statement and form of proxy for the 2004 Annual Meeting of shareholders must be
received at the Company's Executive Offices, 150 North Washington Avenue,
Scranton, Pennsylvania 18503 on or before December 12, 2003.
OTHER MATTERS
The Board of Directors at present knows of no other business to be
presented by or on behalf of the Company or its management at the meeting. If
any other business is presented at said meeting, the proxy herein solicited will
be voted in accordance with the recommendations of the Board of Directors.
By order of the Board of Directors, March 21, 2003.
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania 18503
OTTO P. ROBINSON, JR.
President
MARCH 21, 2003
NOTICE
THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS ACCOMPANIES THIS STATEMENT AND
COPIES ARE AVAILABLE, WITHOUT CHARGE, TO THE PUBLIC. THE ANNUAL REPORT SERVES AS
THE COMPANY'S ANNUAL DISCLOSURE STATEMENT AS REQUIRED UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND MAY BE OBTAINED AT ANY BRANCH LOCATION OF THE BANK, OR
BY CONTACTING:
PATRICK SCANLON, CONTROLLER
PENSECO FINANCIAL SERVICES CORPORATION
150 NORTH WASHINGTON AVENUE
SCRANTON, PENNSYLVANIA 18503
PHONE (570)346-7741 OR (800)327-0394
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APPENDIX A
Penseco Financial Services Corporation and Penn Security Bank and Trust Company
Audit Committee Charter
Purpose
The primary purpose of the Audit Committee (the "Committee") is to assist
the Board of Directors (the "Board") of Penseco Financial Services Corporation
and Penn Security Bank and Trust Company (collectively, the "Company") in
fulfilling its oversight responsibilities regarding reporting of the Company's
financial information to any governmental or regulatory body, the public, or
other users thereof, the Company's systems of internal accounting and financial
controls, legal compliance and compliance with the Company's policies as
established from time to time by the Board.
Composition
The Committee shall be comprised of not less than three members of the
Board all of whom are (1) independent (as defined by the National Association of
Securities Dealers listing standards) from management, (2) have no relationships
with the Company that may interfere with the exercise of judgment and (3) who
have a working familiarity with finance and accounting and at least one of whom
shall have accounting or related financial management expertise.
Responsibilities and Duties
The Committee shall:
Documents/Reports Reviews
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1. Review this Charter periodically as conditions dictate, at least annually
and recommend any updates to the Board.
2. Review and discuss with management and the external independent auditors,
the audited financial statements to be included in the Company's Annual
Report on Form 10-K (or the Annual Report to Shareholders if distributed
prior to the filing of the Form 10-K) and, based on such review and
discussions, recommend to the Board whether the audited financial
statements be included in the Company's Annual Report on Form 10-K for
filing with the Securities and Exchange Commission.
3. Review and discuss with management and the external independent auditor the
interim financial statements (Form 10-Q) to be filed with the Securities
and Exchange Commission and any quarterly report to shareholders if the
review of the external independent auditor results in any disagreement with
management regarding such interim statements.
4. Review and discuss with management and the external auditors the matters
required to be reported under the American Institute of Certified Public
Accountants' Statement of Auditing Standards No. 61 and also the management
letter.
5. Review and discuss with the internal auditor and management the internal
audit reports produced by the internal auditing department and management's
response thereto.
External Auditors
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6. Evaluate and select or replace the external independent auditor firm
considering its independence and effectiveness. The audit firm selected
must be registered with the Public Company Accounting Oversight Board for
Audit years 2003 and beyond. The audit firm selected cannot provide any of
the following non-audit services to the Company or any of its subsidiaries
or affiliates including:
a) bookkeeping or other services related to accounting records or financial
statements of audit client;
b) financial information systems design and implementation;
c) appraisal or valuation services, fairness opinions or
contribution-in-kind reports;
d) actuarial services;
e) internal audit outsourcing services;
f) management functions or human resources;
g) broker or dealer, investment adviser or investment banking services;
h) legal services and expert services unrelated to the audit.
The audit firm selected may engage in other non-audit services, including
tax services, only if pre-approved by the Audit Committee. Non-audit
services performed for the Company must be set forth in the quarterly or
annual financial reports of the Company. The audit firm shall report to the
Audit Committee on all fees for non-audit services on an annual basis.
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7. Receive from the external independent auditor and discuss with them the
disclosures required by Independence Standards Board, Standard No. 1, their
relationships with the Company and their independence.
8. At least annually, consult with the external independent auditors out of
the presence of management about internal controls, the fullness and
accuracy of the Company's financial statements and the appropriateness of
accounting policies. In this regard the auditor must report to the
Committee on:
a) all critical accounting policies and practices to be used;
b) all alternative treatments of financial information within GAAP
(generally accepted accounting principles) that have been discussed with
management officials, ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred by the registered
public accounting firm, and
c) other material written communications with management such as management
letter or schedule of unadjusted differences.
Internal Auditors
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9. Review and recommend to the Board the appointment, replacement,
reassignment or dismissal of the internal auditor.
10. Confirm and assure the independence of the internal auditor.
11. Review and approve the audit scope and procedural plans of the internal
auditor.
12. Periodically (at least quarterly) consult with the internal auditor out of
the presence of management about internal controls, compliance with the
laws and regulations, compliance with policies promulgated by the Board,
compliance with the Company's Code of Conduct and the adequacy of the
department's resources.
General Responsibilities
- ------------------------
13. Provide an open avenue of communication among the external independent
auditors, senior management, the internal auditing department and the
Board.
14. Report to the Board all actions taken by the Committee and their appraisal
of the audit efforts of the Company's external independent auditor and
internal audit departments.
15. Meet as needed with management alone to discuss any matter that the
Committee or management believes should be discussed privately.
Powers
- ------
16. The Audit Committee, if it so desires, can engage independent counsel and
other advisors.
Complaints
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17. The President and Chairman of the Audit Committee shall receive all
complaints regarding accounting, internal accounting controls or auditing
matters including confidential, anonymous submission by employees of
concerns regarding questionable accounting or auditing matters. Submissions
shall be in writing, mailed to the Chairman of the Audit Committee, at his
home address, and may also be delivered or mailed to the President. The
Committee shall review each complaint at its next meeting. The Committee
shall keep a record of all such complaints and actions taken thereto to be
included with the minutes of the Audit Committee.
18. This procedure shall be communicated to employees annually at the same time
as the ethics and conflicts of interest policy is presented to employees
and their acknowledgement thereof requested.
Reliance on Information and Expert Opinion
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In performing its various functions, the Committee may rely on the
information, advice and opinions it receives in its discussions with management,
the Company's internal auditor and the Company's external independent auditor
and it is recognized that the Committee is not providing any expert or special
assurance as to the Company's financial statements or any professional
certification regarding the work of management, the internal auditor or external
independent auditor.
Adopted by Board of Directors
February 25, 2003
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