----------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 3, 2005
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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 3, 2005, 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 2009 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 4, 2005
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 15, 2005
PENSECO FINANCIAL SERVICES CORPORATION
150 North Washington Avenue, Scranton, Pennsylvania 18503
PROXY STATEMENT MAILED MARCH 15, 2005 FOR THE ANNUAL MEETING TO BE HELD TUESDAY,
MAY 3, 2005, 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 4, 2005 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
proxy holders 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 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 (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 2004 all required reports were filed on a timely basis.
The following table sets forth, as of February 25, 2005, 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.
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Name of Individual Amount and Nature Percent
or Identity of Group of Beneficial Ownership(1) of Class
-------------------- -------------------------- ---------
Edwin J. Butler................................... 21,108 (2) .983%
Richard E. Grimm.................................. 3,720 (3) .173%
Russell C. Hazelton .............................. 14,876 (4) .693%
D. William Hume................................... 3,960 (5) .184%
James G. Keisling................................. 18,452 (6) .859%
P. Frank Kozik.................................... 17,116 (7) .797%
Robert W. Naismith................................ 23,952 (8) 1.115%
James B. Nicholas................................. 3,968 (9) .185%
Emily S. Perry.................................... 2,200 (10) .102%
Sandra C. Phillips................................ 74,460 (11) 3.466%
Otto P. Robinson, Jr.............................. 88,262 (12) 4.109%
Steven L. Weinberger.............................. 600 .028%
All Directors and Principal Officers
as a group (23 in group)........................291,042 13.549%
(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 25, 2005.
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
2,936 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 689 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 14,500 shares owned jointly by Dr. Naismith and his
wife and 9,452 shares in a self-directed IRA.
(9) This total includes 758 shares owned by Mr. Nicholas' wife and daughter and
800 shares in a self-directed IRA.
(10) This total includes 1,780 shares owned jointly by Mrs. Perry, her husband
and her children.
(11) These shares are held in trust accounts.
(12) This total includes 9,456 shares owned jointly by Mr. Robinson and his
wife, 25,068 shares owned by Mr. Robinson's wife and children and 7,545
shares held by Penn Security Bank under its Employee Stock Ownership Plan
in which Mr. Robinson has a vested interest.
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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 2009 are to be elected at the Annual
Meeting. Each Director of the Class of 2009 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 2009, and the
Directors in the Classes of 2006, 2007 and 2008 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 2009
- -------------
Richard E. Grimm 56 Executive Vice-President and Treasurer. 1994 2009
Mr. Grimm has served the bank as Executive
Vice-President and Cashier since 1994.
James B. Nicholas 53 Mr. Nicholas is President of D.G. Nicholas Co., 1981 2009
Scranton, PA, a wholesale Auto Parts Company.
Sandra C. Phillips 62 Mrs. Phillips served on the Bank's Abington 1994 2009
Advisory Board since 1984. She is active in
Various community associations and organizations.
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 2006
- -------------
D. William Hume 78 Mr. Hume retired in January, 1999 and was Senior 1991 2006
Vice-President and Assistant Secretary of
the Bank as Executive Vice-President and
Cashier.
*If elected at the Annual Meeting
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Term
Principal Occupation Director Will
Name Age for Past Five Years Since Expire
- ---- --- -------------------- -------- -------
Class of 2006
- -------------
James G. Keisling 56 Mr. Keisling is CEO of Compression Polymers Corporation 1984 2006
and Vycom Corporation, manufacturers of plastic sheet
products.
Otto P. Robinson, Jr. 66 President, CEO and General Counsel. Mr. Robinson is a 1967 2006
practicing attorney. Mr. Robinson has since his
election as President in 1975 been devoting most of his
time to banking matters.
Class of 2007
- -------------
Edwin J. Butler 78 Mr. Butler retired in September, 1991 and was Executive 1977 2007
Vice-President and Cashier of the Bank.
P. Frank Kozik 65 Secretary (non-active officer). Mr. Kozik is President 1981 2007
and CEO of Scranton Craftsmen, Inc., Throop, PA, a
corporation dealing in miscellaneous iron, pre-cast
concrete products and ready mixed concrete.
Steven L. Weinberger 57 Mr. Weinberger is President of G. Weinberger Company, 1999 2007
Old Forge, PA, a mechanical contractor
specializing in commercial and industrial
construction.
Class of 2008
- -------------
Russell C. Hazelton 70 Mr. Hazelton is a retired Captain for Trans World 1977 2008
Airlines.
Robert W. Naismith,
Ph.D. 60 Dr. Naismith is Chairman and Chief Executive Officer of 1988 2008
Life Science Analytics, Inc. Dr. Naismith formerly was
Chairman and Chief Executive Officer of eMedsecurities,
Inc.
Emily S. Perry 64 Mrs. Perry is a retired Insurance Account Executive and 1983 2008
a community volunteer.
BOARD AND COMMITTEE MEETINGS
The Board of Directors met 29 times in 2004. All Directors attended at
least 75% of the total of the Board of Directors meetings and the committee
meetings of which they were members.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank employed Chad J. Hazelton in the non-executive position of
Financial Analyst. Mr. Hazelton, an immediate family member of Director Russell
C. Hazelton, received an aggregate salary and cash bonus of $61,727.88 during
2004.
AUDIT COMMITTEE
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, was filed with the definitive proxy relating to the Company's Annual
Meeting of Shareholders, held May 6, 2003. The charter gives the Audit Committee
the authority and responsibility for the appointment, retention, compensation
and oversight of our independent auditors, including pre-approval of all audit
and non-audit services to be performed by our independent auditors. 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) (15) 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
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Internal Auditor and management's response thereto and report to the Board
thereon. At these meetings, the Committee has the opportunity to discuss with
management the adequacy of the Company's internal controls and the financial
reporting process. It may also discuss these matters with the independent
auditors and with appropriate Company financial personnel. The Committee reviews
our financial statements and discusses them with management and the independent
auditors before those financial statements are filed with the Securities and
Exchange Commission. The Committee met six times in 2004.
The Committee also meets privately with the independent auditors and
periodically reviews their performance and independence from management. The
independent auditors have unrestricted access and report directly to the
Committee.
AUDIT COMMITTEE FINANCIAL EXPERT
The Sarbanes-Oxley Act of 2002 requires the Company to disclose whether or
not its Audit Committee has, as one of its' members, an "Audit Committee
Financial Expert", as that term is defined by the Securities and Exchange
Commission (SEC).
The Board of Directors has elected not to designate any member as an "Audit
Committee Financial Expert". The audit program at our organization has always
been strong. We have our own, full-time internal auditor reporting to the Audit
Committee who has a staff of four full-time assistants. Our financial statements
are audited by an independent registered public accounting firm, which has
received approval from the Public Company Accounting Oversight Board to audit
financial reports of SEC reporting companies. In addition to that, since we are
a banking company, our bank, Penn Security Bank and Trust Company, is examined
every year on an alternate basis by either the Pennsylvania Department of
Banking or the Federal Deposit Insurance Corporation and our parent holding
company is examined yearly by the Federal Reserve. Our four-member Audit
Committee includes three members with substantial education and experience in
accounting and financial management, of which, two are Chief Executive Officers
of companies and one is a former Executive Vice-President of our organization.
The Audit Committee, as well as the entire Board of Directors, are ethical
people who will act responsibly if anything is wrong. We think that our
Committee members acting together have the expertise, information and advice to
assure that our financial statements are fairly presented.
OTHER COMMITTEES
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. Three meetings
of the committee were held in 2004.
The Company does not have a standing Nominating Committee of the Board. Due
to the size and local nature of the Company, as well as the fact that Board
vacancies occur very infrequently, all members of the Board of Directors
participate in the identification, recruitment and selection of nominees for
election as directors of the Company.
DIRECTORS' COMPENSATION
During 2004, 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 2002 through 2004, 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 $100,000.00 for the
fiscal year ended December 31, 2004:
Annual Compensation (1)
-----------------------
Name and All Other
Principal Position Year Salary ($) Bonus($) Compensation($)
- ------------------ ---- ---------- -------- ---------------
Otto P. Robinson, Jr. 2004 240,431.89 .00 1,876.70 (2)
President, CEO & 2003 243,027.79 11,519.21 49,177.52 (3)
General Counsel 2002 227,046.96 22,367.38 4,385.28 (3)
Richard E. Grimm 2004 135,746.85 6,697.05 1,304.02 (5)
Executive Vice-President 2003 137,944.84 6,598.09 1,536.87 (5)
& Treasurer 2002 128,980.60 12,811.81 3,108.98 (4)
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Peter F. Moylan 2004 133,880.88 5,286.83 1,274.03 (5)
Executive Vice-President 2003 131,021.39 5,208.69 1,448.48 (5)
& Trust Officer 2002 128,065.90 12,642.47 3,085.23 (4)
Andrew A. Kettel, Jr. 2004 103,241.29 5,959.08 999.69 (5)
Senior Vice-President 2003 104,372.62 5,871.01 1,172.18 (5)
2002 96,970.95 11,400.00 2,376.19 (4)
William J. Calpin, Jr. 2004 100,063.42 5,959.89 970.61 (5)
Senior Vice-President 2003 102,291.58 5,871.81 1,150.06 (5)
2002 95,645.17 11,401.57 2,347.15 (4)
(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 Retirement
Profit Sharing Plan of $1,876.70. In 2004, there was no contribution for the
Supplemental Benefit Plan described on page 9.
(3) "All Other Compensation" consists of a cash contribution to the Retirement
Profit Sharing Plan of $2,126.52 and $47,051.00 for the Supplemental Benefit
Plan described on page 9.
(4) "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.
(5) "All Other Compensation" consists of a cash contribution to the Retirement
Profit Sharing Plan.
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 2004, 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.
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, suffering a physical incapacity during 2004, did
not accept a cash bonus for that year. The President and Chief Executive Officer
did not participate in the decision by the Board of Directors relating to his
base salary.
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 2004, 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.
-7-
CODE OF ETHICS
The Company has had for many years a Code of Ethics applicable to all
employees including the Company's principal Executive Officer and principal
Financial Officer (Controller). The purpose of the Code is to promote honest and
ethical conduct, full and fair disclosures of financial information, compliance
with laws and regulations and accountability for actions.
A copy of the Code of Ethics may be obtained, without charge, by
contacting:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
1-800-327-0394
REPORT OF THE AUDIT COMMITTEE
We have reviewed the Company's audited financial statements as of and for
the year ended December 31, 2004, and met with both management and McGrail
Merkel Quinn & Associates, independent auditors, 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 the Company's financial
statements and the overall reporting process, including the Company's system of
internal controls. The independent auditors 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 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.
We have 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). These items
relate to the Firm's independence from the Company. We also discussed with
McGrail Merkel Quinn & Associates any matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit Committees).
Based on these reviews and discussions, we recommended to the Board of
Directors that the audited financial statements be included in the Company's
annual report on Form 10-K for the year ended December 31, 2004 as filed 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
- 8 -
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 2004, the Bank contributed
$380,989.00. 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.
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 5,182.80 10,365.60 15,548.40 20,731.20
75,000.00 8,932.80 17,865.60 26,798.40 35,731.20
100,000.00 12,682.80 25,365.60 38,048.40 50,731.20
125,000.00 16,432.80 32,865.60 49,298.40 65,731.20
150,000.00 20,182.80 40,365.60 60,548.40 80,731.20
175,000.00 23,932.80 47,865.60 71,798.40 95,731.20
210,000.00 27,832.80 55,665.60 83,498.40 111,331.20
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 2004 was
$46,344.00.
The years of creditable service as of December 31, 2004 for Messrs.
Robinson, Grimm, Moylan, Kettel and Calpin were 29, 25, 5, 34, and 4
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
-9-
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
2004, the Bank contributed $60,000.00 to the Retirement Profit Sharing Plan.
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 2004, the Bank did
not contribute 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 $9,503,267.54 and
$6,066,296.02 at February 1, 2005 and 2004, respectively. Such loans had a
maximum unpaid balance in the aggregate of $9,474,033.37 and $5,732,323.66
during the years ended December 31, 2004 and 2003, respectively. In addition,
during 2004 and 2003, the Bank had outstanding standby letters of credit for the
accounts of related parties in the amounts of $6,932,107.21 and$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.
-10-
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, 1999 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.
PENSECO FINANCIAL SERVICES CORPORATION
Total Return Performance Graph
Period Ending
---------------------------------------------------------------
Index 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
- ------------------------------------------------------------------------------------------------------
Penseco Financial Services Corporation 100.00 80.99 120.65 149.19 181.00 192.04
S&P 500* 100.00 91.20 80.42 62.64 80.62 89.47
SNL Northeast OTC-BB and Pink Banks 100.00 86.95 107.42 130.20 189.89 221.23
*Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 2005.
Used with permission. All rights reserved. crsp.com.
Source: SNL Financial LC, Charlottesville, VA
@2005 (434)977-1600
OUR RELATIONSHIP WITH OUR AUDITORS
Independent Registered Public Accountants
The Audit Committee has selected McGrail Merkel Quinn and Associates,
Certified Public Accountants and Consultants, to conduct an independent audit of
the financial statements of the Company for the year 2004, and it is expected
they will be selected for the year 2005. Representatives of the Firm as 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.
The fees billed by McGrail Merkel Quinn and Associates during 2004 and 2003
were as follows:
2004 2003
---- ----
Audit Fees $ 57,200 $50,000
Audit-Related Fees 20,100 16,500
Tax Fees 6,000 8,000
All Other Fees - -
-11-
The amounts shown for "Audit-Related Fees" were for audits of employee
benefit plans and student loans. The amount shown for "Tax Fees" were for tax
return review and Federal and State tax advice.
Under its charter, the Audit Committee must pre-approve all engagements of
our Independent Auditors. The Audit Committee, prior to retaining the Auditors,
will evaluate known potential engagements of the Independent Auditor, including
the scope of the work proposed to be performed and the proposed fees, and
approve or reject each service, taking into account whether the services are
permissible under applicable law and the possible impact of each non-audit
service on the Independent Auditor's independence from management. At each
subsequent Committee meeting, the Committee will receive updates on any
non-audit services actually provided by the Independent Auditor, and management
may present additional services for approval. The Committee has delegated to the
Chairman of the Committee the authority to evaluate and approve engagements on
behalf of the Committee in the event that a need arises for pre-approval between
Committee meetings. If the Chairman so approves any such engagements, he will
report that approval to the full Committee at the next Committee meeting.
Since the May 6, 2003 effective date of the Securities and Exchange
Commission rules stating that an Auditor is not independent of an audit client
if the services it provides to the client are not appropriately approved, all
engagements of McGrail Merkel Quinn and Associates were approved in advance by
the Audit Committee, and none of those engagements made use of the de minimus
exception to pre-approval contained in the Commission's rules.
Internal Auditor
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.
SHAREHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
Any shareholder proposal submitted for inclusion in the Company's proxy
statement and form of proxy for the 2006 Annual Meeting of shareholders must be
received at the Company's Executive Offices, 150 North Washington Avenue,
Scranton, Pennsylvania 18503 on or before December 1, 2005.
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 15, 2005.
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania 18503
OTTO P. ROBINSON, JR.
President
MARCH 15, 2005
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
- 12 -
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned shareholder in the
PENSECO FINANCIAL SERVICES CORPORATION (the "Company"), do hereby nominate,
constitute and appoint CAROL GEMMELL, RICHARD C. KUNKLE AND ANITA Z. WIRTH and
each of them (with full power to act without the others) my true and lawful
attorney(s) with full power of substitution, for me and in my name, place and
stead to vote all of the stock of the said PENSECO FINANCIAL SERVICES
CORPORATION, standing in my name on the books of the said Company on March 4,
2005, at the annual meeting of the shareholders thereof to 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 3, 2005, at 2:00 P.M.
or at any adjournment or adjournments thereof, hereby revoking all proxies by me
heretofore made, with all the powers the undersigned would possess if personally
present at said meeting as follows:
1. ELECTION OF DIRECTORS: For the election of three (3) Directors of the
Class of 2009, listed in the proxy statement dated March 15, 2005 accompanying
the notice of the said meeting, as Directors of the Company to serve for four
(4) years and until their successors are elected.
FOR ALL NOMINEE(S) listed WITHHOLD AUTHORITY
below (except as marked to the to vote for all nominees
contrary below). [ ] listed below. [ ]
(INSTRUCTIONS: To withhold authority to vote for any individual nominee(s) mark
the box next to the nominee's name below.)
Class of 2009
- -------------
( ) Richard E. Grimm ( ) James B. Nicholas ( ) Sandra C. Phillips
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 AND IN ACCORDANCE WITH INSTRUCTIONS OF MANAGEMENT ON
OTHER BUSINESS PROPERLY COMING BEFORE THE MEETING.
IN WITNESS WHEREOF, I have hereunto set my hand this ____________ day of
___________________________, 2005.
___________________________________________SIGNATURE
___________________________________________SIGNATURE
(Execute proxy and return in stamped envelope for this purpose)