UNITED STATES
SECURITIES & 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 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
PENSECO FINANCIAL SERVICES CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(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:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] 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 pervious filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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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 3,
2006, at the annual meeting of the shareholders thereof to be held at the Hilton
Scranton and Conference Center located at 100 Adams Avenue, Scranton,
Pennsylvania on Tuesday, May 2, 2006, 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 four (4) Directors of the Class
of 2010 listed in the proxy statement dated March 16, 2006 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.)
[ ] Craig W. Best [ ] D. William Hume
[ ] James G. Keisling [ ] Otto P. Robinson, Jr.
2. AMENDMENT TO ARTICLES OF INCORPORATION: For an amendment to the Company's
Articles of Incorporation to require that any action by shareholders be taken at
a duly called meeting of shareholders.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, the proxy holders 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 ALL OF THE NOMINEES FOR DIRECTOR IN PROPOSAL 1, FOR PROPOSAL 2, AND IN
THE DISCRETION OF THE PROXY HOLDERS ON OTHER BUSINESS PROPERLY COMING BEFORE THE
MEETING.
IN WITNESS WHEREOF, I have hereunto set this hand this __ day of ________, 2006.
__________________________ SIGNATURE
__________________________ SIGNATURE
PENSECO FINANCIAL SERVICES CORPORATION
150 North Washington Avenue
Scranton, Pennsylvania 18503
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 2, 2006
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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 PENSECO FINANCIAL SERVICES
CORPORATION, a Pennsylvania corporation (the "Company"), will be held at the
Hilton Scranton and Conference Center located at 100 Adams Avenue, Scranton,
Pennsylvania, on Tuesday, May 2, 2006, at 2:00 P.M. for the purpose of
considering and acting upon the following matters:
1. To elect four (4) Directors of the Class of 2010 to serve for four (4)
years and until their successors are elected.
2. To approve an amendment to the Company's Articles of Incorporation to
require that any action by shareholders be taken at a duly called meeting of
shareholders.
3. To transact such other business as may be brought before the meeting or
any adjournment thereof.
The foregoing items are more fully described in the Proxy Statement
accompanying this Notice. Only those shareholders of record at the close of
business on March 3, 2006 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 16, 2006
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PENSECO FINANCIAL SERVICES CORPORATION
150 North Washington Avenue, Scranton, Pennsylvania 18503
THIS PROXY STATEMENT IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT MARCH 16,
2006 IN CONNECTION WITH THE ANNUAL MEETING TO BE HELD TUESDAY, MAY 2, 2006, AT
2:00 P.M. AT THE HILTON SCRANTON AND CONFERENCE CENTER LOCATED AT 100 ADAMS
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 2006
Annual Meeting of Shareholders (the "Annual Meeting") 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
Annual Meeting and vote in person.
PERSON MAKING THE SOLICITATION
The solicitation of proxies is made by order of the Board of Directors of
the Company (the "Board"), the cost of which will be borne by the Company. This
solicitation is being made primarily by use of the mail, but the management of
the Company also may solicit proxies by telephone or personal interview.
VOTING SECURITIES & PRINCIPAL HOLDERS THEREOF
Only those holders of record of shares of the Company's common stock (the
"Common Stock") at the close of business on March 3, 2006 (the "Record Date")
shall be entitled to vote at the Annual Meeting. There were 2,148,000 shares of
Common Stock outstanding and entitled to vote as of the Record Date. 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 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. 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 candidate. The candidates
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receiving the highest number of votes up to the number of Directors to be chosen
shall be elected. The accompanying proxy permits a shareholder to vote for, or
withhold his vote from, the election of Directors. Votes that are withheld from
a Director nominee will be excluded entirely from the vote for such nominee and
will have no effect thereon. The proxy holders named on the accompanying proxy
will vote for the Board's nominees unless the shareholder has withheld his 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 (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 holder thereof to one vote.
Abstentions and broker non-votes are counted in determining whether a
quorum is present. Abstentions with respect to any proposal other than the
election of Directors will have the same effect as votes cast against the
proposal, because approval requires a vote in favor of the proposal by a
majority of the shares entitled to vote, either present at the Annual Meeting or
represented by proxy. 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 and the
broker does not have discretionary authority to vote in the absence of
instructions. Broker non-votes are not considered to be shares "entitled to
vote" (other than for quorum purposes), and will therefore have no effect on the
outcome of any of the matters to be voted upon at the Annual Meeting.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities (currently there are no such
persons) to file reports of ownership and changes in ownership with respect to
shares of 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 the year ended
December 31, 2005 all required reports were filed on a timely basis.
The following table sets forth, as of February 28, 2006, the amount and
percentage of the common stock of the Company beneficially owned by each
Director, by each of the named executive officers listed in the Summary
Compensation Table provided in this Proxy Statement and all executive officers
and Directors of the Company as a group. No shareholder owns 5% or more of the
Company's Common Stock. Unless otherwise indicated, each person has sole voting
power and sole investment power. The address of each person named in the table
below is: c/o Penseco Financial Services Corporation, 150 North Washington
Avenue, Scranton, Pennsylvania 18503.
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Common Stock
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Amount and
Nature of Beneficial Percent of
Name of Individual or Identity of Group Ownership (1) Class
--------------------------------------- ------------- ----------
Craig W. Best..................................... 1 *
Edwin J. Butler................................... 20,388(2) *
William J. Calpin, Jr. ........................... 582(3) *
Richard E. Grimm.................................. 3,910(4) *
Russell C. Hazelton............................... 14,876(5) *
D. William Hume................................... 4,260(6) *
James G. Keisling................................. 19,917(7) *
Andrew A. Kettel, Jr. ............................ 2,960(8) *
P. Frank Kozik.................................... 17,116(9) *
Peter F. Moylan................................... 3,156(10) *
Robert W. Naismith................................ 23,952(11) 1.1%
James B. Nicholas................................. 4,668(12) *
Emily S. Perry.................................... 2,200(13) *
Sandra C. Phillips................................ 74,460(14) 3.5%
Otto P. Robinson, Jr.............................. 88,709(15) 4.1%
Steven L. Weinberger.............................. 850 *
All Directors and Executive Officers as
a group (23 in group)........................... 290,543 13.5%
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* 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 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, 2006.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) This total includes 1,253 shares in a self-directed IRA.
(3) This total includes 282 shares held by Penn Security Bank and Trust Company
under its Employee Stock Ownership Plan in which Mr. Calpin has a vested
interest.
(4) This total includes 780 shares owned jointly by Mr. Grimm and his wife and
3,126 shares held by Penn Security Bank and Trust Company under its
Employee Stock Ownership Plan in which Mr. Grimm has a vested interest.
(5) 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.
(6) This total includes 989 shares owned jointly by Mr. Hume and his wife, 100
shares in a self-directed IRA owned by Mr. Hume's wife and 3,171 shares in
a self-directed IRA.
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(7) 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 10,973 shares in a custodial account.
(8) This total includes 213 shares owned jointly by Mr. Kettel, his son and his
father and 2,740 shares held by Penn Security Bank and Trust Company under
its Employee Stock Ownership Plan in which Mr. Kettel has a vested
interest.
(9) This total includes 15,996 shares owned jointly by Mr. Kozik and his wife
and 1,000 shares in a self-directed IRA.
(10) This total includes 50 shares owned by Mr. Moylan's son and 800 shares
owned jointly by Mr. Moylan and his wife and 506 shares held by Penn
Security Bank and Trust Company under its Employee Stock Ownership Plan in
which Mr. Moylan has a vested interest.
(11) This total includes 14,500 shares owned jointly by Dr. Naismith and his
wife and 9,452 shares in a self-directed IRA.
(12) This total includes 758 shares owned by Mr. Nicholas' wife and daughter,
100 shares owned by Mr. Nicholas's mother, for which Mr. Nicholas has
power-of-attorney and 800 shares in a self-directed IRA.
(13) This total includes 1,780 shares owned jointly by Mrs. Perry, her husband
and her children.
(14) These shares are held in trust accounts.
(15) This total includes 9,456 shares owned jointly by Mr. Robinson and his
wife, 25,543 shares owned by Mr. Robinson's wife and children and 7,993
shares held by Penn Security Bank and Trust Company under its Employee
Stock Ownership Plan in which Mr. Robinson has a vested interest.
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ELECTION OF DIRECTORS
(Proposal 1)
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.
Four (4) Directors of the Class of 2010 are to be elected at the Annual
Meeting. Each Director of the Class of 2010 will serve for a term of four (4)
years and until his or her successor is elected. Unless otherwise instructed,
proxy holders will vote the proxies received by them for the election of the
four (4) nominees named below. It is the intent of the persons named in the
accompanying proxy to vote for the nominees for election as Directors of the
Class of 2010 listed in the table below. The Company is not aware of any of
nominees that are unavailable for election. However, in the event that vacancies
occur, such shares may be voted for substitute nominees, if any, designated by
the Board.
The names of each nominee for election as a Director of the Class of 2010,
and of each of the Directors in the Classes of 2007, 2008 and 2009 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 Election to the Board of Directors
for a Four-Year Term Expiring at the 2010 Annual Meeting (Class of 2010)
Director
Name Age Principal Occupation for Past Five Years Since
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Craig W. Best 45 President and Chief Executive Officer. Previously, Mr. 2006
Best was Chief Operating Officer of First Commonwealth
Bank, a $6.2 billion financial services institution
headquartered in Indiana, Pennsylvania.
D. William Hume 79 Chairman of the Board of Directors. Mr. Hume retired in 1991
January 1999 and was Senior Vice-President and Assistant
Secretary of the Bank at that time.
James G. Keisling 57 Mr. Keisling is CEO of Compression Polymers Corp. and 1984
Vycom Corp., manufacturers of plastic sheet products.
Otto P. Robinson, Jr. 67 Mr. Robinson retired as of January 2, 2006 and was 1967
President, CEO and General Counsel of the Bank at that
time. Mr. Robinson continues as General Counsel to the
Bank (excluding corporate governance affairs) and his
private practice of law.
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Members of Board of Directors Continuing in Office
Term will
Expire at
Annual Meeting
Director of Shareholders
Name Age Principal Occupation for Past Five Years Since to be Held In
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Edwin J. Butler 79 Mr. Butler retired in September 1991 and was 1977 2007
Executive Vice-President and Cashier of the
Bank at the time.
P. Frank Kozik 66 Secretary (non-active officer). Mr. Kozik is 1981 2007
President 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 58 Mr. Weinberger is President of G. Weinberger 1999 2007
Company, Old Forge, PA, a mechanical
contractor specializing in commercial and
industrial construction.
Russell C. Hazelton 71 Mr. Hazelton is a retired Captain for Trans 1977 2008
World Airlines.
Robert W. Naismith, Ph.D. 61 Dr. Naismith is Chairman and Chief Executive 1988 2008
Officer of Life Science Analytics, Inc. Dr.
Naismith formerly was Chairman and Chief
Executive Officer of eMedsecurities, Inc.
Emily S. Perry 65 Ms. Perry is a retired Insurance Account 1983 2008
Executive and a community volunteer.
Richard E. Grimm 57 Executive Vice-President and Treasurer. Mr. 1994 2009
Grimm has served the Bank as Executive Vice-
President and Cashier since 1994.
James B. Nicholas 54 Mr. Nicholas is President of D.G. Nicholas Co., 1981 2009
Scranton, PA, a wholesale Auto Parts Company.
Sandra C. Phillips 63 Ms. Phillips has served on the Bank's Abington 1994 2009
Advisory Board since 1984. She is active in
various community associations and
organizations.
The Board of Directors recommends a vote FOR Proposal 1 to elect all nominees
for election as Directors for Four-Year Terms expiring at the 2010 Annual
Meeting of Shareholders.
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GOVERNANCE OF THE COMPANY
Overview
The Board of Directors, which is elected by the shareholders, is the
ultimate decision-making body of the Company, except with respect to those
matters reserved to the shareholders. The Board selects the senior management
team of the Company, which is charged with the conduct of the Company's
business. The Board acts as an advisor and counselor to senior management and
ultimately monitors its performance.
Although the Company's Common Stock is traded on the over-the-counter
market and is not presently quoted on the Nasdaq National Market or listed on a
national securities exchange, and as such is not subject to the corporate
governance requirements of Nasdaq, the New York Stock Exchange or otherwise, the
Board firmly believes that sound corporate governance is in the best interest of
the Company and its stakeholders, including its shareholders and employees. To
that end, the Board has adopted a corporate governance structure that is modeled
upon those required by Nasdaq's listing standards.
The operation and mission of the Board is embodied in the Company's Board
Guidelines on Corporate Governance (the "Guidelines"), a copy of which may be
obtained, without charge, by contacting: Patrick Scanlon, Controller, Penseco
Financial Services Corporation, 150 North Washington Avenue, Scranton,
Pennsylvania 18503, 1-800-327-0394. The Guidelines were adopted by the Board to
serve as a framework for its oversight responsibilities to the Company. Among
other matters, the Guidelines:
o reinforce that the mission of the Board is to represent the
shareholders' interest in the success of the Company through the
Board's active oversight and monitoring of management;
o provide that the Board shall consist of at least a majority of
"independent" directors;
o confirm that the Board 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;
o provide for an annual evaluation by the Nominating and Corporate
Governance Committee of the performance and procedures of the Board,
with the goal of increasing the effectiveness of the Board; and
o provide that the independent members of the Board shall periodically
conduct executive sessions without the presence of any employees of
the Company.
To aid its oversight of the Company's management and employees, and to
comply with the regulations of the Securities and Exchange Commission and Nasdaq
listing standards, the Board has adopted a Code of Ethics applicable to all
employees, including the Company's principal executive officer and principal
accounting officer. The Company's Code of Ethics is designed to enumerate the
Board's expectations for the conduct of the Company's employees in carrying out
the mission of the Company. The Code of Ethics 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 the
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Company's public communication and disclosure reporting systems. The Code of
Ethics constitutes a "code of ethics" within the meaning of Item 406 of the
Securities and Exchange Commission's Regulation S-K. 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, 1-800-327-0394.
In addition to the compliance reporting mechanisms set forth in the Code of
Ethics, the Audit Committee of the Board has also implemented, in accordance
with the regulations of the Securities and Exchange Commission and Nasdaq
listing standards, procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls and auditing matters, including a mechanism for the confidential,
anonymous submission by Company employees of concerns regarding questionable
accounting or auditing matters.
Communications with Directors
In order to provide the Company's 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 communicating with Directors:
o 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.
o 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:
o does not relate to the business or affairs of the Company or the
functioning or constitution of the Board or any of its
committees;
o relates to routine or insignificant matters that do not warrant
the attention of the Board;
o is an advertisement or other commercial solicitation or
communication;
o is frivolous or offensive; or
o is otherwise inappropriate for delivery to Directors.
o 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 the
Company's policies and procedures and applicable laws and regulations
relating to the disclosure of information.
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o The Nominating and Corporate Governance Committee will review the
effectiveness of these procedures from time to time and, if
appropriate, recommend changes to the Board.
Functioning of the Board of Directors
It is the general policy of the Company that all major decisions are
considered by the Board as a whole. As a result, the committee structure of the
Board is limited to those committees considered to be basic to, or required for,
the operation of a publicly-held company. Currently, there are three standing
committees of the Board which consist of non-management directors: the Audit
Committee; the Compensation and Benefits Committee; and the Nominating and
Corporate Governance Committee. In addition, the Board maintains a standing
Executive Committee that is responsible to act on behalf of the Board if a
matter requires action before a meeting of the full Board can be held. The
members and chairs of each of these committees and sub-committees are selected
by the Board upon the recommendation of the Nominating and Corporate Governance
Committee.
The Board has determined that each of Mr. Hume, Mr. Keisling, Mr. Butler,
Mr. Kozik, Mr. Weinberger, Mr. Hazelton, Dr. Naismith, Mr. Nicholas, Ms. Perry
and Ms. Phillips is an "independent director" as that term is defined by Rule
4200 of the Nasdaq listing standards.
The Company's Board of Directors met 33 times during 2005. With the
exception of Mr. Keisling, all Directors attended at least 75% of the total
number of meetings of the Board and all committees of the Board of which they
were members held during 2005. It is expected that all Directors will attend
annual meetings of shareholders. All of the Company's Directors who served on
the Board of Directors at that time were present at the Company's 2005 Annual
Meeting of Shareholders.
Committees of the Board of Directors
Audit Committee
The Audit Committee assists the Board in undertaking and fulfilling its
oversight responsibilities in connection with: (i) reviewing the financial
reports and other financial information prepared by the Company for submission
to any governmental or regulatory body or the public and monitoring the
integrity of such financial reports; (ii) reviewing the Company's systems of
internal controls established for finance, accounting, legal compliance and
ethics; (iii) reviewing the Company's accounting and financial reporting
processes generally and the audits of the financials statements of the Company;
(iv) monitoring compliance with legal regulatory requirements; (v) monitoring
the independence and performance of the Company's independent registered public
accounting firm; and (vi) providing for effective communication between the
Board, the Company's senior and financial management and the Company's
independent registered public accounting firm.
In February 2003, the Audit Committee's charter was adopted by the full
Board of Directors. A copy of the charter of the Audit Committee is attached to
this Proxy Statement as Appendix A and may be obtained, without charge, by
contacting: Patrick Scanlon, Controller, Penseco Financial Services Corporation,
150 North Washington Avenue, Scranton, Pennsylvania 18503, 1-800-327-0394.
The Audit Committee currently consists of Mr. Butler, Mr. Hazelton, Mr.
Keisling and Mr. Kozik, each of whom is a non-management member of the Board.
The Audit Committee met seven times in 2005. The Board believes that the
composition and functioning of the Audit Committee complies with all applicable
requirements of the Sarbanes-Oxley Act of 2002, Securities and Exchange
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Commission's rules and regulations and the Nasdaq National Market, including
those regarding the "independence" of committee members.
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
Securities and Exchange Commission's rules and regulations. However, the Board
believes that each of the members of the Audit Committee has demonstrated that
he is capable of analyzing and evaluating the Company's financial statements and
understanding internal controls and procedures for financial reporting. Because
the Board believes that the current members of the Audit Committee are qualified
to carry out all of the duties and responsibilities of the Company's Audit
Committee, the Board does not believe that it is necessary at this time to
actively search for an outside person to serve on the Board who would qualify as
an audit committee financial expert.
Compensation and Benefits Committee
The Compensation and Benefits Committee is responsible for: (i) reviewing
and approving compensation policies and practices for the Company's executive
officers; (ii) coordinating the Board of Director's role in establishing
performance criteria for executive officers and evaluating their performance
annually; (iii) reviewing and recommending to the Board of Directors the annual
salary, bonus, stock options and other benefits of the Company's executive
officers, including the President and Chief Executive Officer; and (iv)
reviewing and recommending to the Board of Directors new executive compensation
programs and reviewing annually the operation of the Company's executive
compensation programs to determine whether they are properly coordinated and
achieving their intended purpose.
In February 2006, the Compensation and Benefits Committee's charter was
adopted by the full Board of Directors. A copy of the charter of the
Compensation and Benefits Committee is attached to this Proxy Statement as
Appendix B and may be obtained, without charge, by contacting: Patrick Scanlon,
Controller, Penseco Financial Services Corporation, 150 North Washington Avenue,
Scranton, Pennsylvania 18503, 1-800-327-0394.
The Compensation and Benefits Committee currently consists of Mr. Butler,
Mr. Kozik, Dr. Naismith, Ms. Perry and Mr. Robinson. The Compensation and
Benefits Committee met five times in 2005. The Board is presently reviewing the
composition of the Compensation and Benefits Committee to meet with applicable
requirements under the Company's Guidelines on Corporate Governance.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee oversees all aspects of
the Company's corporate governance functions, including (i) recommending, for
the Board of Director's selection, nominees for director; (ii) identifying
qualified individuals to become members of the Board of Directors; and (iii)
assisting the Board of Directors in determining the composition of the Board of
Directors and its committees.
In February 2006, the Nominating and Corporate Governance Committee's
charter was adopted by the full Board of Directors. A copy of the charter of the
Nominating and Corporate Governance Committee is attached to this Proxy
Statement as Appendix C and may be obtained, without charge, by contacting:
Patrick Scanlon, Controller, Penseco Financial Services Corporation, 150 North
Washington Avenue, Scranton, Pennsylvania 18503, 1-800-327-0394.
The Nominating and Corporate Governance Committee currently consists of Mr.
Hume, Mr. Nicholas, Ms. Perry, Ms. Phillips and Mr. Weinberger, each of whom is
a non-management member
- 11 -
of the Board of Directors. The Nominating and Corporate Governance Committee met
one time in 2005. The Board of Directors believes that the composition of the
Nominating and Corporate Governance Committee complies with all applicable
requirements of the Nasdaq National Market, including those regarding the
"independence" of committee members.
Executive Committee
The Executive Committee has the authority to pass upon any business of the
Company requiring immediate action. As such, the Committee may be called into
session at any time between the meetings of the Board of Directors. The
Executive Committee met eight times during 2005.
The Executive Committee currently consists of Mr. Best, Mr. Butler, Mr.
Grimm, Mr. Hume, Mr. Keisling and Mr. Robinson.
Nominations of Directors by Shareholders
The By-Laws of the Company provide procedures pursuant to which a
shareholder may nominate individuals for election to the Board of Directors at
any meeting of the shareholders. A shareholder who proposes to nominate an
individual for election to the Board of Directors must deliver a written notice
to the Secretary of the Company which includes: (i) as to each nominee, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, and Rule 14a-11 thereunder; (ii) a statement
signed by each nominee in which he or she consents to being named in the proxy
statement as a nominee and to serving as a director if elected; (iii) the name
and address of the shareholder giving the notice, as it appears on the Company's
books; (iv) the name and address of the beneficial owner, if any, on whose
behalf the nomination is being made; (v) the class and number of shares of
Common Stock of the Company which are owned beneficially and of record by such
shareholder and such beneficial owner; and (vi) a representation that such
shareholder and beneficial owner intend to appear in person or by proxy at the
meeting.
In order for a shareholder's nomination to be considered at an annual
meeting of the shareholders, the notice must be delivered not later than the
60th day nor earlier than the 90th day prior to the first anniversary of the
preceding year's annual meeting. However, if the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice must be received not earlier than the 90th day prior to the annual
meeting and not later than the later of the 60th day prior to the annual meeting
or the 15th day following the day on which the public announcement of the date
of the meeting is first made by the Company.
A shareholder's nomination of an individual for election to the Board of
Directors may also be considered at any special meeting of the shareholders at
which directors are to be elected pursuant to the Company's notice of meeting.
To be considered, the notice from the shareholder must be delivered to the
Secretary of the Company not earlier than the 90th day prior to such special
meeting and not later than the later of the 60th day prior to such special
meeting or the 15th day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board to be elected at such special meeting.
Of those persons who are nominated by a shareholder only those nominated in
accordance with these procedures shall be eligible to serve as Directors.
- 12 -
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 $63,236.26 during
2005.
DIRECTORS' COMPENSATION
During 2005, Directors received a monthly retainer of $750.00 plus $600.00
for each Board meeting attended and $250.00 for each committee meeting attended.
In September 2005, upon D. William Hume's election as Chairman of the Board, his
monthly retainer was increased by the Board to $1,500.00. Directors who are
operating officers of the Company do not receive fees for committee meetings
attended. Also, effective in 2006, Directors who are operating officers of the
Company do not receive any compensation related to their Board positions.
REPORT OF THE AUDIT COMMITTEE
We have reviewed the Company's audited financial statements as of and for
the year ended December 31, 2005, and met with both 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 the Company's financial
statements and the overall reporting process, including the Company's 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 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, 2005 as filed with
the Securities and Exchange Commission.
MEMBERS OF THE AUDIT COMMITTEE
Edwin J. Butler, Chairman
Russell C. Hazelton
James G. Keisling
P. Frank Kozik
- 13 -
The foregoing Audit Committee Report shall not be deemed to be incorporated
by reference into any filing made by the Company under the Securities Act of
1933 or the Securities Exchange Act of 1934, notwithstanding any general
statement contained in any such filing incorporating this proxy statement by
reference, except to the extent the Company incorporates such report by specific
reference.
- 14 -
EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31, 2003, 2004
and 2005, 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
$100,000.00 for the fiscal year ended December 31, 2005:
Summary Compensation Table
--------------------------
Annual Compensation (1)
-----------------------------------------------------
All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)
- --------------------------- ---- ---------- --------- ----------------
Otto P. Robinson, Jr................ 2005 238,130.74 0.00 4,454.64(3)
President, CEO & General 2004 237,991.89 0.00 1,876.70(4)
Counsel (2) 2003 243,027.79 11,519.21 49,177.52(5)
Richard E. Grimm.................... 2005 138,477.72 8,197.19 3,111.34(6)
Executive Vice President & 2004 135,746.85 6,697.05 1,304.02(4)
Treasurer 2003 137,944.84 6,598.09 1,536.87(4)
Peter F. Moylan..................... 2005 137,398.95 6,740.71 3,057.56(7)
Executive Vice President & Trust 2004 133,880.88 5,286.83 1,274.03(4)
Officer 2003 131,021.39 5,208.69 1,448.48(4)
Andrew A. Kettel, Jr................ 2005 102,110.95 7,597.82 2,327.20(8)
Senior Vice President 2004 103,241.29 5,959.08 999.69(4)
2003 104,372.62 5,871.01 1,172.18(4)
William J. Calpin, Jr............... 2005 104,041.53 6,168.49 2,337.84(9)
Senior Vice President 2004 100,063.42 5,959.89 970.61(4)
2003 102,291.58 5,871.81 1,150.06(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) Mr. Robinson retired from his position as the Company's President and
CEO effective as of January 2, 2006.
(3) "All Other Compensation" consists of a cash contribution to the
Retirement Profit Sharing Plan of $2,227.32 and a cash contribution to
the Employee Stock Ownership Plan of $2,227.32 which may be used to
purchase shares of the Company's Common Stock.
(4) "All Other Compensation" consists of a cash contribution to the
Retirement Profit Sharing Plan.
(5) "All Other Compensation" consists of a cash contribution to the
Retirement Profit Sharing Plan of $2,126.52 and $47,051.00 to the
Supplemental Benefit Plan Agreement described on page 20.
(6) "All Other Compensation" consists of a cash contribution to the
Retirement Profit Sharing Plan of $1,555.67 and a cash contribution to
the Employee Stock Ownership Plan of $1,555.67 which may be used to
purchase shares of the Company's Common Stock.
- 15 -
(7) "All Other Compensation" consists of a cash contribution to the Profit
Sharing Plan of $1,528.78 and a cash contribution to the Employee
Stock Ownership Plan of $1,528.78 which may be used to purchase shares
of the Company's Common Stock.
(8) "All Other Compensation" consists of a cash contribution to the Profit
Sharing Plan of $1,163.60 and a cash contribution to the Employee
Stock Ownership Plan of $1,163.60 which may be used to purchase shares
of the Company's Common Stock.
(9) "All Other Compensation" consists of a cash contribution to the Profit
Sharing Plan of $1,168.92 and a cash contribution to the Employee
Stock Ownership Plan of $1,168.92 which may be used to purchase shares
of the Company's Common Stock.
- 16 -
COMPENSATION AND BENEFITS COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company's compensation program for executive officers is administered
by the Compensation and Benefits 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
2005, 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. The President and Chief Executive Officer did not participate in
the decision by the Board of Directors relating to his compensation.
MEMBERS OF THE COMPENSATION AND
BENEFITS COMMITTEE
Robert W. Naismith, Ph.D., Chairman
Edwin J. Butler
P. Frank Kozik
Emily S. Perry
Otto P. Robinson, Jr.
- 17 -
EMPLOYMENT AGREEMENT
On January 2, 2006, we entered into an employment agreement with Craig W.
Best when he joined the Company and the Bank as President and Chief Executive
Officer. Under this agreement, which includes non-competition and
confidentiality covenants:
o Mr. Best will receive an initial annual salary of $230,000 (subject to
adjustment in years after 2006 at the discretion of the Board) and a
bonus of up to 20% of his annual base salary determinable (i) in 2006
based upon certain performance standards set forth in the agreement,
and (ii) in succeeding years based upon parameters mutually agreeable
to Mr. Best and the Board.
o Mr. Best will be eligible to be reimbursed by the Bank for up to
$50,000 of relocation expenses.
o We awarded stock appreciation rights to Mr. Best with respect to
10,000 shares of Common Stock, 2,000 shares of which will become
vested and exercisable on each of January 2, 2007, January 2, 2008,
January 2, 2009, January 2, 2010 and January 2, 2011.
o In the event that Mr. Best is involuntarily terminated by the Company
and the Bank without cause (as defined in the agreement) or Mr. Best
terminates his employment for good reason (as defined in the
agreement), Mr. Best would receive a cash payment equal to 12 months
of base salary. In addition, we would pay $30,000 for outplacement
services for Mr. Best and provide medical benefits to him (and his
spouse and dependents, if they were covered immediately prior to such
termination) for 12 months.
o In the event that Mr. Best is involuntarily terminated without cause
or resigns for good reason (each as defined in the agreement) within
12 months following certain changes of control of the Company and/or
the Bank or a sale of all or substantially all of the Company's assets
in a complete liquidation or dissolution, Mr. Best would receive a
cash payment equal to two years of base salary and his annual bonus
for the calendar year in which the termination occurs. We would also
pay $30,000 for outplacement services for Mr. Best and provide medical
benefits to him (and his spouse and dependents, if they were covered
immediately prior to such termination) for 24 months. All outstanding
stock appreciation rights then held by Mr. Best would immediately vest
and become exercisable.
o In the event that payments to Mr. Best under the agreement would
result in the imposition of a parachute excise tax under Internal
Revenue Code Section 280G, Mr. Best would be entitled to receive an
additional "gross-up" payment to insulate him from the effect of that
tax.
- 18 -
COMPENSATION AND BENEFITS COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During 2005, 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.
EMPLOYEE BENEFIT PLANS
Pension Plan
Executive officers of the Bank participate in the Bank's employee benefit
programs on the same basis as all other employees and receive only those
benefits that are available to all other employees.
The Bank maintains a qualified defined benefit retirement plan (the
"Pension Plan") for its employees and officers. Directors who are non-active
officers are not included in the Pension Plan. In 2005, the Bank contributed
$375,387.00 to the Pension Plan. Under the funding method employed for the
Pension 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 Pension 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 5,059.20 10,118.40 15,177.60 20,236.80
75,000.00 8,809.20 17,618.40 26,427.60 35,236.80
100,000.00 12,559.20 25,118.40 37,677.60 50,236.80
125,000.00 16,309.20 32,618.40 48,927.60 65,236.80
150,000.00 20,059.20 40,118.40 60,177.60 80,236.80
175,000.00 23,809.20 47,618.40 71,427.60 95,236.80
203,000.00 28,009.20 56,018.40 84,027.60 112,036.80
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 Pension 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
- 19 -
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 2005 was
$48,816.00.
The years of creditable service as of December 3l, 2005 for Mr. Robinson,
Mr. Grimm, Mr. Moylan, Mr. Kettel and Mr. Calpin were 30, 26, 6, 35 and 5,
respectively.
Supplemental Benefit Plan Agreement
The Bank has entered into a Supplemental Benefit Plan Agreement (the
"Supplemental Plan") dated December 28, 1995 with a retroactive effective date
of January l, 1994, with Mr. Robinson. The purpose of the Supplemental Plan 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
Supplemental 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 Supplemental Plan provides that if Mr. Robinson retires from employment with
the Bank at his Normal Retirement Date, he will 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
retires from employment at his Early Retirement Date, he will 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 Pension Plan. If Early
Retirement Benefits commence prior to his Normal Retirement Date, the benefits
payable under the Supplemental Plan and the Pension Plan will 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 will
been 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 been entitled to receive total benefits from the
Supplemental Plan and the Pension Plan in excess of the benefit he would have
received from the Pension Plan if the limitations under Code Section 40l (a)
(17) were not applicable to the Pension Plan. If Mr. Robinson terminates
employment with the Bank for any reason, the Accrued Benefit at the date of
termination shall be valued and payable in 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 the Bank occurs, Mr. Robinson's accrued benefit shall be
valued and payable in accordance with the provisions stated above. A "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 Company's capital stock.
Retirement Profit Sharing Plan
The Bank's Retirement Profit Sharing Plan (the "Profit Sharing Plan")
includes employees as well as executive officers. Directors who are non-active
officers are not included in the Profit Sharing Plan. Under the Profit Sharing
Plan, amounts approved by the Board 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 2005, the Bank
contributed $70,000.00 to the Profit Sharing Plan.
- 20 -
Employee Stock Ownership Plan
The Bank's Employee Stock Ownership Plan (the "ESOP"), includes employees
as well as officers. Directors who are non-active officers are not included in
the ESOP. Under the ESOP, amounts approved by the Board 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 the Company's Common Stock. In 2005, the Bank contributed
$70,000.00 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 EXECUTIVE OFFICERS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with Directors and executive
officers and any of their immediate families, and affiliated companies in which
any of the preceding are principal equity holders (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 outstanding of $10,332,383.15 and $9,503,267.34 as of February 1, 2006 and
2005 respectively. Such loans had a maximum unpaid balance in the aggregate of
$11,112,292.49 and $9,474,033.37 during the years ended December 31, 2005 and
2004, respectively. In addition, during 2005 and 2004, the Bank had outstanding
standby letters of credit for the accounts of related parties in the amounts of
$6,545,403.70 and $6,932,107.21.
- 21 -
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, 2000 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.
Total Return Performance Graph
Period Ending
---------------------------------------------------------------
Index 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
- ------------------------------------------------------------------------------------------------------
Penseco Financial Services Corporation 100.00 148.95 184.22 223.49 237.13 245.35
S&P 500 100.00 88.11 68.64 88.33 97.94 102.74
SNL Northeast OTC-BB and Pink Banks 100.00 123.54 149.74 218.39 254.42 253.65
Source: SNL Financial LC, Charlottesville, VA
- 22 -
OUR RELATIONSHIP WITH OUR AUDITORS
Independent Registered Public Accountants
The Audit Committee selected McGrail Merkel Quinn and Associates, Certified
Public Accountants and Consultants, as the Company's independent registered
public accountants to conduct an independent audit of the financial statements
of the Company for 2005, and it is expected they will be selected for 2006.
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 following is a summary of the fees billed by McGrail Merkel Quinn and
Associates for professional services rendered during the years ended December
31, 2005 and 2004:
2005 2004
---- ----
Audit Fees $ 107,000 $ 57,200
Audit-Related Fees 26,700 20,100
Tax Fees 6,500 6,000
All Other Fees - -
The amounts shown for "Audit-Related Fees" were for audits of employee
benefit plans and student loans. The amounts shown for "Tax Fees" were for tax
return review and Federal and State tax advice.
The Audit Committee's procedures provide for pre-approval of audit,
audit-related, tax services and other services. All services to be performed by
the independent registered public accountants require specific pre-approval by
the Audit Committee. The Audit Committee pre-approved all audit and non-audit
services described above that were rendered to the Company by McGrail Merkel
Quinn and Associates during the years ended December 31, 2005 and 2004. The
Audit Committee believes the rendering of these services is not incompatible
with the independent registered public accountants maintaining their
independence.
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.
- 23 -
AMENDMENT TO ARTICLES OF INCORPORATION
TO REQUIRE ACTION BY SHAREHOLDERS BE TAKEN AT MEETING OF
SHAREHOLDERS (PROPOSAL 2)
The Board of Directors of the Company has unanimously approved and
recommended that the Company's shareholders approve an amendment to the
Company's Articles of Incorporation to require that any action by shareholders
be taken at a duly called meeting of shareholders by amending Article NINTH,
Section 3 of the Company's Articles of Incorporation. The text of the proposed
amendment to Article NINTH, Section 3 is set forth in Appendix D to this Proxy
Statement.
Article NINTH, Section 3 of the Company's Articles of Incorporation
presently provides that any action required or permitted to be taken at a
meeting of shareholders may be taken without such a meeting of shareholders upon
the written consent of those shareholders that would have been entitled to cast
the minimum number of votes that would have been required to approve the action
at a meeting of the shareholders. Under Pennsylvania law, any actions approved
by written consent of the shareholders of publicly-held corporations that are
subject to the reporting requirements of the Federal securities laws and the
rules and regulations of the Securities and Exchange Commission become effective
immediately, prior to providing notice to those shareholders who have not
consented to the action.
Elimination of the ability of the Company's shareholders to act by written
consent would mean that proposals for shareholder action, such as proposed
amendments to the Company's Articles of Incorporation or By-Laws or the removal
of one or more of our directors, could be delayed until our next annual
shareholders meeting.
Eliminating shareholder action by written consent may have the effect of
discouraging or delaying unsolicited efforts to acquire control of the Company.
Elimination of the ability of the Company's shareholders to act by written
consent would make it more difficult to discourage a merger, proxy contest or
the assumption of control of the Company by a large shareholder or group of
shareholders who lack the consent of the Board. To the extent that elimination
of the right of the Company's shareholders to act by written consent has this
effect, we believe the Board will be better able to protect the interests of the
Company's shareholders.
None of our directors or executive officers has any financial or other
personal interest in the adoption of the proposed amendment to the Company's
Articles of Incorporation described in this proposal, except insofar as the
elimination of the ability of shareholders to act by written consent may prevent
or dissuade an unsolicited change in control or takeover of the Company and thus
might allow those individuals to remain in their positions and earn compensation
for their services for a longer period of time.
The Board of Directors recommends a vote FOR Proposal 2 to amend the Company's
Articles of Incorporation to require action by shareholders be taken at meeting
of shareholders.
- 24 -
SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING
Shareholders may nominate director candidates and make proposals to be
considered at the Annual Meeting of Shareholders to be held in 2007 (the "2007
Annual Meeting"). In accordance with our By-Laws, any shareholder nominations of
one or more candidates for election as Directors at the 2007 Annual Meeting or
any other proposal for consideration at the 2007 Annual Meeting must be received
by the Company at the address set forth below, together with certain information
specified in our By-Laws, between January 30, 2007 and March 1, 2007. See
"Governance of the Company--Nominations of Directors by Shareholders" in this
Proxy Statement for a summary description of this information.
In addition to being able to present proposals for consideration at the
Annual Meeting, shareholders may also be able to have their proposals included
in our proxy statement and form of proxy for the 2007 Annual Meeting. In order
to have a shareholder proposal included in the proxy statement and form of
proxy, the proposal must be delivered to us at the address set forth below not
later than December 2, 2006, and the shareholder must otherwise comply with
applicable SEC requirements and our By-Laws. If the shareholder complies with
these requirements for inclusion of a proposal in our proxy statement and form
of proxy, the shareholder need not comply with the notice requirements described
in the preceding paragraph.
A copy of the full text of the By-law provisions discussed above may be
obtained by writing to the Secretary, and all notices and nominations referred
to above must be sent to the Secretary, at the following address: Penseco
Financial Services Corporation, 150 North Washington Avenue, Scranton,
Pennsylvania 18503.
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 16, 2006.
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania 18503
CRAIG W. BEST
President & CEO
THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS ACCOMPANIES THIS PROXY STATEMENT AND
COPIES ARE AVAILABLE, WITHOUT CHARGE, TO THE PUBLIC. THE ANNUAL REPORT SERVES AS
THE COMPANY'S ANNUAL DISCLOSURE STATEMENT AS REQURIED 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
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 l0-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.
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External Auditors
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.
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.
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Internal Auditors
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
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
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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APPENDIX B
Penseco Financial Services Corporation and Penn Security Bank and Trust Company
Compensation and Benefits Committee Charter
I. ORGANIZATION
A. Membership
The Compensation and Benefits Committee (the "Committee") of the Board
of Directors ("Board") of' Penseco Financial Services Corporation (the
"Company") shall consist of at least three members each of whom, in the opinion
of the Board of Directors, meets the independence requirements of The Nasdaq
Stock Market ("Nasdaq").
Membership on the Committee shall be determined annually by the Board.
Unless a Chairman of the Committee is elected by the full Board the members of
the Committee may designate a Chairman of the Committee by majority vote of the
full Committee membership. Should any member of the Committee cease to be
independent, such member shall immediately resign his or her membership on the
Committee. The Board of Directors may remove a member of the Committee at any
time with or without cause. In the case of a vacancy on the Committee, the Board
may appoint an independent director to fill the vacancy for the remainder of the
term.
B. Meetings
The Committee shall meet at such times and from time to time as it
deems to be appropriate, but not less than once annually. Members of the
Committee may attend a meeting by telephone conference, but not be compensated,
unless determined by the Board. The Committee may request any officer or
employee of the Company or the Company's outside counsel or independent public
accountants to attend a meeting of the Committee or to meet with any members of,
or consultants to, the Committee.
Except as otherwise provided by statute or this Charter, a majority of
the incumbent members of the Committee shall be required to constitute a quorum
for the transaction of business at any meeting, and the act of a majority of the
Committee members present and voting at any meeting at which a quorum is present
shall be the act of the Committee. Minutes of each meeting of the Committee
shall be reduced to writing. The Committee shall report to the Board at the
first regular Board meeting following each such Committee meeting. The Committee
may also act by unanimous written consent without a meeting.
In addition, compensation matters may be discussed in executive
session or with the full Board during the course of the year.
II. COMPENSATION PHILOSOPHY
The Compensation and Benefits Committee's compensation policies with
respect to the Company's employees are based on the principles that the
compensation should, to a significant extent, be reflective of the financial
performance of the Company and that a portion of the executive officers'
compensation should provide long term incentives. The Committee seeks to have
compensation set at levels that are sufficiently competitive so that the Company
may attract, retain and motivate high quality employees to contribute to the
Company's success. In assessing overall compensation, the Committee
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considers among other things the Company's performance and industry position and
reviews compensation levels at comparable publicly-held companies.
III. RESPONSIBILITIES
The following functions are the common recurring activities of the
Committee in carrying out its responsibilities. These functions are set forth as
a guide with the understanding that the Committee may diverge from this guide as
appropriate given the circumstances.
1. Review and approve compensation policies and practices for the Company's
employees.
2. Coordinate the Board's role in establishing performance criteria for all
employees and evaluate their performance annually.
3. Review and approve the annual salary, bonus and other benefits, direct
and indirect, of the Company's employees.
4. Review and recommend to the Board new compensation programs; review
periodically the operation of the Company's compensation programs to determine
whether they are properly coordinated and achieving their intended purpose(s);
establish and periodically review policies for the administration of
compensation programs; and take steps to ensure that the Company's compensation
programs comport with the Compensation Committee's compensation philosophy
stated above.
5. Establish and periodically review policies in the area of senior
management perquisites.
6. Review and recommend to the Board the terms of any employment agreement
executed by the Company.
7. Review and recommend to the Board the appropriate structure and amount
of compensation for the Directors.
8. Review and approve material changes in the Company's employee benefit
plans.
9. Administer the Company's compensation programs for those employees
involved at the senior management level, as well as for the remaining employees
of the Company.
10. As necessary, produce an annual Report of the Compensation and Benefits
Committee on Executive Compensation for the Company's annual proxy statement in
compliance with applicable rules and regulations.
11. Review and reassess the adequacy of this Committee and its Charter
periodically and recommend any proposed changes to the Board for consideration
and approval.
IV. AUTHORITY
The Committee will have the resources budgeted for it and authority
necessary to discharge its duties and responsibilities. The Committee has
authority to retain and terminate outside counsel, or other experts or
consultants, subject to approval by the Board. The Committee will be provided
with appropriate funding by the Company with a budget set by the Board, for the
payment of
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compensation to the Company's outside counsel and other advisors, and ordinary
administrative expenses of the Committee that are necessary or appropriate in
carrying out its duties. In discharging its oversight role, the Committee is
empowered to investigate any matter brought to its attention related to
compensation matters. Any communications between the Committee and legal counsel
in the course of obtaining legal advice will be considered privileged
communications of the Company and the Committee will take all necessary steps to
preserve the privileged nature of those communications.
Adopted by Board of Directors - February 21, 2006
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APPENDIX C
Penseco Financial Services Corporation and Penn Security Bank and Trust Company
Nominating and Corporate Governance Committee Charter
II. ORGANIZATION
A. Membership
The Nominating and Corporate Governance Committee (the "Committee") of
the Board of Directors (the "Board") of Penseco Financial Services Corporation
(the "Company") shall consist of at least three members each of whom, in the
opinion of the Board of Directors, meets the independence requirements of The
Nasdaq Stock Market ("Nasdaq").
Membership on the Committee shall be determined annually by the Board.
Unless a Chairman of the Committee is elected by the full Board, the members of
the Committee may designate a Chairman of the Committee by majority vote of the
full Committee membership. Should any member of the Committee cease to be
independent, such member shall immediately resign his or her membership on the
Committee. The Board of Directors may remove a member of the Committee at any
time with or without cause. In the case of a vacancy on the Committee, the Board
may appoint an independent director to fill the vacancy for the remainder of the
term.
B. Meetings
The Committee shall meet at such times and from time to time as it
deems to be appropriate, but not less than once annually. Members of the
Committee may attend a meeting by telephone conference but not be paid a fee,
unless determined by the Board. The Committee may request any officer or
employee of the Company or the Company's outside counsel or independent public
accountants to attend a meeting of the Committee or to meet with any members of,
or consultants to, the Committee.
Except as otherwise provided by statute or this Charter, a majority of
the incumbent members of the Committee shall be required to constitute a quorum
for the transaction of business at any meeting, and the act of a majority of the
Committee members present and voting at any meeting at which a quorum is present
shall be the act of the Committee. Minutes of each meeting of the Committee
shall be reduced to writing. The Committee shall report to the Board at the
first regular Board meeting following each such Committee meeting. The Committee
may also act by unanimous written consent without a meeting.
In addition, nomination matters may be discussed in executive session
or with the full Board during the course of the year.
III. BASIC FUNCTION AND PURPOSE
The role of the Nominating and Corporate Governance Committee is to:
o recommend, for the Board's selection, nominees for director,
o seek recommendations from directors, management, etc. for
potential Board member candidates and collect and analyze
information regarding their suitability,
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o assist the Board in determining the composition of the Board and
its committees, and
o assist the Board in developing the Company's corporate governance
guidelines.
IV. RESPONSIBILITIES
Subject to the provisions of the Company's corporate governance
guidelines that may be in effect from time to time, the Committee, in
consultation with the Chairman of the Board and the President, shall:
1. Review and make recommendations on the range of skills and expertise
which should be represented on the Board, and the eligibility criteria
for individual Board and committee membership.
2. Review and recommend to the Board the appropriate structure of the
Board.
3. Identify and recommend potential candidates for election or
re-election to the Board.
4. Implement a policy and procedures with regard to the consideration of
any director candidates recommended by security holders.
5. Review and recommend to the Board the appropriate structure of Board
committees, committee assignments and the position of chairman of each
committee.
6. Recommend to the Board for adoption, governance guidelines for the
Company.
7. Assess succession planning for management and leadership of the
Company.
8. Assist the Board in implementing a policy providing for a process for
security holders to send communications to the Board.
9. Review and reassess the adequacy of this Committee and its Charter not
less than annually and recommend any proposed changes to the Board for
consideration and approval.
V. AUTHORITY
a. The Committee will have the resources budgeted or it and authority
necessary to discharge its duties and responsibilities. The Committee has sole
authority to retain and terminate outside counsel, or other experts or
consultants, as it deems appropriate, including sole authority to approve the
firms' fees and other retention terms. The Committee will be provided with
appropriate funding by the Company with a budget set by the Board, for the
payment of compensation to the Company's outside counsel and other advisors, as
it deems appropriate, and ordinary administrative expenses of the Committee that
are necessary or appropriate in carrying out its duties. In discharging its
oversight role, the Committee is empowered to investigate any matter brought to
its attention. Any communications between the Committee and legal counsel in the
course of obtaining legal advice will be considered privileged communications of
the Company and the Committee will take all necessary steps to preserve the
privileged nature of those communications.
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b. The Committee may form and delegate authority to subcommittees and may
delegate authority to one or more designated members of the Committee.
Adopted by Board of Directors - February 21, 2006
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APPENDIX D
Proposed Amendment to the Articles of Incorporation of Penseco Financial
Services Corporation to Require Action by Shareholders be Taken at Meeting of
Shareholders
Article NINTH, Section 3 of the Company's Articles of Incorporation shall be
amended and restated in its entirety to read as follows:
3. The shareholders of the Corporation may not take any action by
written consent in lieu of a meeting, and must take any actions at a
duly called annual meeting or special meeting of shareholders and the
power of shareholders to consent in writing without a meeting is
specifically denied.
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