UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON D.C. 20549
SCHEDULE 14A
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 ss240.14a-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 previous 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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PENSECO FINANCIAL SERVICES CORPORATION
150 North Washington Avenue
Scranton, Pennsylvania 18503
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 1, 2007
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Penseco
Financial Services Corporation will be held at 2:00 p.m. local time, on Tuesday
May 1, 2007 at the Hilton Scranton and Conference Center, 100 Adams Avenue,
Scranton, Pennsylvania for the following purposes:
1. To elect three directors of the Class of 2011 to serve for
four-year terms and until their successors are duly elected and
qualified;
2. To ratify the selection of McGrail, Merkel, Quinn & Associates as
our independent registered public accounting firm for fiscal year
2007; and
3. To transact such other business as may properly come before the
annual meeting or any adjournment or postponement thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the meeting.
Record holders of the common stock of Penseco Financial Services
Corporation at the close of business on March 2, 2007 are entitled to receive
notice of the annual meeting and to vote at the meeting and any adjournment or
postponement of the meeting. The annual meeting may be adjourned to permit us to
solicit proxies in the event that there are insufficient votes for a quorum or
to approve any of the proposals at the time of the meeting. A list of
shareholders entitled to vote at the annual meeting will be available at our
offices at 150 North Washington Avenue, Scranton, Pennsylvania, for a period of
five days prior to the annual meeting and will also be available at the annual
meeting itself.
BY ORDER OF THE BOARD OF DIRECTORS,
Craig W. Best
President and Chief Executive Officer
March 16, 2007
Scranton, Pennsylvania
IMPORTANT: The prompt return of proxies will save us the expense of further
requests for proxies in order to ensure a quorum. A self-addressed envelope is
enclosed for your convenience. No postage is required if mailed in the United
States.
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Proxy Statement
of
Penseco Financial Services Corporation
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This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Penseco Financial Services Corporation
("Penseco" or the "Company"), a Pennsylvania business corporation headquartered
at 150 North Washington Avenue, Scranton, Pennsylvania 18503, to be used at the
Annual Meeting of Shareholders. Penseco is the holding company for Penn Security
Bank and Trust Company (the "Bank"). The Annual Meeting will be held at the
Hilton Scranton and Conference Center, 100 Adams Avenue, Scranton, Pennsylvania
on Tuesday, May 1, 2007 at 2:00 p.m., local time. This Proxy Statement and the
enclosed proxy card are being first mailed on or about March 16, 2007 to
shareholders of record.
General Information About Voting
Who Can Vote at the Meeting
You are entitled to vote your Penseco Financial Services Corporation common
stock only if our records show that you held your shares as of the close of
business on March 2, 2007. If your shares are held in a stock brokerage account
or by a bank or other nominee, you are considered the beneficial owner of shares
held in "street name" and these proxy materials are being forwarded to you by
your broker or nominee. As the beneficial owner, you have the right to direct
your broker how to vote. As of the close of business on March 2, 2007, there
were 2,148,000 shares of Company common stock outstanding.
Attending the Meeting
If you were a shareholder as of the close of business on March 2, 2007, you
may attend the meeting. However, if you held your shares in street name, you
will need proof of your ownership of such stock to be admitted to the meeting. A
recent brokerage statement or letter from a bank or broker are examples of proof
of ownership. If you want to vote your shares of common stock held in street
name in person at the meeting, you must obtain a written proxy in your name from
the broker, bank or other nominee who is the record holder of your shares.
Vote Required
A majority of the outstanding shares of common stock entitled to vote is
required to be represented at the meeting to constitute a quorum for the
transaction of business. If you return valid proxy instructions or attend the
meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes of determining the existence of a quorum. A
broker non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner.
You are entitled to one vote for each share you held on the record date,
except that for the election of directors you have cumulative voting rights and
are entitled to cast in the aggregate a number of votes equal to the number of
shares owned multiplied by the number of directors to be elected and 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 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
1
exercise discretionary authority to cumulate votes in the election of directors
by distributing the votes they are authorized to cast among the Board's nominees
in order to elect the largest possible number of them and, to the extent
possible, in order to cast the same number of votes for each Board nominee.
Votes that are withheld and broker non-votes will have no effect on the outcome
of the election. For all other matters other than the election of directors,
each share of common stock outstanding as of March 2, 2007 is entitled to one
vote.
Voting By Proxy
The Company's Board of Directors is sending you this Proxy Statement for
the purpose of requesting that you allow your shares of Company common stock to
be represented at the annual meeting by the persons named in the enclosed proxy
card. All shares of Company common stock represented at the annual meeting by
properly executed and dated proxy cards will be voted according to the
instructions indicated on the proxy card. If you sign, date and return a proxy
card without giving voting instructions, your shares will be voted as
recommended by our Board of Directors.
The Board of Directors recommends that you vote:
o for each of the nominees for director; and
o for ratification of the appointment of McGrail, Merkel, Quinn &
Associates as the Company's independent registered public accounting
firm.
If any matters not described in this Proxy Statement are properly presented
at the annual meeting, the persons named on the proxy card will use their own
best judgment to determine how to vote your shares. This includes a motion to
adjourn or postpone the meeting to solicit additional proxies. We do not know of
any other matters to be presented at the annual meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of the
Company in writing before your common stock has been voted at the annual
meeting, deliver a later dated proxy, or attend the meeting and vote your shares
in person. Attendance at the annual meeting will not in itself constitute
revocation of your proxy.
If your Company common stock is held in "street name," you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Please review the proxy card or instruction
form provided by your broker, bank or other nominee that accompanies this proxy
statement.
Participants in the Penn Security Bank and Trust Company ESOP
If you participate in the Penn Security Bank and Trust Company Employee
Stock Ownership Plan (the "ESOP"), you will receive a single voting instruction
card for the ESOP that reflects all shares you may vote under the plan. Under
the terms of the ESOP, the ESOP trustee votes all shares held by the ESOP, but
each ESOP participant may direct the trustee how to vote the shares of common
stock allocated to his or her account. The ESOP trustee will not vote shares for
which no voting instructions are received.
2
Corporate Governance
General
We periodically review and revise our corporate governance policies and
procedures to ensure that we meet the highest standards of ethical conduct,
report results with accuracy and transparency and maintain full compliance with
the laws, rules and regulations that govern our operations. As part of this
periodic corporate governance review, the Board of Directors reviews and adopts
best corporate governance policies and practices for the Company.
The Board of Directors, which is elected by the shareholders, is our
ultimate decision-making body, except with respect to those matters reserved to
the shareholders. The Board selects our senior management team, which is charged
with the conduct of our business. The Board acts as an advisor and counselor to
senior management and ultimately monitors its performance.
Corporate Governance Guidelines
Although our common stock is traded on the over-the-counter market and is
not presently listed on The Nasdaq Stock Market ("Nasdaq") 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, we
firmly believe that sound corporate governance is in our best interest and that
of our stakeholders, including our shareholders and employees. To that end, the
Board of Directors has adopted a corporate governance structure that is modeled
upon that required by Nasdaq's listing standards.
The operation and mission of the Board is embodied in our Board Guidelines
on Corporate Governance (the "Guidelines"), a copy of which is posted on our
website (www.pennsecurity.com). The Guidelines were adopted by the Board to
serve as a framework for its oversight responsibilities. Among other matters,
the Guidelines:
o reinforce that the mission of the Board of Directors is to represent
the shareholders' interest in our success through the Board of
Director's active oversight and monitoring of management;
o provide that the Board of Directors shall consist of at least a
majority of "independent" directors;
o confirm that the Board of Directors shall maintain standing
committees, including an Audit Committee, Compensation and Benefits
Committee, and Nominating and Corporate Governance Committee, and that
each of such committees will consist solely of independent directors;
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 of
Directors; and
o provide that the independent members of the Board of Directors shall
periodically conduct executive sessions without the presence of any of
our employees.
Employee Code of Ethics
To aid its oversight of our management and employees, the Board has adopted
a Code of Ethical Conduct applicable to all of our employees, including our
principal executive officer and principal accounting officer, and the employees
of our wholly-owned subsidiary, Penn Security Bank and Trust Company. The Code
of Ethical Conduct is designed to enumerate the Board's expectations for the
conduct of our employees in carrying out our mission. The Code of Ethical
Conduct requires that such individuals carry out their jobs in an honest and
ethical manner, in compliance with laws, avoiding conflicts of interest, while
implementing and maintaining our public communication and disclosure reporting
systems. A copy of the Code of Ethical Conduct is posted on our website
(www.pennsecurity.com).
3
In addition to the compliance reporting mechanisms set forth in the Code of
Ethical Conduct, the Audit Committee of the Board has also implemented
procedures for the receipt, retention and treatment of complaints received by us
regarding accounting, internal accounting controls and auditing matters,
including a mechanism for the confidential, anonymous submission by our
employees of concerns regarding questionable accounting or auditing matters.
Meetings of the Board of Directors
The Board of Directors oversees all of our business, property and affairs.
The Chairman of the Board and the executive officers keep the members of the
Board informed of the Company's business through discussions at Board meetings
and by providing them with reports and other materials. During 2006, the Board
of Directors held 27 regular meetings. With the exception of Mr. Keisling, each
of the directors attended at least 75% of aggregate of the total number of
meetings of the Board and the total number of meetings held by all committees of
the Board on which he or she served.
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 we prepare for submission to
any governmental or regulatory body or the public and monitoring the integrity
of such financial reports; (ii) reviewing our systems of internal controls
established for finance, accounting, legal compliance and ethics; (iii)
reviewing our accounting and financial reporting processes generally and the
audits of our financial statements; (iv) monitoring compliance with legal
regulatory requirements; (v) monitoring the independence and performance of our
independent registered public accounting firm; and (vi) providing for effective
communication between the Board, our senior and financial management and our
independent registered public accounting firm.
The Audit Committee's charter was adopted by the full Board of Directors. A
copy of the charter of the Audit Committee is posted on our website
(www.pennsecurity.com). The Audit Committee currently consists of Mr. Butler,
Mr. Hazelton, Mr. Keisling and Mr. Kozik, each of whom is independent under the
Nasdaq listing standards. The Audit Committee met 11 times in 2006.
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 our 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 our 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 our 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
for our 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 our 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 posted on our website
(www.pennsecurity.com).
4
The Compensation and Benefits Committee currently consists of Mr. Butler,
Mr. Keisling, Mr. Kozik, Dr. Naismith and Ms. Perry, each of whom is independent
under Nasdaq listing standards. The Compensation and Benefits Committee met 11
times in 2006.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee oversees all aspects of our 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 posted on our website
(www.pennsecurity.com).
The Nominating and Corporate Governance Committee currently consists of Mr.
Hume, Mr. Nicholas, Ms. Perry, Ms. Phillips and Mr. Weinberger, each of whom is
independent under Nasdaq listing standards. The Nominating and Corporate
Governance Committee met 12 times in 2006.
Attendance at the Annual Meeting. We expect our directors to attend annual
meetings of shareholders. All directors attended the 2006 Annual Meeting of
Shareholders.
Compensation of Directors
The following table sets forth information concerning the compensation
received by individuals who served as non-employee directors during the year
ended December 31, 2006. During 2006, directors did not receive any perquisites.
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Fees Earned or Paid
Name in Cash ($)
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Edwin J. Butler 44,950
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P. Frank Kozik 29,150
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Steven L. Weinberger 28,900
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Russell C. Hazelton 27,450
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Robert W. Naismith, Ph.D. 27,800
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Emily S. Perry 32,000
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Otto P. Robinson, Jr. 36,700
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James B. Nicholas 34,850
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Sandra C. Phillips 30,450
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D. William Hume 50,600
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James G. Keisling 24,150
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Mr. Robinson was formerly an executive officer of the Company and the Bank
and retired from his positions as president and chief executive of the Company
and the Bank on January 2, 2006. Since his retirement, Mr. Robinson has received
and will continue to receive a monthly pension benefit under the Bank's Pension
Plan of $7,099. Please see the discussion of his compensation for 2006 under the
heading "Executive Compensation".
Cash Retainer and Meeting Fees for Non-Employee Directors
For 2006, each non-employee director received a monthly retainer of $750
(or $1,500 in the case of the Chairman of the Board) plus $600 for each Board
meeting attended and $250 for each committee meeting attended. For 2007, each
non-employee director will receive a monthly retainer of $1,250 (or $2,250 in
the case of the Chairman of the Board) plus $1,000 for each Board meeting
attended and $400 for each committee meeting attended ($800 per meeting for the
Chairman of the Audit Committee, the Compensation and Benefits Committee and
Nominating and Corporate Governance Committee). Directors who are employees do
not receive any compensation related to their Board positions.
5
Stock Ownership
No shareholder owns of record or is known by the Board of Directors to be
the beneficial owner of more than 5% of our outstanding common stock.
The following table sets forth the information concerning the number of
shares of Company common stock beneficially owned, as of March 2, 2007, by each
present director, nominee for director, executive officer named in the
compensation table set forth elsewhere herein and by all directors and executive
officers as a group.
Name Amount and
Nature of
Beneficial Percent of Common Stock
Ownership (1) Outstanding
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Craig W. Best.................................. 2,508 (2) *
Edwin J. Butler................................ 20,443 (3) 1.0
Richard E. Grimm............................... 3,915 (4) *
Russell C. Hazelton............................ 14,876 (5) *
D. William Hume................................ 4,560 (6) *
James G. Keisling.............................. 19,917 (7) *
Andrew A. Kettel, Jr........................... 2,978 (8) *
P. Frank Kozik................................. 17,116 (9) *
Peter F. Moylan................................ 3,714 (10) *
Robert W. Naismith............................. 30,522 (11) 1.4
James B. Nicholas.............................. 6,200 (12) *
Emily S. Perry................................. 2,040 (13) *
Sandra C. Phillips............................. 74,460 (14) 3.5
Otto P. Robinson, Jr........................... 75,696 (15) 3.5
Patrick Scanlon................................ 2,066 (16) *
Steven L. Weinberger........................... 850 *
All Directors and Executive Officers as
a group (28 in group) 293,885 13.7%
* 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 March 2, 2007.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Includes 2,500 shares in a self-directed IRA and 7 shares held by Penn
Security Bank and Trust Company under its Employee Stock Ownership Plan in
which Mr. Best has a non-vested interest.
(3) Includes 1,308 shares in a self-directed IRA.
(4) Includes 780 shares owned jointly by Mr. Grimm and his wife and 3,131
shares held by Penn Security Bank and Trust Company under its Employee
Stock Ownership Plan in which Mr. Grimm has a vested interest.
(5) 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) Includes 1,289 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.
(7) 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) Includes 228 shares owned jointly by Mr. Kettel, his son and his father and
2,743 shares held by Penn Security Bank and Trust Company under its
Employee Stock Ownership Plan in which Mr. Kettel has a vested interest.
(9) Includes 15,996 shares owned jointly by Mr. Kozik and his wife and 1,000
shares in a self-directed IRA.
(10) Includes 800 shares owned jointly by Mr. Moylan and his wife, 2,400 shares
held in trust accounts and 514 shares held by Penn Security Bank and Trust
Company under its Employee Stock Ownership Plan in which Mr. Moylan has a
vested interest.
6
(11) Includes 19,500 shares owned jointly by Dr. Naismith and his wife and
11,022 shares in a self-directed IRA.
(12) Includes 400 shares owned by Mr. Nicholas's mother, for which Mr. Nicholas
has power-of-attorney, 800 shares in a self-directed IRA, 600 shares owned
by Mr. Nicholas's wife and 1,200 shares held in trust accounts.
(13) Includes 1,900 shares owned jointly by Mrs. Perry, her husband and her
children and 140 shares in a self-directed IRA.
(14) These shares are held in trust accounts.
(15) Includes 9,456 shares owned jointly by Mr. Robinson and his wife and 12,998
shares owned by Mr. Robinson's wife and children.
(16) These shares are held by Penn Security Bank and Trust Company under its
Employee Stock Ownership Plan in which Mr. Scanlon has a vested interest.
7
Proposal 1 - Election Of Directors
The Company's Board of Directors currently consists of thirteen members,
all of whom are independent under the listing standards of Nasdaq Market, except
for Craig W. Best, Otto P. Robinson, Jr. and Richard E. Grimm. The Board is
divided into four classes, as nearly equal in number as possible, and identified
by the year in which the term of such class expires, i.e., the Class of 2007,
the Class of 2008, the Class of 2009 and the Class of 2010. The Class of 2011
directors elected at this annual meeting will serve for four-year terms. The
Classes of 2008, 2009 and 2010 will continue to serve for one year, two years
and three years, respectively, in order to complete their four-year terms.
The Board of Directors has fixed the number of directors in the Class of
2011 at three and has nominated Edwin J. Butler, P. Frank Kozik and Steven L.
Weinberger for election as Class of 2011 directors to hold office for four-year
terms to expire at the 2011 Annual Meeting of Shareholders or when their
successors are duly elected and qualified. These individuals are currently
members of our Board of Directors.
Unless you indicate on your proxy card that your shares should not be voted
for certain nominees, the Board of Directors intends that the proxies solicited
by it will be voted for the election of all of the Board's nominees. If any
nominee is unable to serve, the persons named on the proxy card would vote your
shares to approve the election of any substitute proposed by the Board of
Directors. Alternatively, the Board may adopt a resolution to reduce the size of
the Board. At this time, the Board of Directors knows of no reason why any
nominees might be unable to serve.
The Board of Directors recommends that you vote "FOR" the election of its
nominees.
Information regarding the Board of Directors' nominees and the directors
continuing in office is provided below.
Nominees for Election of Directors
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Age as of Principal Occupation Director Directorship of other
Name 2/28/2007 for Past Five Years Since Public Companies
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Mr. Butler retired in September 1991 and 1977 None
was Executive Vice-President and Cashier
Edwin J. Butler 80 of the Bank at the time
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Secretary. Mr. Kozik is President and
Chief Executive Officer of Scranton
Craftsmen, Inc., Throop, PA, a
corporation dealing in miscellaneous
iron, pre-cast concrete products and
P. Frank Kozik 67 ready mixed concrete. 1981 None
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Mr. Weinberger is President of G.
Weinberger Company, Old Forge, PA, a
mechanical contractor specializing in
Steven L. Weinberger 59 commercial and industrial construction. 1999 None
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8
Directors Continuing in Office
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Term Expires at Directorship
Annual Meeting of Other
Name Age as of Principal Occupation Director of Shareholders Public
2/28/07 for Past Five Years Since to be Held in Companies
- ---------------------------------------------------------------------------------------------------------------------
Mr. Hazelton is a retired
Russell C. Hazelton 72 Captain for TransWorld Airlines 1977 2008 None
- ---------------------------------------------------------------------------------------------------------------------
Dr. Naismith is Chairman and
Chief Executive Officer of Life
Robert W. Naismith, Ph.D. 62 Science Analytics, Inc. 1988 2008 None
- ---------------------------------------------------------------------------------------------------------------------
Ms. Perry is a retired Insurance
Account Executive and a
Emily S. Perry 67 community volunteer. 1983 2008 None
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Executive Vice-President and
Treasurer. Mr. Grimm has served
the Bank as Executive
Vice-President and Cashier since
Richard E. Grimm 59 1994. 1994 2009 None
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Mr. Nicholas is President of D.G.
Nicholas Co., Scranton, PA,
James B. Nicholas 55 a wholesale auto parts company 1981 2009 None
- ---------------------------------------------------------------------------------------------------------------------
Ms. Phillips has served on the
Abington Advisory Board of Penn
Security Bank and Trust Company
since 1984. She is active in various
community associations and
Sandra C. Phillips 64 organizations. 1994 2009 None
- ---------------------------------------------------------------------------------------------------------------------
President and Chief Executive
Officer. Previously, Mr. Best
was Chief Operating Officer of
First Commonwealth Bank, a $6.2
billion financial services
institution headquartered in
Craig W. Best 46 Indiana, PA 2006 2010 None
- ---------------------------------------------------------------------------------------------------------------------
Chairman of the Board of
Directors. Mr. Hume retired in
January 1999 and was Senior
Vice-President and Assistant
Secretary of the Bank at that
D. William Hume 80 time. 1991 2010 None
- ---------------------------------------------------------------------------------------------------------------------
Mr. Keisling is Chairman of the
Board of CPG International, Inc.
and Vycom Corp., manufacturers of
plastic sheets products. Mr.
Kiesling was formerly Chief CPG
Executive Officer of Compression International,
James G. Keisling 59 Polymers Group and Vycom Corp. 1984 2010 Inc.
- ---------------------------------------------------------------------------------------------------------------------
Mr. Robinson retired as of January
2, 2006 and was President, Chief
Executive Officer and General
Counsel of the Bank at the time.
Mr. Robinson serves as General
Counsel to the Bank (excluding
corporate governance affairs)
and continues his private North Penn
Otto P. Robinson, Jr. 68 practice of law. 1967 2010 Bancorp, Inc.
- ---------------------------------------------------------------------------------------------------------------------
9
Proposal 2 - Ratification of Independent Public Accounting Firm
The Audit Committee of the Board of Directors has appointed McGrail,
Merkel, Quinn & Associates, as our independent registered public accountants for
2007. McGrail, Merkel, Quinn & Associates has served as our independent
registered public accountants 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.
Audit Fees
The following table sets forth the fees billed to us for the fiscal years
ending December 31, 2006 and 2005 respectively by McGrail, Merkel, Quinn &
Associates.
Year Ended December 31,
------------------------------------
2006 2005
----------------- -----------------
Audit Fees (1)...................... $115,000 $107,000
Audit-Related Fees (2).............. 22,000 26,700
Tax Fees (3)........................ 8,500 6,500
All Other Fees...................... -- --
------------- -------------
Total............................... $145,500 $140,200
============= =============
(1) Audit fees consist of fees for professional services rendered for the audit
of our financial statements and review of financial statements included in
our quarterly reports and services normally provided by the independent
registered public accounting firm in connection with statutory and
regulatory filings or engagements.
(2) Audit-Related Fees consist of fees for audits of employee benefit plans and
student loans.
(3) Tax fees consist of compliance fees for the preparation of original tax
returns. Tax service fees also include fees relating to other tax advice,
tax consulting and planning.
Pre-Approval of Services by the Independent Registered Public Accounting Firm
The Audit Committee has adopted policies and procedures relating to the
approval of audit, audit-related, tax services and other services to be
performed by our independent registered public accounting firm. Pursuant to
these policies, all services to be performed by our independent registered
public accounting firm must be approved by the Audit Committee in advance.
During the year ended December 31, 2006, all audit and non-audit services were
approved, in advance, by the Audit Committee in compliance with these
procedures.
Report of Audit Committee
The Audit Committee has reviewed Penseco's audited financial statements as
of and for the year ended December 31, 2006, and met separately with management
and McGrail, Merkel, Quinn & Associates, independent registered public
accountants, to discuss those financial statements. Management has represented
to us that the financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
Management has primary responsibility for Penseco's financial statements
and the overall reporting process, including Penseco'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 Penseco in
conformity with accounting principles generally accepted in the United States of
America and discuss with us their independence and any other matters they are
required to discuss with us or that they believe should be raised with us.
The Audit Committee has received from and discussed with McGrail, Merkel,
Quinn & Associates the written disclosure and the letter required by
Independence Standards Board Standard No. 1 (Independence
10
Discussions with Audit Committee) as adopted by the Public Company Accounting
Oversight Board in Rule 3600T. These items relate to the firm's independence
from the Company and its management. The Audit Committee also discussed with
McGrail, Merkel, Quinn & Associates any matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit Committees) as
adopted by the Public Company Accounting Oversight Board in Rule 3200T.
Based on these reviews and discussions, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in
Penseco's Annual Report on Form 10-K for the year ended December 31, 2006 as
filed with the Securities and Exchange Commission. The Audit Committee has also
approved the selection of the Company's independent registered public accounting
firm for the fiscal year ending December 31, 2007.
Members of the Audit Committee of Penseco Financial Services Corporation
Edwin J. Butler, Chairman
Russell C. Hazelton
James G. Keisling
P. Frank Kozik
11
Executive Compensation
Summary Compensation Table
The following table sets forth information for the year ended December 31,
2006, concerning the compensation of our principal executive officer, principal
financial officer and the Company's other three most highly compensated
executive officers (or executive officers of its subsidiaries) whose
compensation was $100,000 or more who were serving as such on December 31, 2006
for services in all capacities to the Company and its subsidiaries. No named
executive officers received perquisites in excess of $10,000 during the year
ended December 31, 2006.
- -------------------------------------------------------------------------------------------------------------------------
Change in
Pension Value
and
Nonqualified
Deferred
Compensation All Other
Name and Salary Bonus Stock Awards Earnings Compensation
Principal Position Year ($) ($)(2) ($)(3) ($)(4) ($)(5) Total ($)
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Craig W. Best, President 2006 228,367 45,673 0 11,333 4,870 290,243
and Chief Executive
Officer
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Otto P. Robinson, Jr., 2006 32,538(6) -- -- -- 257,213 289,751
President and Chief
Executive Officer (1)
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Patrick Scanlon, Controller 2006 94,700 10,640 -- 9,951 2,096 117,387
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Richard E. Grimm, 2006 165,439 11,246 -- 38,398 3,712 218,795
Executive Vice President,
Credit Division Head
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Peter F. Moylan, 2006 139,351 3,780 -- 19,566 3,142 165,839
Executive Vice President,
Wealth Management
Division Head
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
Andrew A. Kettel, Jr., 2006 104,849 3,616 -- 14,882 2,358 125,705
Executive Vice President,
Private Banking Division
Head
- ---------------------------- -------- ----------- -------- ---------------- ----------------- ---------------- ----------
(1) Mr. Robinson served as president and chief executive officer of the Company
and the Bank until his retirement on January 2, 2006.
(2) The dollar value of bonus (cash and non-cash) earned during the fiscal
year.
(3) Mr. Best was awarded 10,000 stock appreciation rights on January 2, 2006,
which vest annually at a rate of 2,000 per year. At December 31, 2006, no
rights had vested and the exercise price of such rights was greater than
the fair market value of the Company's stock.
(4) The sum of (i) the aggregate change in the actuarial present value of
accumulated benefits under all defined benefit and actuarial pension plans
from the plan measurement date used for financial statement reporting
purposes with respect to the prior completed fiscal year to the plan
measurement date used for financial statement reporting purposes with
respect to the covered fiscal year, and (ii) above-market or preferential
earnings on non-tax-qualified deferred compensation.
(5) Details of the amounts reported in the "All Other Compensation" column for
2006 are provided in the table below:
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
Mr. Best Mr. Robinson Mr. Scanlon Mr. Grimm Mr. Moylan Mr. Kettel
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
Employer Contributions to the
Profit Sharing Plan $ 2,435 $ -- $ 1,048 $ 1,856 $ 1,571 $ 1,179
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
Payment under Supplemental
Benefit Plan -- 155,127 -- -- -- --
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
Employer Contributions to the
ESOP 2,435 -- 1,048 1,856 1,571 1,179
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
Annual Retirement Benefit
under Pension Plan -- 78,086 -- -- -- --
- -------------------------------- -------------- --------------- --------------- --------------- --------------- ---------------
12
For Mr. Robinson, all other compensation also includes a $24,000 annual
retainer for his services as General Counsel to the Company and the Bank.
Mr. Best was awarded 10,000 stock appreciation rights on January 2, 2006,
which vest at a rate of 2,000 per year. At December 31, 2006, no rights had
vested and the exercise price of such rights was greater than the fair
market value of the Company's stock and therefore the rights had no value.
(6) Includes $5,557 in salary and $26,981 in accrued vacation pay that was paid
to Mr. Robinson upon his retirement.
The foregoing table includes payments made on behalf of the named executive
officers to the Bank's Retirement Profit Sharing Plan (the "Profit Sharing
Plan"). The Profit Sharing Plan includes employees as well as executive
officers. Directors who are not employees 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 2006, the Bank contributed $70,000 to the Profit Sharing
Plan.
The foregoing table also includes payments made on behalf of the named
executive officers to the Bank's Employee Stock Ownership Plan (the "ESOP"). The
ESOP includes employees as well as officers. Directors who are not employees 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 our common stock. In 2006, the Bank contributed $70,000 to
the ESOP. Distribution of a participant's stock account occurs upon retirement
or death or disability or termination of employment.
Grants of Plan-Based Awards Table
The following table sets forth information concerning grants of awards
pursuant to plans made to the named executive officers during the year ended
December 31, 2006.
- ---------------------------------------------------------------------------
Grant Number of Shares of Exercise Price of
Date Stock or Units (#) Awards ($/Sh)
Name (1) (2) (3)
- ---------------------------------------------------------------------------
Craig W. Best 1/2/2006 10,000 43.00
- ---------------------------------------------------------------------------
(1) The grant date for the stock appreciation rights.
(2) The number of stock appreciation rights granted in the fiscal year. These
rights vest at a rate of 20% per year.
(3) The per-share exercise price of the stock appreciation rights granted in
the fiscal year. The exercise price of such rights was equal to the fair
market value of the Company's common stock on the date of the grant.
Employment Agreement
The Company and the Bank jointly maintain a three-year employment agreement
with Craig W. Best, President and Chief Executive Officer. The Company and the
Bank entered into the employment agreement, effective as of January 2, 2006, to
help ensure a stable and competent management base and encourage the continued
success of the Company and the Bank.
The term of the employment agreement renews automatically on each
anniversary of the effective date for an additional one-year period, unless
either party provides at least 30 days' notice of non-renewal. The executive's
current base salary is $236,900; the Bank's Board of Directors will review his
performance each year and make salary adjustments accordingly. In addition to
base salary, the employment agreement provides for an annual bonus of up to 20%
of base salary, based upon the attainment of performance goals mutually agreed
upon by the executive and the Bank's Board each year (See the Compensation
Discussion and Analysis section of this proxy statement.). The employment
agreement also provides that the executive may participate in current or future
employee benefit programs, including stock-based and long-term incentive
compensation plans and a supplemental executive pension plan, and for the
purchase of term life insurance with a death benefit of $500,000 payable upon
the executive's death. Under the agreement, the Company provides the executive
with the use of an appropriate automobile, along with reasonable insurance and
maintenance costs, as well as reimbursement for country and dining club
13
memberships and reasonable business expenses. The Company also agrees to
indemnify the executive to the fullest extent legally allowable.
At the time of hire, the employment agreement provided that the executive
would receive stock appreciation rights covering 10,000 shares of the Company's
stock, to be granted pursuant to a separate award agreement between the Company
and the executive. The executive also received a relocation allowance of up to
$50,000 and reimbursement for temporary housing expenses for up to 90 days
following the effective date of the agreement, as well as an indemnification
payment to make the executive whole for any additional personal income taxes
resulting from the initial relocation and temporary housing payments.
Under the employment agreement, the Bank and the Company may terminate the
executive's employment for cause (as defined in the agreement) at any time. Upon
termination for cause, voluntary termination by the executive without good
reason (as defined in the agreement) or termination due to the executive's death
or disability, the executive will receive only accrued compensation and vested
benefits through his termination date. Upon involuntary termination by the
Company without cause or voluntary termination by the executive with good reason
(i.e., constructive termination), the executive will receive his accrued
compensation and other benefits through his termination date, along with a
severance payment equal to 12 months of continued base salary, payment of health
insurance premiums for 12 months (for executive and his dependents) and $30,000
in outplacement assistance to be paid by the Company to a firm selected by the
executive. If the Company terminated the executive's employment without cause on
December 31, 2006, the severance payment due under the employment agreement
(based solely on the executive's then-current cash compensation, without regard
to future base salary adjustments or bonuses) would have been $270,834.
If the Company terminates the executive without cause or the executive
terminates for good reason within 12 months of a change in control, he will
receive, in addition to previously accrued compensation and benefits, a
severance payment equal to 24 months of base salary, 24 months of health
insurance continuation, and $30,000 in outplacement assistance. In addition, the
executive will immediately vest in all outstanding stock-based compensation
awards upon termination in connection with a change in control.
Generally, under Section 280G of the Internal Revenue Code, severance
payments made in connection with a change in control that equal or exceed three
times an executive's average annual compensation over the five preceding tax
years (or period of employment, if less) are considered "excess parachute
payments." Amounts that exceed the Section 280G limit are subject to an excise
tax payable by the executive and are non-deductible by the Company. The
employment agreement limits payments to the executive to an amount that will not
exceed his Section 280G limit under the Internal Revenue Code.
If a change in control of the Bank or the Company had occurred at December
31, 2006, the cash severance payment due to the executive under the employment
agreement (based solely on the executive's then-current cash compensation,
without regard to future base salary adjustments or bonuses), would have been
$603,669 and stock appreciation rights having a value of $85,520 would have
become fully vested.
Under the employment agreement, the executive agrees to maintain the
confidentiality of non-public information and trade secrets learned during the
course of employment and further agrees that the Company and the Bank maintain
ownership over his work product (as defined in the agreement). In addition, for
a period of 12 months following termination of employment, the executive agrees
that he will not: (1) solicit customers, potential customers or suppliers for or
on behalf of a competing business (as defined under the agreement); (2) recruit
employees of the Bank or Company for a competing business, or (3) serve as a
director, officer, employee or investor in a competing business.
14
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning stock appreciation
rights that have not vested for Mr. Best as of December 31, 2006.
- ------------------------ --------------------------- ---------------------------
Number of Shares or Units Market Value of Shares or
of Stock That Have Not Units of Stock That Have
Name Vested (#) (1) Not Vested($) (2)
- ------------------------ --------------------------- ---------------------------
Craig W. Best 10,000 0
- ------------------------ --------------------------- ---------------------------
(1) The total number of stock appreciation rights that have not vested.
(2) The aggregate market value of the stock appreciation rights that have that
have not vested is zero because the exercise price of such rights exceeded
the fair market value of the Company's common stock at December 31, 2006.
Pension Benefits
The following table sets forth information concerning our plans that
provide for payments or other benefits at, following, or in connection with,
retirement for each of the named executive officers.
- ---------------------- ------------- --------------- ------------- -------------
Number of Years Present Payment
of Value of During
Credited Accumulated Last Fiscal
Service Benefit Year
Name Plan Name (#) (1) ($) (2) ($) (3)
- ---------------------- ------------- --------------- ------------- -------------
Craig W. Best Employees 1 11,333 --
Pension Plan
and
Supplemental
Benefit Plan
- ---------------------- ------------- --------------- ------------- -------------
Otto P. Robinson, Jr. Employees 30 985,835 78,086
Pension Plan
- ---------------------- ------------- --------------- ------------- -------------
Patrick Scanlon Employees 31 108,509 --
Pension Plan
- ---------------------- ------------- --------------- ------------- -------------
Richard E. Grimm Employees 27 378,577 --
Pension Plan
- ---------------------- ------------- --------------- ------------- -------------
Peter F. Moylan Employees 7 122,738 --
Pension Plan
- ---------------------- ------------- --------------- ------------- -------------
Andrew A. Kettel, Jr. Employees 36 296,505 --
Pension Plan
- ---------------------- ------------- --------------- ------------- -------------
(1) The number of years of service credited to the executive officer under the
plan, computed as of the same pension plan measurement date used for
financial statement reporting purposes with respect to the registrant's
audited financial statements for the last completed fiscal year.
(2) The actuarial present value of the named executive officer's accumulated
benefit under the plan(s), computed as of the same pension plan measurement
date used for financial statement reporting purposes with respect to the
registrant's audited financial statements for the last completed fiscal
year.
(3) The dollar amount of any payments and benefits paid to the named executive
officer during the registrant's last completed fiscal year.
The information in the foregoing table relates to the Bank's qualified
defined benefit retirement plan (the "Pension Plan") for its employees and
officers and the Supplemental Benefit Plan Agreement with Mr. Best (the
"Supplemental Plan"). The information in the table has been determined using
interest rate and mortality rate assumptions consistent with those used in the
Company's financial statements. Executive officers of the Bank participate in
the Pension Plan on the same basis as all other employees and receive only those
benefits that are available to all other employees. Directors who are not
employees are not included in the Pension Plan. In 2006, the Bank contributed
$246,000 to the Pension Plan.
15
Supplemental Benefit Plan Agreement. The Bank maintains the Penn Security
Bank and Trust Company Excess Benefit Plan (the "Supplemental Plan"), as amended
and restated effective April 15, 2002. Mr. Best became a participant in the
Supplemental Plan effective as of April 18, 2006. The Supplemental Plan provides
Mr. Best with pension benefits that would otherwise be limited by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). Specifically, the plan provides Mr. Best with the difference
between the early, normal or deferred retirement benefit (depending upon his age
at retirement) he would be eligible to receive under the Pension Plan, if the
Code limitations did not exist, and the actual retirement benefit he would
receive upon application of the Code limitations. Under no circumstances,
however, will Mr. Best receive a pension benefit greater than what would be
provided under the pension plan if he was not subject to the Internal Revenue
Code compensation limitations discussed above. The accrued benefit under the
Supplemental Plan becomes payable upon termination of employment for any reason,
in the form of a lump sum, annual installments over a period of time elected by
Mr. Best, an annuity for Mr. Best's lifetime or a joint and survivor annuity for
the lives of Mr. Best and his spouse. Upon a change in control (as defined under
the Supplemental Plan), Mr. Best's accrued benefit would be payable in an
actuarially equivalent lump sum. If Mr. Best had terminated employment on
December 31, 2006, his accrued benefit under the Supplemental Plan would have
been $475.
Potential Payments to Named Executive Officers Upon Termination or Change in
Control
In 2006, the Company announced a Voluntary Early Retirement Initiative for
employees. Mr. Peter Moylan will participate in this Initiative. Upon his
retirement, he will receive a one-time payment of $37,567, which represents two
weeks of salary for every year of service. In addition, Penn Security Bank and
Trust Company will pay for health insurance for Mr. Moylan and his family until
Mr. Moylan reaches age 65. The cost of the health insurance benefit is $25,612.
The Company and the Bank are parties to an employment agreement with Mr.
Best which provides for payments in the event of termination or a change in
control. Those potential payments are discussed under "Employment Agreement."
Compensation Discussion and Analysis
Our Compensation Philosophy
Our compensation philosophy starts from the premise that the success of
Penseco Financial Services Corporation depends, in large part, on the dedication
and commitment of the people we place in key operating positions to drive our
business strategy. We strive to satisfy the demands of our business model by
providing our management team with incentives tied to the successful
implementation of our corporate objectives. However, we recognize that the
Company operates in a competitive environment for talent. Therefore, our
approach to compensation considers the full range of compensation techniques
that enable us to compare favorably with our peers as we work to attract and
retain key personnel.
We base our compensation decisions on the following principles:
o Meeting the Demands of the Market - Our goal is to compensate our
employees at competitive levels that position us as the employer of
choice among our peers who provide similar financial services in the
markets we serve.
o Driving Performance - We will structure compensation around the
attainment of company-wide, business unit and individual targets that
return positive results to our bottom line.
o Reflecting our Business Philosophy - Our approach to compensation
reflects our values and the way we do business in the communities we
serve.
16
Our compensation program currently relies on two primary elements: (i) base
compensation or salary and (ii) discretionary cash-based, short-term incentive
compensation. We believe that we can meet the objectives of our compensation
philosophy by achieving a balance among these two elements that is competitive
with our industry peers and creates appropriate incentives for our management
team. To achieve the necessary balance, the Compensation and Benefits Committee
of our Board of Directors has consulted with Larry R. Webber, an independent
compensation consultant, as well as reviewed survey data for peer institutions
to help us benchmark our compensation program and our financial performance to
our peers.
Base Compensation. The salaries of our executive and other officers are
reviewed at least annually to assess our competitive position and make any
necessary adjustments. Our goal is to maintain salary levels for our officers at
a level consistent with base pay received by those in comparable positions at
our peers. To further that goal, we obtain peer group information from a variety
of sources. We also evaluate salary levels at the time of promotion or other
change in responsibilities or as a result of specific commitments we made when a
specific officer was hired. Individual performance and retention risk are also
considered as part of our annual assessment.
Cash-Based Incentive Compensation. The Compensation and Benefits Committee
of the Board of Directors authorizes bonuses for key personnel based on the
terms of a cash-based incentive program which rewards the attainment of annual
company-wide financial objectives at specified levels and individual performance
relative to the specific tasks we expect an employee to accomplish during the
year. Our objective is to drive annual performance at both the company and
individual levels to the highest attainable levels by establishing thresholds
tied to incentive awards.
Role of the Compensation and Benefits Committee
We rely on the Compensation and Benefits Committee to develop our executive
compensation program and to monitor the success of the program in achieving the
objectives of our compensation philosophy. The Committee, which consists of five
independent directors, is also responsible for the administration of our
compensation programs and policies, including the administration of our cash-
and stock-based incentive programs. The Committee reviews and approves all
compensation decisions relating to our officers. The compensation of our Chief
Executive Officer and the other named executive officers are set by the
Committee. The Chief Executive Officer attends the Compensation and Benefits
Committee meetings at the invitation of the Committee. The Chief Executive
Officer does not participate in any discussions on his own compensation and does
not vote on matters presented in the Committee. The Committee operates under the
mandate of a formal charter that establishes a framework for the fulfillment of
the Committee's responsibilities. A copy of the Charter of the Compensation and
Benefits Committee is posted on our website (www.pennsecurity.com).
The Committee reviews the charter at least annually to ensure that the
scope of the charter is consistent with the Committee's expected role. Under the
charter, the Committee is charged with general responsibility for the oversight
and administration of our compensation program. During 2006, the Compensation
and Benefits Committee met 11 times. The members of the Committee are Edwin J.
Butler, James G. Keisling, P. Frank Kozik, Robert W. Naismith and Emily S.
Perry, each of whom is independent under Nasdaq listing standards.
Role of Compensation Consultants
Our Compensation and Benefits Committee has worked with Larry R. Webber to
help us benchmark our compensation program against our peers and to ensure that
our program is consistent with prevailing practice in our industry. In February
2007, we paid Mr. Webber $8,800 in the aggregate for his services.
Role of Management
Our Chief Executive Officer makes recommendations to the Compensation and
Benefits Committee from time to time regarding the appropriate mix and level of
compensation for his subordinates. Those recommendations consider the objectives
of our compensation philosophy and the range of compensation programs authorized
by the Compensation and Benefits Committee. Our Chief Executive Officer does not
participate in Committee discussions or the review of Committee documents
relating to the determination of his own compensation.
17
Peer Group Analysis
A critical element of our compensation philosophy and a key driver of
specific compensation decisions for our management team is the comparative
analysis of our compensation mix and levels relative to a peer group of publicly
traded banks and thrifts. We firmly believe that the cornerstone of our
compensation program is the maintenance of competitive compensation program
relative to the companies with whom we compete for talent. In 2006, our peer
group was selected with the assistance of compensation consultants on the basis
of several factors, including geographic location, size, operating
characteristics, and financial performance.
Severance and Change in Control Benefits
We recognize that an important consideration in our ability to attract and
retain key personnel is our ability to minimize the impact on our management
team of the possible disruption associated with our analysis of strategic
opportunities. Accordingly, we believe that it is in the best interest of
Penseco and its shareholders to provide our key personnel with reasonable
financial arrangements in the event of termination of employment following a
change in control or involuntary termination of employment for reasons other
than cause. Our Chief Executive Officer, who has an employment agreement, has a
provision in his agreement that provides for certain benefits in the event of
voluntary or involuntary termination following a change in control. These
provisions are described in the "Employment Agreement" section above. In
addition, the employment agreement contains provisions which provide for certain
severance benefits in the event we terminate the Chief Executive Officer's
employment for reasons other than cause. These provisions are also described in
"Employment Agreement" along with estimates of the severance and change in
control benefits provided to the Chief Executive Officer.
Retirement Benefits; Employee Welfare Benefits
We offer our employees tax-qualified retirement plans. Our primary
retirement benefit vehicles are (i) a pension plan, (ii) a retirement profit
sharing plan and (iii) an employee stock ownership plan that allows participants
to accumulate a retirement benefit in employer stock at no cost to the
participant. We also provided our former Chief Executive Officer and provide our
present Chief Executive Officer with a supplemental retirement plan agreement
which provides the former and present executives with 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 Internal Revenue Code. A description of
these arrangements is provided in the "Supplemental Benefit Plan Agreement".
In addition to retirement programs, we provide our employees with coverage
under medical, dental, vision, life insurance and disability plans on terms
consistent with industry practice.
Perquisites
We provide certain of our officers, including the Chief Executive Officer,
with perquisites similar to those provided to executives employed by our peers.
The perquisites are intended to further the officers' abilities to promote the
business interests of Penseco in our markets and to reflect competitive
practices for similarly situated officers employed by our peers.
Director Compensation
Retainer and Meeting Fees. Our outside directors are compensated through a
combination of retainers and meeting fees. Directors who are also employees of
the company do not receive additional compensation for service on the Board. The
level and mix of director compensation is revised by the Compensation and
Benefits Committee on a periodic basis to ensure consistency with the objectives
of our overall compensation philosophy.
18
Our 2006 Compensation Program
Salary Levels and Adjustments
The base salaries paid to our named executive officers are set forth above
in the Summary Compensation Table. We believe that the base salaries paid to our
executive officers during 2006 achieves our executive compensation objectives,
compares favorably to our peer group and is within our target of providing a
base salary at the market median.
In January 2007, adjustments to our executive base salaries were made based
on an analysis of current market pay levels of peer companies and in published
surveys. In addition to the pay levels of our peer group, factors taken into
account in making any changes for 2007 included the contributions made by the
executive officer, the performance of the executive officer, the role and
responsibilities of the executive officer and the relationship of the executive
officer's base pay to the base salary of our other executives. The Committee
adjusted base salaries for 2007 on an average by 3%, which placed senior
management, as a group, within the peer group median.
Bonus Awards
Subject to the final approval of the Bank's full Board of Directors, the
Compensation and Benefits Committee authorized bank-wide cash bonuses. The
Committee determined the bonus of the President/Chief Executive Officer. The
Committee, based on recommendations of the Chief Executive Officer, determined
the bonuses of the other members of senior management. The Board of Directors
voted final approval of all bonuses in January 2007 for payment in February
2007.
Compensation and Benefits Committee Report
The Compensation and Benefits Committee has reviewed and discussed with
management the Compensation Discussion and Analysis that is required by the
rules established by the Securities and Exchange Commission. Based on such
review and discussions, the Compensation and Benefits Committee has recommended
to the Board of Directors that the Compensation Discussion and Analysis be
included in this proxy statement. See "Compensation Discussion and Analysis".
Compensation and Benefits Committee of the Board of Directors
of Penseco Financial Services Corporation
Robert W. Naismith, Ph.D., Chairman
Edwin J. Butler
James G. Keisling
P. Frank Kozik
Emily S. Perry
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than 10% of our common
stock, to file reports of ownership and changes of ownership with the Securities
and Exchange Commission. Executive officers, directors and greater than 10%
shareholders are required by regulation to furnish us with copies of all Section
16(a) reports they file.
Based solely on our review of the copies of the reports we have received
and written representations provided to us from the individuals required to file
the reports, we believe that (i) we have no 10% shareholders and (ii) each of
our executive officers and directors has complied with applicable reporting
requirements for transactions in our common stock during the year ended December
31, 2006.
19
Certain Relationships and Related Transactions
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to
its executive officers and directors. However, the Sarbanes-Oxley Act contains a
specific exemption from such prohibition for loans by the Bank to its executive
officers and directors in compliance with federal banking regulations. Federal
regulations require that all loans or extensions of credit to executive officers
and directors of insured financial institutions must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank is therefore prohibited from making any new loans or extensions of
credit to executive officers and directors at different rates or terms than
those offered to the general public. Notwithstanding this rule, federal
regulations permit the Bank to make loans to executive officers and directors at
reduced interest rates if the loan is made under a benefit program generally
available to all other employees and does not give preference to any executive
officer or director over any other employee.
The Audit Committee of the Board of Directors periodically reviews a
summary of the Company's transactions with directors and executive officers of
the Company and with firms that employ directors, as well as other related
person transactions, to recommend to the disinterested members of the Board of
Directors that the transactions are fair, reasonable and with Company policy and
should be ratified and approved. Besides including such requirement in the Audit
Committee Charter, the Company does not maintain written policies or procedures
for the review, approval or ratification of certain transactions with related
persons. However, in accordance with banking regulations, the Board of Directors
reviews all loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans made to such person and his
or her related interests exceed the greater of $25,000 or 5% of the Company's
capital and surplus (up to a maximum of $500,000) and such loan must be approved
in advance by a majority of the disinterested members of the Board of Directors.
At December 31, 2006 certain of the Company's directors, nominees, and
executive officers or their associates had outstanding loans or commitments from
Penn Security Bank and Trust Company. These transactions were made in the
ordinary course of the Bank's business and on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectability or present other unfavorable features.
Nominating and Corporate Governance Committee Procedures
General
It is the policy of the Nominating and Corporate Governance Committee of
the Board of Directors to consider director candidates recommended by
shareholders who appear to be qualified to serve on our Board of Directors. The
Nominating and Corporate Governance Committee may choose not to consider an
unsolicited recommendation if no vacancy exists on the Board of Directors and
the Nominating and Corporate Governance Committee does not perceive a need to
increase the size of the Board of Directors. In order to avoid the unnecessary
use of the Nominating and Corporate Governance Committee's resources, the
Nominating and Corporate Governance Committee will consider only those director
candidates recommended in accordance with the procedures set forth below.
Procedures to be Followed by Shareholders
A shareholder who proposes to nominate an individual for election to the
Board of Directors at an annual meeting must deliver a written notice to the
Secretary of the Company within the times frames set forth under "Submission of
Business Proposals and Shareholder Nominees" which includes:
1. The name and address of the person recommended as a director
candidate;
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2. All information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors
pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended;
3. The written consent of the person being recommended as a director
candidate to be named in the proxy statement as a nominee and to serve
as a director if elected;
4. The name and address of the shareholder giving the notice, as it
appears on our books;
5. The name and address of the beneficial owner, if any, on whose behalf
the nomination is being made;
6. The class and number of shares owned beneficially and of record by
such shareholder and such beneficial owner and a representation that
such shareholder and beneficial owner intend to appear in person or by
proxy at the meeting;
7. If the recommending shareholder is not a shareholder of record, a
statement from the record holder verifying the holdings of the
shareholder and a statement from the recommending shareholder of the
length of time that the shares have been held;
8. A statement from the shareholder as to whether the shareholder has a
good faith intention to continue to hold the reported shares through
the date of the meeting; and
9. A statement from the recommending shareholder supporting its view that
the proposed nominee possesses the minimum qualifications for nominees
(if any) and describing the contributions that the nominee would be
expected to make to the Board and to the governance of Penseco.
Of those persons who are nominated by a shareholder only those nominated in
accordance with these procedures shall be eligible for election as directors at
the annual meeting.
Process for Identifying and Evaluating Nominees
The process the Nominating and Corporate Governance Committee follows when
it identifies and evaluates individuals to be nominated for election to the
Board of Directors is as follows:
Identification. For purposes of identifying nominees for the Board of
Directors, the Nominating and Corporate Governance Committee relies on personal
contacts of the Committee and other members of the Board of Directors as well as
its knowledge of members of the Bank's local communities. The Nominating and
Corporate Governance Committee will also consider director candidates
recommended by shareholders in accordance with the policy and procedures set
forth above. The Nominating and Corporate Governance Committee may use an
independent search firm in identifying nominees.
Evaluation. In evaluating potential nominees, the Nominating and Corporate
Governance Committee determines whether the candidate is eligible and qualified
for service on the Board of Directors by evaluating the candidate under the
selection criteria set forth above. In addition, the Nominating and Corporate
Governance Committee will conduct a check of the individual's background and may
interview the candidate. Candidates proposed by shareholders are considered
under the same criteria except that the Committee may also consider the size and
duration of the equity interest of the recommending shareholder in Penseco and
the extent to which the recommending shareholder intends to continue holding
this interest.
Minimum Qualifications
The Nominating and Corporate Governance Committee has not adopted a
specific set of minimum qualifications that must be met by nominees. Nominees
are selected on the basis of their integrity, experience, achievements,
judgment, intelligence, personal character and capacity to make independent
analytical inquiries, ability and willingness to devote adequate time to Board
duties and the likelihood of being able to serve on the
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Board for a sustained period. Consideration is also given to the Board's overall
balance of diversity of perspectives, backgrounds and experiences. The Committee
also considers factors such as global experience, experience as a director of a
public company and knowledge of relevant industries.
In addition, prior to nominating an existing director for re-election to
the Board of Directors, the Committee will consider and review an existing
director's Board and committee performance and his or her satisfaction of any
minimum qualifications established by the Committee.
Submission of Business Proposals and Shareholder Nominations
We must receive proposals that shareholders seek to include in the Proxy
Statement for our next annual meeting no later than November 17, 2007. If next
year's annual meeting is held on a date more than 30 calendar days from May 1,
2008, a shareholder proposal must be received by a reasonable time before we
begins to print and mail its proxy solicitation for such annual meeting. Any
shareholder proposals will be subject to the requirements of the proxy rules
adopted by the Securities and Exchange Commission.
The Company's bylaws provide that, in order for a shareholder to make
nominations for the election of directors or proposals for business to be
brought before the annual meeting, a shareholder must deliver notice of such
nominations and/or proposals to the Corporate Secretary not less than 60 days
nor more than 90 days prior to May 1, 2008. However, if the date of the
Company's annual meeting is more than 30 days before or more than 60 days prior
to May 1, 2008, notice must be received not less than 60 days nor more than 90
days prior to the annual meeting date or no later than 15 days after public
announcement of the date of the annual meeting
Shareholder Communications
In order to provide our shareholders and other stakeholders with a direct
and open means of communication to the Board of Directors, the Board has adopted
the following procedures for communications to our Board of Directors or
individual directors.
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 our business or affairs 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; 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 our policies and procedures and applicable
laws and regulations relating to the disclosure of information.
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Miscellaneous
We will pay the cost of this proxy solicitation. We will reimburse
brokerage firms and other custodians, nominees and fiduciaries for reasonable
expenses incurred by them in sending proxy materials to the beneficial owners of
our common stock. In addition to soliciting proxies by mail, our directors,
officers and regular employees may solicit proxies personally, by email or by
telephone without receiving additional compensation.
Our Annual Report to Shareholders has been mailed to persons who were
shareholders as of the close of business on March 2, 2007. Any shareholder who
has not received a copy of the Annual Report may obtain a copy by writing to the
Secretary of the Company. The Annual Report is not to be treated as part of the
proxy solicitation material or as having been incorporated in this Proxy
Statement by reference.
If you and others who share your address own shares in street name, your
broker or other holder of record may be sending only one Annual Report and Proxy
Statement to your address. This practice, known as "householding," is designed
to reduce our printing and postage costs. However, if a shareholder residing at
such an address wishes to receive a separate Annual Report or Proxy Statement in
the future, he or she should contact the broker or other holder of record. If
you own your shares in street name and are receiving multiple copies of our
Annual Report and Proxy Statement, you can request householding by contacting
your broker or other holder of record.
Whether or not you plan to attend the annual meeting, please vote by
marking, signing, dating and promptly returning the enclosed proxy card in the
enclosed envelope.
BY ORDER OF THE BOARD OF DIRECTORS
Craig W. Best
President and Chief Executive Officer
March 16, 2007
Scranton, Pennsylvania
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