Details emerge as bank combination nears

BY DAVID FALCHEK
Times Shamrock Writer

Details about the pending combination of Penn Security Bank & Trust and Peoples Neighborhood Bank have emerged in a lengthy prospectus released to shareholders as they prepare to cast their votes on the deal that would create the largest community bank in Northeast Pennsylvania.

Hallstead-based Peoples Neighborhood Bank, the legal acquirer in the complex transaction, sent voluminous information to shareholders in the form of the merger agreement, prospectus and shareholder proxy and shelf registration of the new stock it will need to issue to complete the acquisition of Penseco Financial Services Corp., the Scranton-based parent company of Penn Security.

After being hashed out by the banks’ respective boards and a slate of financial and legal consultants, the matter is now before the shareholders.

The final regulatory approvals were received last week. The official creation of Peoples Security Bank & Trust should happen within days after the approval from Penseco shareholders, which requires 75 percent of voting shares to be cast in favor.

Based on the exchange ratio, 1.3636 shares of Peoples stock for each share of Penseco stock is $49.19 per share, consultants had determined. With 3,285,143 of Penseco shares outstanding, that translates to a deal valued at $161.6 million.

To pay for the stock and cash deal, Peoples will have to issue 4,466,086 new shares. Peoples will redeem fractional shares in cash.

With so much at stake, if either side backs out of the deal, it will be obligated to pay the other a $3.7 million termination fee.

The new bank
The combined bank will be lead by Penseco CEO Craig Best with Peoples Bank veteran Scott Seasock as chief financial officer and Karen Dissinger as chief operating officer.

The combined People Security Bank & Trust agrees to pay a quarterly cash dividend no less than 31 cents per share for five years following the merger. For at least three years, the headquarters and loan office will be in Scranton, at the current Penseco headquarters. Deposits and data processing functions will be in Hallstead at the Peoples facility.

Peoples chief executive Alan Dakey will remain on for six months after the merger to assist in the integration of the companies, for which he will be paid $95,000 in addition to compensation upon completion of the acquisition in the amount of $668,420, according to the Golden Parachute Summary in Peoples regulatory filing required by Dodd-Frank Wall Street Reform and Consumer Protection Act. While shareholders may vote on the compensation package, the votes are advisory only and non-binding to the board.

Penseco board members will hold the majority of board seats in the new company’s 14-member board, with eight current board members slated to remain part of the institution. Two Penseco board members – Richard E. Grimm and D. Williams Hume – will not be board members. All six non-executive directors of Peoples will remain on the board.

Peoples is already authorized to issue 12.5 million shares, more than it needs to handle the Penseco acquisition. Peoples is asking shareholders to amend the company articles of incorporation to allow issuance of 25,000,000 shares.

The move could give the company latitude to make another acquisition in the future or set the table for a stock split which could increase the liquidity of the stock, said Bert Ely, a financial institution consultant based in Alexandria, Va.

“It’s an interesting move, but a minor one,” he said, of any speculation of the bank’s future moves.

Origin of deal
The idea began with Penseco, and moved swiftly from idea to draft agreement in one month.

Best has been discussing merger opportunities with Penseco’s board for some time. On Feb. 27 he presented two options of the executive committee of the board of directors with assistance from Cedar Hill Advisors, a Chalfont, Bucks County-based firm which specializes in mergers and acquisitions.
Based up the potential benefits, the committee authorized Best to approach Peoples chairman William Aubrey. They met Feb. 28 and remained in frequent phone contact hashing out potential details and terms. Best was invited to pitch the plan to Aubrey, Peoples chief executive Alan W. Dakey and chief financial officer Scott Seasock March 18, leaving them with materials to share with Peoples’ full board. In the ensuing weeks, information was presented to member of both companies boards.

Penseco’s board of directors designated an independent committee consisting of Joseph Cesare, M.D., D. Hume, James Keisling and Robert Naismith, to scrutinize the proposals. Peoples’ strategic planning committee was comprised of Earle Wootton, Ronald G. Kukuchka and George H. Stover.

By March 28, the banks had a non-binding draft agreement and through April, both board reviewed the details. Peoples hired Boenning & Scattergood, a suburban Philadelphia-based investment banking firm to review the deal on its behalf. Peoples’ board agreed to continue the discussion, but examined other options, including seeking other merger opportunities, doing nothing or growing other ways as they considered the proposed terms presented by Penseco.

Through April and May, the analysis of and refinements to the agreement continued, and in June, attorneys began drafting the merger agreement, announced to the pubic June 28. Here are some of the consideration that prompted the banks to join forces:
-Low-growth economy. The region’s relatively flat growth limits opportunities for the banks individually to add shareholder value, leaving mergers and acquisition as key options for growth.

-Competitiveness. The combination of a competitive banking landscape and low growth sets the table for even tougher competition among banking institutions in the future, and the merger would give the combined bank a increased competitive edge and economies of scale, increased market share, and geographic reach.

-Outside takeover risk. The banks could become target of hostile takeover by outside banks, which could result in a loss of local control.

-Complementary service areas. With very little overlap of their service areas, the combined bank would see no need to shutter branches.

-Regulatory burden. The fixed costs of complying with regulations is a mounting burden for community banks. As a larger bank, those costs are more spread out.

After the closing, the new bank hopes to seek placement on a major exchange such as the New York Stock Exchange