SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to .
Commission File No. 0-28366
Norwood Financial Corp.
- -------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2828306
- ---------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
717 Main Street, Honesdale, Pennsylvania 18431
- ---------------------------------------------- -------------------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (717) 253-1455
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 11, 1997, there were 900,346 issued and outstanding 889,116
shares of the registrant's Common Stock.
The Registrant's voting stock trades under the symbol "NWFL." The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last price the registrant's Common Stock was sold on
March 11, 1997, was $29,785,386 ($33.50 per share based on 889,116 shares of
Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended December 31, 1996. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business.
General
Norwood Financial Corp. (the "Company") is a Pennsylvania corporation
organized in November 1995 at the direction of Wayne Bank ("Wayne Bank" or the
"Bank") to facilitate the reorganization of the Bank into the holding company
form of organization ("Reorganization"). On March 29, 1996, the Bank completed
the Reorganization and became a wholly owned subsidiary of the Company. Prior to
such date, the description of all financial information herein is that of the
Bank.
Wayne Bank is a Pennsylvania chartered commercial bank located in
Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870
as Wayne County Savings Bank. Wayne County Savings Bank changed its name to
Wayne County Bank and Trust in December 1943. In September 1993, the Bank
adopted the name Wayne Bank. The Bank's deposits are currently insured by the
Bank Insurance Fund ("BIF") as administered by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is regulated by the Pennsylvania Department of
Banking ("PDB") and the FDIC.
The Bank is an independent community-oriented bank with six offices in
Wayne County and two offices in Pike County and one office in Susquehanna
County. The Bank primarily serves the Pennsylvania counties of Wayne and Pike
and to a much lesser extent, the counties of Lackawanna, Monroe and Susquehanna.
These offices include three offices acquired from Meridian Bank as of March 25,
1996, one each in the counties of Wayne, Pike and Susquehanna. In addition, the
Bank operates three automated teller machine only remote service facilities with
one in Wayne County and two in Pike County.
The Bank offers a wide variety of personal, business credit services and
trust and investment products to the consumers, businesses, nonprofit
organizations, and municipalities in each of the communities that the Bank
serves. At December 31, 1996, the Bank had total assets, deposits, and
stockholders equity of $260.1 million, $229.3 million, and $21.5 million,
respectively.
Competition
The Company's primary market area of Wayne and Pike Counties,
Pennsylvania, is rural and derives a significant portion of its economic base
from businesses which serve the leisure time and youth camp markets. The market
place has a large amount of seasonal dwellings, marina and lake activity,
hunting, fishing, skiing and camping - tourism related activity. Wayne County
will be more accessible to the western areas of Scranton and Wilkes-Barre with
the completion prior to 1999 of the Lackawanna Industrial Highway. Pike County
continues to experience growth above the state average through migration of
residents from neighboring New York and New Jersey. The retail and services
industries are growing accordingly. Pike County is within daily commuting
distance of the New York/Northern New Jersey metropolitan area.
The Bank is one of 16 financial institutions serving its immediate market
area. The competition for deposit products comes from 10 commercial banks in the
market area, one savings association and five credit unions. Deposit competition
also includes a variety of insurance products sold by local agents and
investment products such as mutual funds, annuity products and other securities
sold by local and regional brokers. The Bank prices its deposit products, both
rates paid and service charges to be competitive in its market area.
1
<PAGE>
The Bank is in a competitive environment for loan products. The Bank
prices its loans to be competitive with local and regional competition, while
remaining aware of risk elements.
Personnel
As of December 31, 1996, the Bank had 104 full-time and 39 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group.
Lending Activities
The Bank's loan products include loans for personal and business use. This
includes mortgage lending to finance principal residence as well as "seasonal"
or second home dwellings. The products include adjustable rate mortgages up to
30 years which are retained and serviced through the Bank. The Bank offers
longer term fixed rate mortgage products, a portion of which may be sold,
servicing retained, in the secondary market through the Federal National
Mortgage Corporation (Fannie Mae) or Federal Home Loan Mortgage Corporation
(Freddie Mac). Fixed rate home equity loans are made on terms up to 180 months,
as well as offering a home equity line of credit. The Bank does a significant
level of indirect dealer financing of automobiles, boats, and recreational
vehicles through a network of over 30 dealers in Northeast Pennsylvania. In
addition to automobile lending, the Bank recently began an auto leasing program
through its dealer network.
Commercial loans and commercial mortgages are provided to local small and
mid-sized businesses at a variety of terms and rate structures. Commercial
lending activities include lines of credit, revolving credit, term loans,
mortgages, various forms of secured lending and letter of credit facilities.
Adjustable-rate mortgage loans decrease the risks associated with changes
in interest rates by periodically repricing, but involve other risks because as
interest rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default. At the same time, the marketability of the
underlying collateral may be adversely affected by higher interest rates. Upward
adjustment of the contractual interest rate is also limited by the maximum
periodic interest rate adjustment permitted by the adjustable-rate mortgage loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. These risks have not had an adverse effect on
the Bank.
Commercial and commercial real estate lending entail significant
additional risks when compared with residential mortgages and consumer lending.
For example, commercial loans typically involve larger loan balances to single
borrowers or groups of related borrowers, the payment experience on such loans
typically is dependent on the successful operation of the project and these
risks can be significantly impacted by the cash flow of the borrowers and supply
and demand conditions in the market. A number of the Bank's commercial lending
customers operate businesses related to leisure time and vacation related
industries. As such they maybe subject to seasonal fluctuation in cash flow and
are in part dependent on consumer vacation patterns.
2
<PAGE>
Types of Loans and Leases. Set forth below is selected data relating to
the composition of the Bank's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------------------ ---------------- --------------- ---------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in Thousands)
Type of Loans and Leases:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural.... $ 29,679 16.8% $ 33,891 22.0% $ 31,378 22.2% $ 31,421 23.0 $ 33,426 24.4
Real Estate-construction ................. 1,602 .9% 1,380 0.9 3,480 2.5 1,748 1.3 -- --
Real Estate-mortgage ..................... 91,401 51.6% 94,822 61.6 90,908 64.3 89,677 65.6 88,752 64.8
Installment Loans to Individuals ......... 37,502 21.1% 23,800 15.5 15,543 11.0 13,948 10.2 14,770 10.8
Leases to Individuals (Net of unearned).... 16,981 9.6% -- -- -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total Loans ........................... 177,165 100% 153,892 100% 141,309 100% 136,794 100% 136,948 100%
==== ==== ==== ==== ====
Less: Unearned income ................... 2,611 1,798 608 799 1,037
Allowance for loan losses ............. 2,616 2,125 1,893 1,864 2,342
-------- -------- -------- -------- --------
Total loans, net ......................... $171,938 $149,969 $138,808 $134,131 $133,569
======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
Maturities and Sensitivities of Loans and Leases to Changes in Interest
Rates. The following table sets forth maturities and interest rate sensitivity
for all categories of loans as of December 31, 1996. Scheduled repayments are
reported in the maturity category in which payment is due.
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Commercial, Financial
and Agricultural $ 5,881 $ 18,067 $ 5,731 $ 29,679
Real Estate - 1,602 --- --- 1,602
Construction
Real Estate Mortgage 7,662 32,111 51,628 91,401
Leases (net) 4,175 12,806 --- 16,981
Installment loans to
individuals 9,184 26,978 1,340 37,502
-------- -------- -------- --------
Total $ 28,504 $ 89,962 $ 58,699 $177,165
======== ======== ======== ========
Loans with fixed-rate $17,359 $52,494 $ 15,590 $ 85,443
Loans with floating
rates 11,145 37,468 43,661 91,722
-------- -------- -------- --------
Total $ 28,504 $ 89,962 $59,251 $177,165
======== ======== ======= ========
4
<PAGE>
Nonaccrual, Past Due and Restructured Loans. The following table sets
forth information regarding non-accrual loans, other real estate owned ("OREO"),
and loans that are 90 days or more delinquent but on which the Bank was accruing
interest at the dates indicated and restructured loans. The Bank had no troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No.
114, "Accounting by Creditors for Impairment of a Loan."
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C>
Commercial and all other ................................. $ 1,633 $ 1,572 $ 2,754 $ 3,276 $ 611
Real estate .............................................. 1,790 2,205 2,175 2,631 2,078
Consumer ................................................. 28 48 -- -- 1
------- ------- ------- ------- -------
Total ...................................................... $ 3,451 $ 3,825 $ 4,929 $ 5,907 $ 2,690
======= ======= ======= ======= =======
Accruing loans which are contractually past 90 days or more:
Commercial and all other ................................ $ 38 $ 55 $ 553 $ 609 $ 2,444
Real estate ............................................. -- -- 2,716 2,061 1,450
Consumer ................................................ 4 -- 7 5 141
------- ------- ------- ------- -------
Total ...................................................... $ 42 $ 55 $ 3,276 $ 2,675 $ 4,035
======= ======= ======= ======= =======
Total non-performing loans ................................. $ 3,493 $ 3,880 $ 8,205 $ 8,582 $ 6,725
Other real estate owned .................................... 2,283 1,944 1,377 $ 1,715 $ 1,520
------- ------- ------- ------- -------
Total non-performing assets ................................ $ 5,776 $ 5,824 $ 9,582 $10,297 $ 8,245
======= ======= ======= ======= =======
Total non-performing loans to total loans................... 1.98% 2.55% 5.83% 6.31% 4.95%
Total non-performing loans to total assets.................. 1.34% 1.79% 4.18% 4.43% 3.61%
Total non-performing assets to total assets................. 2.22% 2.68% 4.89% 5.32% 4.42%
</TABLE>
Potential Problem Loans. As of December 31, 1996, there were no loans not
previously disclosed, where known information about possible credit problems of
borrowers causes management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms.
Impaired Loans. At December 31, 1996 and 1995 the recorded investment in
loans considered impaired in accordance with Statement No. 114 and 118 were
$2,877,248 and $3,713,104 respectively.
5
<PAGE>
Analysis of the Allowance for Loan and Lease Losses. The following table
sets forth information with respect to the Bank's allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans and leases net of unearned outstanding......... $ 174,621 $ 152,094 $ 140,701 $ 135,995 $ 135,911
Average loans and leases outstanding ...................... 160,517 145,990 136,314 135,659 134,928
Allowance balances at beginning of period ................. 2,125 $ 1,893 $ 1,864 $ 2,342 $ 2,000
Charge-offs:
Commercial and all other ............................... (820) (448) (709) (767) (1,112)
Real estate ............................................ (226) (353) (306) (587) (130)
Consumer ............................................... (320) (123) (82) (79) (89)
--------- --------- --------- --------- ---------
Total ..................................................... (1,366) (924) (1,097) (1,433) (1,331)
Recoveries:
Commercial and all other ................................ 70 513 31 24 12
Real estate ............................................. 16 3 3 0 0
Consumer ................................................ 60 21 22 16 11
--------- --------- --------- --------- ---------
Total ..................................................... 146 537 56 40 23
Provisions charged to expense ............................. 1,710 619 1,070 915 1,650
--------- --------- --------- --------- ---------
Allowance balance at end of period ........................ $ 2,615 $ 2,125 $ 1,893 $ 1,864 $ 2,342
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding .............................. 1.50% 1.40% 1.35% 1.37% 1.72%
Net loans charged off as a percent of
average loans outstanding ............................... .76% 0.27% 0.76% 1.03% 0.97%
</TABLE>
6
<PAGE>
Allocation of the Allowance For Loan and Lease Losses. The following table sets
forth the allocation of the Bank's allowance for loan and lease losses by
category and the percent in each category to total at the date indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ---------------- ----------------- ---------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 871 16.8% $ 927 22.0% $ 793 22.2% $ 963 23.0% $ 609 24.4%
Real Estate - Construction 38 .9% 14 0.9 29 2.5 19 1.3 -- --
Real Estate - Mortgage 727 51.6% 909 61.6 759 64.3 810 65.6 1,205 64.8
Installment loans to individual260 21.1% 155 15.5 87 11.0 72 10.2 160 10.8
Leases 85 9.6% -- -- -- -- -- -- -- --
Unallocated 635 -- 120 -- 225 -- -- -- 367 --
-------- ---- ------- -- ------ ---- ------ ---- ------ ----
Total $ 2,615 100% $ 2,125 100.0% $1,893 100.0% $1,864 100.0% $2,342 100.0%
======== === ======= ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -------------------------
(1) Includes specific reserves for assets classified as loss.
7
<PAGE>
Investment Activities
General. The Company maintains a portfolio of investment securities
consisting principally of obligations of the U.S. Government and its agencies
and obligations of state, counties and municipalities including school
districts. The Company considers its investment portfolio a source of earnings
and liquidity.
Securities Portfolio. Carrying values of securities at the dates indicated
are as follows:
At December 31
----------------------------
1996 1995 1994
-------- ------- --------
Investment Securities:
(carrying value)
U.S. Government Securities ... $ 3,993 $ 5,521 $15,288
Obligations of U.S. ..........
Government Agencies .......... 25,858 18,717 2,954
Obligations of state and
political subdivisions ....... 13,979 12,003 9,390
Corporate Notes and bonds .... 503 972 8,458
Mortgage-backed Securities ... 11,359 9,028 --
Equity Securities ............ 2,018 2,640 2,569
------- ------- -------
Total Investment Securities $57,710 $48,881 $38,659
======= ======= =======
Market value of Investment
Securities ..................... $57,945 $49,034 $38,485
======= ======= =======
8
<PAGE>
Maturity Distribution of Securities. The following table sets forth
certain information regarding carrying values, weighted average yields, and
maturities of the Company's investment securities portfolio at December 31,
1996. All yields are stated on a fully taxable equivalent basis using a Federal
tax rate of 34%. Actual maturities may differ from contractual maturities as
certain instruments have call features which allow prepayment of obligations.
Maturity as shown below is based upon expected average lives rather than
contractual terms. Equity securities with no stated maturity are classified as
"One year or less."
<TABLE>
<CAPTION>
After One through After Five through Total
One Year or Less Five Years Ten Years After Ten Years Investment Securities
----------------- ------------------- ------------------ ------------------ --------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Securities $ 501 5.51 % $ 3,492 5.85% $ -- --% $ -- -- $ 3,993 5.81%
Obligations of U.S. -- -- 14,516 6.50% 10,062 7.37% 1,280 7.02% 25,858 6.86%
Government Agencies
Obligations of state and 500 7.47% 500 7.43% 982 7.62% 11,997 8.27% 13,979 8.17%
political subdivisions(3)
Corporate Notes and bonds 503 5.51% -- -- -- 503 5.51%
Mortgage-backed Securities(1) 441 7.24% 6,747 6.92% 1,291 7.34% 2,880 7.45% 11,359 7.11%
Equity Securities(2) 2,018 4.95% -- --% -- --% -- --% 2,018 4.95%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total Investment Securities $ 3,963 5.66% $25,255 6.54% $12,335 7.39% $16,157 8.02% $57,710 7.07%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
Actual maturities may differ from contractual maturities as certain instruments
have call features which allow prepayment of obligations.
1. Maturity is based upon expected average lives rather than contractual terms.
2. Equity securities with no stated maturity are classified as 'One year or
less'.
3. Includes $8,804,889 in securities classified as held-to-maturity with a
market value of $9,040,338.
9
<PAGE>
Deposit Activities.
General. The Bank provides a full range of deposit products to its retail
and business customers. These include interest-bearing and non-interest bearing
transaction accounts, statement savings and money market accounts. Certificate
of deposit terms range up to 5 years for retail and IRA instruments. The Bank
participates in Jumbo CD ($100,000 and over) markets with local municipalities
and school districts. Other services the Bank offers its customers on a limited
basis include cash management, direct deposit, ACH activity and payroll
processing. The Bank operates eleven automated teller machines and is affiliated
with MAC, PLUS and CIRRUS networks.
Maturities of Time Deposits. The following table indicates the amount of
the Bank's certificates of deposit in amounts of $100,000 or more and other time
deposits of $100,000 or more by time remaining until maturity as of December 31,
1996.
Certificates
of Deposits
-------------
Maturity Period (In Thousands)
Within three months............................ $ 14,735
Over three through six months.................. 7,226
Over six through twelve months................. 4,080
Over twelve months............................. 2,849
-----------
$ 28,890
===========
Short-Term Borrowings
The following table sets forth information concerning only short-term
borrowings (those maturing within one year) which consist principally of federal
funds purchased, securities sold under agreements to repurchase and U.S.
Treasury demand notes, that the Company had during the periods indicated.
Year ended December 31,
-----------------------------
1996 1995 1994
------ ------- ------
Short-term borrowings:
Average balance outstanding ......... $ 4,902 $ 2,631 $ 2,110
Maximum amount outstanding at any
month-end during the period ....... 11,967 9,277 2,819
Weighted average interest rate during
the period .......................... 5.04% 5.53% 3.57%
Total short-term borrowings at end of
period ................................ $ 3,227 $ 2,031 $ 1,589
10
<PAGE>
Trust Activities
The Bank operates a Trust Department which provides estate planning,
employee benefit plan administration, investment management and financial
planning to Bank customers. At December 31, 1996, the Bank acted as trustee for
$44.3 million of assets.
Subsidiary Activities
The Bank, a Pennsylvania chartered bank, is the only wholly owned
subsidiary of the Company. Norwood Investment Corp. ("NIC"), incorporated in
1996, is a Pennsylvania licensed insurance agency, a wholly-owned subsidiary of
the Bank. NIC business is annuity and mutual fund sales primarily to customers
of the Bank. The annuities, mutual funds and other investment products are not
insured by the FDIC or any other government agency. They are not deposits,
obligations of or guaranteed by any bank. The securities are offered through
CoreLink Financial Inc., a registered broker/dealer.
WCB Realty Corp. is a wholly-owned real estate subsidiary of the Bank whose
principal asset is the administrative offices of the Company.
Personnel
As of December 31, 1996, the Company and the Bank had 104 full-time and 39
part-time employees. None of the Company employees are represented by a
collective bargaining group. The Company believes that its relationship with its
employees is good.
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
- -------------------------
General. The Company is a bank holding company within the meaning of
Pennsylvania Banking Code of 1965 and the Bank Holding Company Act of 1956 (the
"Act"). As such, the Company is subject to regulation by the PDB and the Board
of Governors of the Federal Reserve System ("FRB"). As an FDIC insured
subsidiary of a bank holding company, the Bank is subject to certain
restrictions in dealing with the Company and with other persons from time to
time affiliated with the Bank, and is subject to examination and supervision by
the PDB and the FDIC. In addition, the FRB has enforcement authority over the
Company and its non-bank subsidiaries which also permits the FRB to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
bank. This regulation and oversight is intended primarily for the protection of
the depositors of the Bank and not for stockholders of the Company.
A bank holding company is prohibited under the Act from engaging in or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in non-banking activities unless the FRB, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making such
determinations, the FRB considers whether the performance of these activities by
a bank holding company would offer benefits to the public that outweigh the
possible adverse effects. See "- Permitted Non-Banking Activities."
11
<PAGE>
As a bank holding company, the Company is required to file with the FRB an
annual report and any additional information as the FRB may require pursuant to
the Act. The FRB also examines the Company and its subsidiaries.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Act on extensions of credit to the bank holding
company or any of its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries, and on the taking of
such stock or securities as collateral for loans to any borrower. Furthermore,
under amendments to the Act and regulations of the FRB, a bank holding company
and its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit or provision of credit or providing
any property or services. Generally, this provision provides that a bank may not
extend credit, lease or sell property, or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to the bank holding company, or to any other subsidiary of the bank
holding company or on the condition that the customer not obtain other credit or
service from a competitor of the bank, the bank holding company, or any
subsidiary of the bank.
Permitted Non-Banking Activities. The FRB permits bank holding companies
to engage in non-banking activities or businesses so closely related to banking
or to managing or controlling banks so as to be a proper incident thereto. FRB
approval notice is required before the Company or a non-bank subsidiary of the
Company may engage in any such activities or before such a business may be
acquired. The FRB is authorized to differentiate between activities that are
initiated by a bank holding company or a subsidiary and activities commenced by
acquisition of a going concern.
Regulatory Capital Requirements. The FRB has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The FRB capital adequacy guidelines are similar to those imposed on
the Bank by the FDIC. See "Regulation of the Bank - Regulatory Capital
Requirements."
Commitments to Affiliated Depository Institutions. Under FRB policy, the
Company will be expected to act as a source of financial strength to the Bank
and to commit resources to support the Bank in circumstances when it might not
do so absent such policy. The enforceability and precise scope of this policy is
unclear, however, in light of recent judicial precedent; however, should the
Bank require the support of additional capital resources, it should be
anticipated that Company will be required to respond with any such resources
available to it.
Pennsylvania Regulation of Acquisition of the Company. The Company is
organized under Pennsylvania law. Because the Company will not be a "registered
company" under Pennsylvania law, the Company included in its Articles of
Incorporation certain provisions governing mergers, takeovers, business
combinations, and other similar transactions applicable to registered companies
in Pennsylvania.
Federal Securities Law. The Company Common Stock is registered under the
1934 Act and therefore, the Company is subject to the information, reporting,
proxy solicitation, and insider trading restrictions and requirements under the
1934 Act.
Regulation of the Bank
- ----------------------
General. As a Pennsylvania chartered, BIF-insured bank, the Bank is
subject to extensive regulation and examination by the PDB, the FDIC, which
insures its deposits to the maximum extent permitted by law, and to a much
lesser extent, by the FRB. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments,
12
<PAGE>
the reserves required to be kept against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
stockholders. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the PDB, the
FDIC or the United States Congress could have a material adverse impact on the
Company, the Bank and their operations.
Pennsylvania Banking Law. The Pennsylvania Banking Code ("Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, and employees, as well as
corporate powers, savings and investment operations and other aspects of the
Bank and its affairs. The Banking Code delegates extensive rule-making power and
administrative discretion to the PDB so that the supervision and regulation of
state chartered bank may be flexible and readily responsive to changes in
economic conditions and in savings and lending practices.
The PDB generally examines each bank not less frequently than once every
two years. The Banking Code permits the PDB to accept the examinations and
reports of the FDIC in lieu of the PDB's examination. The present practice is
for the PDB to conduct individual examinations. The PDB may order any bank to
discontinue any violation of law or unsafe or unsound business practice and may
direct any director, trustee, officer, attorney or employee of a bank engaged in
an objectionable activity, after the PDB has ordered the activity to be
terminated, to show cause at a hearing before the PDB why such person should not
be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with commercial banks authorizes (I) a bank or holding company thereof
located in another state (a "foreign institution") to acquire the voting stock
of, merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered bank and (ii) the establishment of branches in
Pennsylvania by foreign institutions, in each case subject to certain conditions
including (A) reciprocal legislation in the state in which the foreign
institution seeking entry into Pennsylvania is located permitting comparable
entry by Pennsylvania savings institutions and (B) approval by the PDB.
Pennsylvania law also provides for nationwide branching by
Pennsylvania-chartered banks, subject to the PDB's approval and certain other
conditions.
On September 29, 1994, the United States Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Law"), which amended various federal banking laws to provide for nationwide
interstate banking, interstate bank mergers and interstate branching. The
Interstate Banking Law will allow, effective September 29, 1995, the acquisition
by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
will be allowed effective June 1, 1997; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting laws that specifically
prohibit such interstate transactions. States may, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. Pursuant to the Interstate Banking Law, states may also
enact legislation to allow for de novo interstate branching by out of state
banks.
13
<PAGE>
Pennsylvania has enacted "opt-in" legislation authorizing full interstate
branching for state-chartered financial institutions prior to June 1, 1997. This
legislation allows out-of-state banks to branch into Pennsylvania either by
buying an existing bank or converting it into a branch or by setting up a de
novo branch. The law requires reciprocity from the other state until June 1,
1997. The legislation also allows state-chartered banks the same rights as
federally chartered banks to branch into other states that allow interstate
branching.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the BIF to a maximum of $100,000 for each insured account (as defined by law and
regulation). Regardless of an institution's capital level, insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all insured institutions. Under
applicable regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital (i.e., "well capitalized,"
"adequately capitalized" and "undercapitalized"). These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. Because the BIF exceeded
its statutory required ratio of reserves to insured deposits, the Bank paid
approximately $2,000 in federal deposit insurance premiums for year ended
December 31, 1996.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the Bank will pay, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 6.4 basis points. Based on total deposits as of
December 31, 1996, had the Act been in effect, the Bank's annual deposit
insurance premium would have been approximately $15,000. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance funds
be merged before January 1, 2000, the rate paid by all members of this new fund
to retire the Fico Bonds would be equal.
Regulatory Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy prescribing the capital adequacy requirements for
state-chartered banks, some of which, like the Bank, are not members of the
Federal Reserve System. At December 31, 1996, the Bank exceeded all regulatory
capital requirements and is classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Leverage or core capital is
14
<PAGE>
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill, and certain purchased mortgage
servicing rights and purchased credit and relationships.
The FDIC also requires that state-chartered banks meet a risk-based
capital standard. The risk- based capital standard requires the maintenance of
total capital (which is defined as Tier I capital and supplementary (Tier 2)
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
A bank which has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
The following table sets forth the Company's regulatory capital position
as of December 31, 1996 as compared to the minimum capital requirements imposed
by the FDIC. (The Bank's ratios do not significantly differ from the Company's).
Percent of
Amount Adjusted Assets
------ ---------------
(Dollars in Thousands)
Leverage Capital................... $19,415 7.64%
Required......................... 10,098 4.00%
------- -----
Excess........................... $ 9,317 3.64%
======= =====
Tier 1 Capital..................... $19,415 10.26%
Required......................... 7,572 4.00%
------- -----
Excess........................... $11,843 6.26%
======= =====
Total Capital...................... $21,784 11.51%
Required......................... 15,144 8.00%
------- -----
Excess........................... $ 6,640 3.51%
====== =====
The Bank is also subject to more stringent PDB guidelines. Although not
adopted in regulation form, the PDB utilizes capital standards requiring a
minimum of 6.5% leverage capital and 10% total risk-
15
<PAGE>
based capital. The components of leverage and risk-based capital are
substantially the same as those defined by the FDIC.
The Bank was in compliance in both the FDIC and Pennsylvania capital
requirements at December 31, 1996.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a commercial bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. The Bank
received an "outstanding" rating in its last CRA examination in May, 1995.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a bank or its subsidiaries and its
affiliates be on terms as favorable to the Bank as transactions with
non-affiliates. In addition, certain of these transactions are restricted to a
percentage of the Bank's capital. Affiliates of the Bank include the Company and
any company which would be under common control with the Bank.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed.
Federal Reserve System. The FRB requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, interest-bearing checking accounts)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy the liquidity
requirements that are imposed by the PDB. At December 31, 1996, the Bank met its
reserve requirements.
Item 2. Description of Properties
- -----------------------------------
The Bank operates from its main office located at 717 Main Street,
Honesdale, Pennsylvania and eight additional branch offices. The Bank's total
investment in office property and equipment is $12.5 million with a net book
value of $7.8 million at December 31, 1996. The Bank currently operates
automated teller machines at seven of its branch offices and three automated
teller machine only facilities.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Market and Dividend Information" in
the Registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1996 ("Annual Report") on page 11, and is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Annual Report on page 1, and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The table that follows sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which are
expected to reprice or mature in each of the future time periods shown.
The table also indicates the time periods in which interest-earning assets
and interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The assumptions used in the table are included in the notes
thereto. Management believes that the assumptions used to evaluate the
vulnerability of the Bank's operations to changes in interest rates are
reasonable. The interest rate sensitivity of the Bank's assets and liabilities
as shown in the table below could vary substantially if differing assumptions
were used or if actual experience differs from the assumptions used in the
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in differing degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Further, in the event of a significant change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the table. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase.
17
<PAGE>
<TABLE>
<CAPTION>
Less than 90 Days One to Over
90 Days to 1 Year Five Years Five Years Total
------------ ------------ ------------ ----------- ---------
($ 000)
Interest Earning Assets
<S> <C> <C> <C> <C> <C>
Money Market Instruments ................ $ 8,037 $ 0 $ $ $ 8,037
Loans and Leases ........................ 47,334 46,297 62,984 17,939 174,554
Investment Securities ................... 3,511 9,963 26,116 18,120 57,710
--------- --------- --------- --------- ---------
Total Rate Sensitive Assets .......... 58,882 56,260 89,100 36,059 240,301
Interest bearing Liabilities
Time Deposits ........................... 34,668 52,964 25,742 113,374
Interest-bearing checking ............... 1,011 3,030 16,161 20,202
Money market and statement
savings ............................... 6,192 18,585 45,721 70,498
Other Borrowed Funds .................... 3,227 150 2,292 5,669
--------- --------- --------- --------- ---------
Total rate sensitive liabilities...... $ 45,098 $ 74,579 $ 87,774 $ 2,292 $ 209,743
========= ========= ========= ========= =========
Incremental Gap ............................ $ 13,784 $ (18,319) $ 1,326 $ 33,767
========= ========= ========= =========
Cumulative Gap ............................. $ 13,784 $ (4,535) $ (3,209) $ 30,558
========= ========= ========= =========
Rate sensitive assets/rate sensitive
liabilities on a cumulative basis .......... 130.56% 96.21% 98.45% 114.57%
</TABLE>
Except as set forth above, the above-captioned information appears under
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on pages 6 through 12 and is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of Norwood Financial Corp. and its
subsidiaries, together with the report thereon by S.R. Snodgrass, A.C. appears
in the Annual Report on pages 13 through 26 and are incorporated herein by
reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director, Directors Continuing in Office and Executive
Officers" at pages 3 to 6 of the Registrant's definitive proxy statement for the
Registrant's Annual Meeting of Stockholders to be held on April 22, 1997 (the
"Proxy Statement"), which was filed with the Commission on March 31, 1997 and
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 6 through 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement at pages 3 through 4.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement at page
11.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
PAGE
Independent Auditors' Report......................................... 13
Consolidated Balance Sheets as of December 31, 1996 and 1995......... 14
Consolidated Statements of Income For the Years Ended
December 31, 1996, 1995 and 1994................................... 15
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994............... 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................... 17
Notes to Consolidated Financial Statements........................... 18-26
The remaining information appearing in the Annual Report is not deemed to
be filed as part of this report, except as expressly provided herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of Norwood Financial Corp.*
3.2 Bylaws of Norwood Financial Corp.*
4.0 Specimen Stock Certificate of Norwood Financial Corp.*
10.1 Employment Agreement with William W. Davis, Jr., President and Chief
Executive Officer
10.2 Employment Agreement with Lewis J. Critelli, Senior Vice Presiden
and Chief Financial Officer
10.3 Form of Change-in-Control Severance Agreement with 9 key employees
of the Bank
10.4 Consulting Agreement with Russell L. Ridd
10.5 Wayne Bank Stock Option Plan*
11.0 Statement regarding computation of earnings per share (see Note 1 to
the Notes to Consolidated Financial Statements in the Annual Report)
13.0 Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1996
21.0 Subsidiary of the Registrant (see "Item 1. Business - General" and
"-Subsidiary Activity" herein)
20
<PAGE>
27.0 Financial Data Schedule**
(b) Reports on Form 8-K.
None.
- ----------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form 10, Registration Statement, initially filed with the Commission on
April 29, 1996, Registration No. 28366.
** Only in electronic filing.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORWOOD FINANCIAL CORP
Dated: March 11, 1997 By:/s/ William W. Davis, Jr.
--------------------------------
William W. Davis, Jr.
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ William W. Davis, Jr. By: /s/ Lewis J. Critelli
---------------------------------- --------------------------------
William W. Davis, Jr. Lewis J. Critelli
President, Chief Executive Officer Senior Vice President and Chief Financial Officer
and Director (Principal Financial and Accounting Officer)
(Principal Executive Officer)
Date: March 11, 1997 Date: March 11, 1997
By: /s/ By: /s/ John E. Marshall
----------------------------------- -------------------------------
Charles E. Case John E. Marshall
Director Director
Date: March ____, 1997 Date: March 11, 1997
By: /s/ Daniel J. O'Neill By: /s/ Dr. Kenneth A. Phillips
----------------------------------- --------------------------------
Daniel J. O'Neill Dr. Kenneth A. Phillips
Director Director
Date: March 14, 1997 Date: March 11, 1997
By: /s/ Gary R. Rickard By: /s/ Russell L. Ridd
----------------------------------- -------------------------------
Gary R. Rickard Russell L. Ridd
Director Chairman of the Board
Date: March 11, 1997 Date: March 11, 1997
</TABLE>
By: /s/ Harold A. Shook By: /s/ John J. Weidner
---------------------------------- -------------------------------
Harold A. Shook John J. Weidner
Director Director
Date: March 11, 1997 Date: March 11, 1997
EXHIBIT 10.1
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 29th day of July , 1996 but commencing
August 26, 1996, (the "Effective Date"), by and between William W. Davis, Jr.
(the "Employee"), Wayne Bank
(the "Bank"), and Norwood Financial Corp. (the "Company").
WHEREAS, the Bank desires to employ the Executive initially as its
President and Chief Executive Officer under the terms and conditions set forth
herein; and
WHEREAS, the Executive desires to serve the Bank in an executive
capacity under the terms and conditions set forth in this agreement.
WHEREAS, the Boards of Directors of the Bank and of the Company believe
it is in their mutual best interests to enter into this Agreement with the
Employee in order to assure continuity of management and to reinforce and
encourage the continued attention and dedication of the Employee to his assigned
duties; and
WHEREAS, the parties desire by this writing to set forth employment
relationships between the Employee, the Bank and the Company.
NOW, THEREFORE, it is AGREED as follows:
POSITION AND DUTIES The Executive shall initially serve as the President and
Chief Executive Officer of the Bank, reporting only to the Board of Directors of
the Bank; shall have supervision and control over, and responsibility for, the
general management and operation of the Bank; and shall have such other powers
and duties as may from time to time be prescribed by the Board of Directors of
the Bank, provided that such duties are consistent with the Executive's position
as the President and Chief Executive Officer in charge of the general management
of the Bank.
1. Defined Terms
When used anywhere in this Agreement, the following terms shall have the
meaning set forth herein.
(a) "Change in Control" shall mean any one of the following
events: (I) the acquisition of ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Existing Board") cease for any reason
to
-1-
<PAGE>
constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the foregoing,
in the case of (I), (ii) and (iii) hereof, ownership or control of the Bank by
the Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(c) "Code ss.280G Maximum" shall mean product of 2.99 and his
"base amount" as defined in Code ss.280G(b)(3).
(d) "Good Reason" shall mean any of the following events, which
has not been consented to in advance by the Employee in writing: (I) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than sixty (60) miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the Change in Control
or as the same may be increased from time to time; (iii) the failure by the Bank
or the Company to continue to provide the Employee with compensation and
benefits provided for on the date of the Change in Control, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the Bank
or the Company which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the Change in Control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Bank or the Company, if the Employee is serving on such Board
on the date of the Change in Control; (vi) a material diminution or reduction in
the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank or the
Company; or (vii) a material reduction in the secretarial or other
administrative support of the Employee. In addition, "Good Reasons" shall mean
an impairment of the Employee's health to an extent that it makes continued
performance of his duties hereunder hazardous to his physical or mental health.
(e) "Just Cause" shall mean, in the good faith determination of
the Bank's Board of Directors, the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and- desist order, or material breach of any provision of this Agreement.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. No act, or failure to act, on the
Employee's part shall be considered "willful" unless he has acted, or failed to
-2-
<PAGE>
act, with an absence of good faith and without a reasonable belief that his
action or failure to act was in the best interest of the Bank and the Company.
(f) "Protected Period" shall mean the period that begins on the
date six months before a Change in Control and ends on the later of the first
annual anniversary of the Change in Control or the expiration date of this
Agreement.
2. Employment. The Employee is employed as the President and Chief
Executive Officer of the Bank and of the Company. In each capacity, the Employee
shall render such administrative and management services for the Bank and the
Company as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank and the Company. The Employee's other duties shall be such as the
Boards of Directors of the Bank and the Company may from time to time reasonably
direct, including normal duties as an officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $ 135,000.00 per annum, payable
in cash not less frequently than monthly. The Board of Directors of the Bank
shall review, not less often than annually, the rate of the Employee's salary,
and shall increase the employee's base salary by no less than $6,000.00 per year
for 1997, 1998, 1999, 2000, 2001. The Company hereby agrees that, in lieu of
paying the Employee a base salary during the term of this Agreement, it shall be
jointly and severally liable with the Bank for the payment of all amounts due
under this Agreement. Nevertheless, the Board of Directors of the Company may in
its discretion at any time during the term of this Agreement agree to pay the
Employee a base salary for the remaining term of this Agreement. If the Board of
Directors of the Company agrees to pay such salary, the Board shall thereafter
review, not less often than annually, the rate of the Employee's salary, and in
its sole discretion may decide to increase his salary.
Notwithstanding the foregoing, following a Change in Control, the Boards
of Directors of the Bank and the Company shall continue to annually review the
rate of the Employee's salary, and shall increase said rate of salary by a
percentage which is not less than the average annual percentage increase in
salary that the Employee received over the three calendar years immediately
preceding the year in which the Change in Control occurs.
4. Discretionary Bonuses. The Employee shall participate in an equitable
manner with all other senior management employees of the Bank and in
discretionary bonuses that the Boards of Directors of the Bank and the Company
may award from time to time to their senior management employees. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses. Notwithstanding
the foregoing, following a Change in Control, the Employee shall receive
discretionary bonuses that are made no less frequently than, and in annual
amounts not less than, the average annual discretionary bonuses
-3-
<PAGE>
paid to the Employee during the three calendar years immediately preceding the
year in which the Change in Control occurs.
5. Participation in Retirement, Medical and Other Plans.
(a) During the term of this Agreement, the Employee shall be
eligible to participate in the following benefit plans: group hospitalization,
disability, health, dental, sick leave, life insurance, travel and/or accident
insurance, auto allowance/auto lease, retirement, pension, and/or other present
or future qualified plans provided by the Bank, generally which benefits, taken
as a whole, must be at least as favorable as those in effect on the Effective
Date and the Company.
(b) The Employee shall be eligible to participate in any fringe
benefits which are or may become available to the Bank's and the Company's
senior management employees, including for example: any stock option or
incentive compensation plans, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank and the Company. Additionally, the Employee shall be
entitled to:
(1) Banking Industry Functions. The Employee may devote
reasonable time to attending conventions, seminars and meetings sponsored by the
Pennsylvania Bankers Association, the American Bankers Association and other
banking or educational organizations at the expense of the Bank.
(2) Club Membership. The Bank shall provide the Employee with
application fees, bond costs and annual dues in connection with his membership
in the Honesdale Golf Club and such other private clubs, social, civic and
community organizations that the Board of Directors of the Bank may reasonably
determine during the term of employment hereunder.
(3) Automobile. The Executive shall be furnished a new
executive quality automobile with insurance, maintenance, fuel and all fees and
costs paid by the Bank. Said car to be replaced upon the sooner of three (3)
years, 50,000 miles or excessive maintenance costs.
(4) Other Perquisites and Benefits. The Executive shall be
entitled to receive such other perquisites and fringe benefits as the Board of
Directors of the Bank reasonably deems appropriate in its sole discretion.
(5) Employee is entitled to be reimbursed for reasonable moving
expenses up to a maximum of $2,000.00.
6. Term. The Bank and the Company hereby employ the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective
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<PAGE>
Date and ending sixty months thereafter (or such earlier date as is determined
in accordance with Section 10 or 12).
In the event the Employee serves the full term of this Agreement, and
the Bank does not offer to renew this Agreement upon substantially the same
terms and conditions for an additional five (5) year term, the Employee shall be
entitled to a severance allowance of up to twelve (12) months of his then
current base annual salary, plus such vested employee benefits to which the
Employee may be entitled when due and payable, and the Bank shall have no
further obligations to the Employee under this Agreement, EXCEPT that in such
event, the Bank shall provide, at the Employee's request, out-placement services
to the Employee through Drake, Beam, and Moran, New York, New York, or such
comparable out-placement service as the parties shall select. The Bank's costs
for such services shall not exceed 17% of the Employee's then current base
annual salary.
7. Loyalty; Noncompetition; Nondisclosure.
(a) Loyalty. During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote substantially all his full business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder; provided, however, from time to time, Employee may serve on the
boards of directors of, and hold any other offices or positions in, companies or
organizations, which will not present any conflict of interest with the Bank,
the Company or any of their subsidiaries or affiliates or unfavorably affect the
performance of Employee's duties pursuant to this Agreement, or will not violate
any applicable statute or regulation. "Full business time" is hereby defined as
that amount of time usually devoted to like companies by similarly situated
executive officers. Except with the prior written approval of the Board of
Directors of the Bank, the Executive shall not engage in any other business or
commercial activities, duties or pursuits, during the term of this Agreement.
Under no circumstances may the Employee engage in any business or commercial
activities, duties or pursuits which compete with the business or commercial
activities of the Bank nor may the Employee serve as a director or officer or in
any other capacity in a company or financial institution which competes with the
Bank. Investments and personal activities not resulting in material compensation
or a conflict of interest with the Bank shall not be deemed a breach of the
restrictions of this paragraph. Participation in trade associations, charitable,
civil or similar not-for-profit, philanthropic or eleemosynary organizations,
including service as an officer or director, shall not be deemed a breach of
this Agreement, but the total amount of time spent by the Employee in such
activities during normal working hours shall be periodically reviewed by the
Board of Directors of the Bank.
(b) Noncompetition. The Employee covenants and agrees as follows:
the Employee shall not directly or indirectly, within the marketing area of the
Bank or the Company (defined as Wayne County, Pennsylvania) or any future
marketing area of the Bank or the Company (defined as an area within twenty (20)
miles of any branch office located outside of Wayne County, Pennsylvania and
begun during the Employee's employment under the terms of this Agreement), enter
into or engage generally in competition with the Bank or the Company either as a
sole proprietor or as a partner or joint venturer, or as a director, officer,
shareholder (except as a shareholder of less than
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<PAGE>
five percent (5%) of the outstanding shares of a corporation if Executive is not
an employee, officer or director of such corporation), employee or agent for any
person, for a period of one (1) year after the date of termination of his
employment if (I) the Employee's employment is terminated for Just Cause
pursuant to Section 10 of this Agreement, or (ii) such termination is the result
of a resignation by the Employee other than pursuant to subsection 10(d)(2) or
subsection 12(a) of this Agreement. The Employee agrees that any breach of
restrictions set forth in this paragraph shall result in irreparable injury to
the Bank and the Company and for which they shall have not adequate remedy at
law and the Bank and the Company shall be entitled to injunctive relief in order
to enforce the provisions hereof. In the event that this paragraph shall be
determined by any court of competent jurisdiction to be unenforceable in part by
reason of it being too great a period of time or covering too great a
geographical area, it shall be in full force and effect as to that period of
time or geographical area determined to be reasonable by the court.
(c) Unauthorized Disclosure. At no time during the period of his
employment hereunder and thereafter, shall the Employee, without the written
consent of the Boards of Directors of the Bank or a person authorized thereby,
knowingly disclose to any person, other than an employee of the Bank or the
Company or a person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by the Employee of his duties as an executive of
the Bank or the Company, any material confidential information obtained by him
while in the employ of the Bank or the Company with respect to any of the Bank's
or the Company's services, products, improvements, formulas, designs or styles,
processes, customers, methods of distribution of any business practices the
disclosure of which he knows will be materially damaging to the Bank or the
Company; provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by the Employee) or any information of a type not
otherwise considered confidential by persons engaged in the same business or a
business similar to that conducted by the Bank and the Bank.
(d) Nothing contained in this Section shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank or the Company, or, solely as a
passive or minority investor, in any business.
8. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards as the Boards of Directors of the
Bank and the Company may establish from time to time. The Bank and the Company
will provide Employee with the working facilities and staff customary for
similar executives and necessary for him to perform his duties.
9. Vacation and Sick Leave. At such reasonable times as the Board shall
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank, but not less
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<PAGE>
than four weeks in any calendar year (pro-rated in any calendar year during
which the Employee is employed hereunder for less than the entire calendar year
in accordance with the number of days in such year which he is so employed).
(b) The Employee shall not receive any additional compensation from
the Bank or the Company on account of his failure to take a vacation or sick
leave, and the Employee shall not accumulate unused vacation or sick leave from
one fiscal year to the next, except in either case to the extent authorized by
the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank and the Company for such additional
periods of time and for such valid and legitimate reasons as the Board may in
its discretion determine. Further, the Boards of Directors of the Bank and the
Company may grant to the Employee a leave or leaves of absence, with or without
pay, at such time or times and upon such terms and conditions as such Boards in
their discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board of Directors of the Bank and the
Company.
10. Termination and Termination Pay. Subject to Section 12 hereof, the
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
(b) Disability. The Bank and the Company may terminate the
Employee's employment if the Employee becomes totally and permanently disabled.
The Employee shall be deemed totally and permanently disabled if he becomes
unable to perform a substantial portion of his duties under this Agreement and a
physician selected by Bank determines such inability will continue for a period
of six (6) months or more and is likely to be permanent. The Employee shall be
deemed disabled if he qualifies to receive total disability benefits under
Bank's disability insurance plan. Such termination shall be without prejudice to
any right the Employee may have to receive benefits under any disability
insurance plan maintained by Bank or the Company.
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause. For the purposes of this Agreement, the Bank
shall have "Just Cause" to terminate the Employee's employment hereunder upon:
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(1) the willful failure by the Employee to substantially perform
his material duties hereunder other than any such failure resulting from
the Employee's incapacity due to physical or mental illness; or
(2) conviction of a felony; or
(3) the willful violation by the Employee of the provisions of this
Agreement; or
(4) the willful violation by the Employee of material Bank or
Company policy as formally expressed by the Board of Directors of the
Company or the Bank; or
(5) the violation of state or federal banking, tax or financial
laws, regulations or rules in his own conduct or in the operation of the
Bank or the Company, the result of which is materially adverse to the
Bank or the Company; or
None of the above which are capable of being cured shall be grounds for
termination until Bank and the Company give notice thereof to the Employee and
the Employee fails to cure such failure or violation within thirty (30) days of
said notice, or if said failure or violation cannot be cured within thirty (30)
days, within a reasonable time thereafter if the Employee is diligently
attempting to cure the failure or violation.
Bank and the Company may terminate this Agreement without notice and
opportunity to cure upon receipt of a final written directive or order of any
governmental body or entity having jurisdiction over the Bank or the Company
requiring termination or removal of the Employee from the positions referenced
in Section 2 of this Agreement.
(d) Without Just Cause; Constructive Discharge. (1) The Boards of
Directors of the Bank and the Company may, by written notice to the Employee,
immediately terminate his employ ment at any time for a reason other than Just
Cause, in which event the Employee shall be entitled to receive the following
compensation and benefits (unless such termination occurs during the Protected
Period in which event the benefits and compensation provided for in Section 12
shall apply): (I) the salary provided pursuant to Section 3 hereof, up to the
earlier of the expiration date of this Agreement (including any renewal term) of
this Agreement and the date that is 12 months after the employee's last day of
employment, and (ii) long-term disability and such medical benefits as are
available to the Employee under the provisions of COBRA for eighteen (18)
months. All amounts payable to the Employee shall be paid, at the option of the
Employee, either (I) in periodic payments through the Expiration Date, or (II)
in one lump sum within ten (10) days of such termination.
(2) The Employee shall be entitled to receive the compensation
and benefits payable under subsection 10(d)(1) hereof in the event that the
Employee voluntarily terminates employment within 90 days of an event that
constitutes Good Reason, (unless such voluntary termination occurs during the
Protected Period, in which event the benefits and compensation provided for in
Section 12 shall apply).
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<PAGE>
(e) Termination or Suspension Under Federal Law. (1) If the
Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations of the Bank under this Agreement shall terminate as of
the date of default; however, this Paragraph shall not affect the vested rights
of the parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (I) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee. Subject to Section 12(a)(ii)
hereof, the Employee may voluntarily terminate employment with the Bank during
the term of this Agreement, upon at least ninety (90) days' prior written notice
to the Board of Directors, in which case the Employee shall receive only his
compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 10(d)(2) hereof
or within the Protected Period, in which event the benefits and compensation
provided for in Sections 10(d) or 12, as applicable, shall apply).
11. No Mitigation. The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
12. Change in Control Severance Payments.
(a) Trigger Events. The Employee shall be entitled to collect the
severance benefits set forth in Subsection (b) hereof in the event that (I) the
Employee voluntarily terminates employment either for any reason within the
30-day period beginning on the date of a Change in Control, (ii) the Employee
voluntarily terminates employment within 90 days of an event that both occurs
during the Protected Period and constitutes Good Reason, or (iii) the Bank or
the Company or their successor(s) in interest terminate the Employee's
employment without his written consent and for any reason other than Just Cause
during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled
to collect severance benefits pursuant to Section 12(a) hereof, the Bank shall
pay the Employee:
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(I) a severance benefit equal to the difference between the
Code ss.280G Maximum and the sum of any other "parachute payments"
as defined under Code ss.280G(b)(2) that the Employee receives on
account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
Said sum shall be paid in one lump sum within ten (10) days of the
later of the date of the Change in Control and the Employee's last day of
employment with the Bank or the Company. In the event that the Employee, the
Bank, and the Company jointly agree that the Employee has collected an amount
exceeding the Code ss.280G Maximum, the parties may agree in writing that such
excess shall be treated as a loan ab initio which the Employee shall repay to
the Bank, on terms and conditions mutually agreeable to the parties, together
with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control. Not later than
ten business days after a Change in Control, the Bank shall (I) establish a
grantor trust (the "Trust") that is designed in accordance with Revenue
Procedure 92-64 and has a trustee independent of the Bank and the Company, (ii)
deposit in said Trust an amount equal to the Code ss.280G Maximum, unless the
Employee has previously provided a written release of any claims under this
Agreement, and (I) provide the trustee of the Trust with a written direction to
hold said amount and any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust. Upon the earlier of
the Trust's final payment of all amounts due under the following paragraph or
the date 15 months after the Change in Control, the trustee of the Trust shall
pay to the Bank the entire balance remaining in the segregated account
maintained for the benefit of the Employee. The Employee shall thereafter have
no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail return receipt requested. On the tenth
(10th) business day after mailing said notice to the Bank, the trustee of the
Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto the Bank provides the trustee with a
written notice directing the trustee to withhold such payment. In the latter
event, the trustee shall submit the dispute to non-appealable binding
arbitration for a determination of the amount payable to the Employee pursuant
to this Agreement, and the costs of such arbitration shall be paid by the Bank.
The trustee shall choose the arbitrator to settle the dispute, and such
arbitrator shall be bound by the rules of the American Arbitration Association
in making his determination. The parties and the trustee shall be bound by the
results of the arbitration and, within 3 days of the determination by the
arbitrator, the trustee shall pay from the Trust the amounts required to be paid
to the Employee
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<PAGE>
and/or the Bank, and in no event shall the trustee be liable to either party for
making the payments as determined by the arbitrator.
Upon the earlier of (I) any payment from the Trust to the Employee, or
(ii) the date twelve (12) months after the date on which the Bank makes the
deposit referred to in the first paragraph of this subsection 11(d), the trustee
of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
13. Indemnification. The Bank and the Company agree that their
respective Bylaws shall continue to provide for indemnification of directors,
officers, employees and agents of the Bank and the Company, including the
Employee during the full term of this Agreement, and to at all times provide
adequate insurance for such purposes.
14. Additional Offices. The Employee agrees to serve without additional
compensation, if elected or appointed thereto, as an officer in one or more
offices or as a director of any subsidiary of the Company or the Bank; provided,
however, the Employee shall not be required to serve in such additional offices
or as a director of any subsidiary, if such service would expose him, as an
individual, to adverse financial conditions.
15. Reimbursement of Employee for Enforcement Proceedings. In the event
that any dispute arises between the Employee and the Bank as to the terms or
interpretation of this Agreement, whether instituted by formal legal proceedings
or otherwise, including any action that the Employee takes to defend against any
action taken by the Bank or the Company, the Employee shall be reimbursed for
all costs and expenses, including reasonable attorneys' fees, arising from such
dispute, proceedings or actions, provided that the Employee obtains either a
written settlement or a final judgement by a court of competent jurisdiction
substantially in his favor. Such reimbursement shall be paid within ten (10)
days of Employee's furnishing to the Bank written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Employee.
16. Federal Income Tax Withholding. The Bank and the Company may
withhold all federal and state income or other taxes from any benefit payable
under this Agreement as shall be required pursuant to any law or government
regulation or ruling.
17. Successors and Assigns.
(a) Bank and Company. This Agreement shall not be assignable by the
Bank and the Company, provided that this Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Bank and the Company
which shall acquire, directly or indirectly, by merger, consolidation, purchase
or otherwise, all or substantially all of the assets or stock of the Bank.
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<PAGE>
(b) Employee. Since the Bank and the Company are contracting for
the unique and personal skills of the Employee, the Employee shall be precluded
from assigning or delegating his rights or duties hereunder without first
obtaining the written consent of the Bank and the Company; provided, however,
that nothing in this paragraph shall preclude (I) the Employee from designating
a beneficiary to receive any benefit payable hereunder upon his death, or (ii)
the executors, administrators, or other legal representatives of the Employee or
his estate from assigning any rights hereunder to the person or persons entitled
thereunto.
(c) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
18. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
19. Applicable Law. Except to the extent preempted by Federal law, the
laws of the Commonwealth of Pennsylvania shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
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EXHIBIT 10.2
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 14th day of August, 1996 (the
"Effective Date"), by and between Lewis J. Critelli (the "Employee"), Wayne Bank
(the "Bank"), and Norwood Financial Corp. (the "Company").
WHEREAS, the Employee has heretofore been employed by the Bank as its
Chief Financial Officer and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Boards of Directors of the Bank and of the Company believe
it is in their mutual best interests to enter into this Agreement with the
Employee in order to assure continuity of management and to reinforce and
encourage the continued attention and dedication of the Employee to his assigned
duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Employee, the Bank and the Company.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
--------------------
When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Existing Board") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the foregoing,
in the case of (i), (ii) and (iii) hereof, ownership or control of the Bank by
the Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Bank's non-employee directors as
to whether or not a Change in Control has occurred shall be conclusive and
binding.
<PAGE>
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(c) "Code ss.280G Maximum" shall mean product of 2.99 and
his "base amount" as defined in Code ss.280G(b)(3).
(d) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the Change in Control
or as the same may be increased from time to time; (iii) the failure by the Bank
or the Company to continue to provide the Employee with compensation and
benefits provided for on the date of the Change in Control, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the Bank
or the Company which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the Change in Control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Bank or the Company, if the Employee is serving on such Board
on the date of the Change in Control; (vi) a material diminution or reduction in
the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank or the
Company; or (vii) a material reduction in the secretarial or other
administrative support of the Employee. In addition, "Good Reasons" shall mean
an impairment of the Employee's health to an extent that it makes continued
performance of his duties hereunder hazardous to his physical or mental health.
(e) "Just Cause" shall mean, in the good faith
determination of the Bank's Board of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. The Employee shall have no right to receive compensation or
other benefits for any period after termination for Just Cause. No act, or
failure to act, on the Employee's part shall be considered "willful" unless he
has acted, or failed to act, with an absence of good faith and without a
reasonable belief that his action or failure to act was in the best interest of
the Bank and the Company.
(f) "Protected Period" shall mean the period that begins on
the date six months before a Change in Control and ends on the later of the
first annual anniversary of the Change in Control or the expiration date of this
Agreement.
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<PAGE>
2. Employment. The Employee is employed as the Chief Financial Officer
of the Bank and of the Company. In each capacity, the Employee shall render such
administrative and management services for the Bank and the Company as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the Bank and
the Company. The Employee's other duties shall be such as the Boards of
Directors of the Bank and the Company may from time to time reasonably direct,
including normal duties as an officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $77,250.00 per annum, payable in
cash not less frequently than monthly. The Board of Directors of the Bank shall
review, not less often than annually, the rate of the Employee's salary. The
Company hereby agrees that, in lieu of paying the Employee a base salary during
the term of this Agreement, it shall be jointly and severally liable with the
Bank for the payment of all amounts due under this Agreement. Nevertheless, the
Board of Directors of the Company may in its discretion at any time during the
term of this Agreement agree to pay the Employee a base salary for the remaining
term of this Agreement. If the Board of Directors of the Company agrees to pay
such salary, the Board shall thereafter review, not less often than annually,
the rate of the Employee's salary, and in its sole discretion may decide to
increase his salary.
Notwithstanding the foregoing, following a Change in Control, the
Boards of Directors of the Bank and the Company shall continue to annually
review the rate of the Employee's salary, and shall increase said rate of salary
by a percentage which is not less than the average annual percentage increase in
salary that the Employee received over the three calendar years immediately
preceding the year in which the Change in Control occurs.
4. Discretionary Bonuses. The Employee shall participate in an
equitable manner with all other senior management employees of the Bank and in
discretionary bonuses that the Boards of Directors of the Bank and the Company
may award from time to time to their senior management employees. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses. Notwithstanding
the foregoing, following a Change in Control, the Employee shall receive
discretionary bonuses that are made no less frequently than, and in annual
amounts not less than, the average annual discretionary bonuses paid to the
Employee during the three calendar years immediately preceding the year in which
the Change in Control occurs.
5. Participation in Retirement, Medical and Other Plans.
(a) During the term of this Agreement, the Employee shall be
eligible to participate in the following benefit plans: group hospitalization,
disability, health, dental, sick leave, life insurance, travel and/or accident
insurance, auto allowance/auto lease, retirement, pension, and/or other present
or future qualified plans provided by the Bank, generally which
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<PAGE>
benefits, taken as a whole, must be at least as favorable as those in effect on
the Effective Date and the Company.
(b) The Employee shall be eligible to participate in any fringe
benefits which are or may become available to the Bank's and the Company's
senior management employees, including for example: any stock option or
incentive compensation plans, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank and the Company. Additionally, the Employee shall be
entitled to:
(1) Banking Industry Functions. The Employee may devote
reasonable time to attending conventions, seminars and meetings sponsored by the
Pennsylvania Bankers Association, the American Bankers Association and other
banking or educational organizations at the expense of the Bank.
(2) Club Membership. The Bank shall provide the Employee
with application fees, bond costs and annual dues in connection with his
membership in the Honesdale Golf Club and such other private clubs, social,
civic and community organizations that the Board of Directors of the Bank may
reasonably determine during the term of employment hereunder.
(3) Automobile. The Executive shall be furnished a new
executive quality automobile with insurance, maintenance, fuel and all fees and
costs paid by the Bank. Said car to be replaced upon the sooner of three (3)
years, 50,000 miles or excessive maintenance costs.
(4) Other Perquisites and Benefits. The Executive shall be
entitled to receive such other perquisites and fringe benefits as the Board of
Directors of the Bank reasonably deems appropriate in its sole discretion.
6. Term. The Bank and the Company hereby employ the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending sixty months thereafter (or such
earlier date as is determined in accordance with Section 11 or 13).
Additionally, on each annual anniversary date from the Effective Date, the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date provided the Boards of
Directors of the Company and the Bank determine in duly adopted resolutions that
the performance of the Employee has met requirements and standards of such
boards, and that this Agreement shall be extended. Only those members of the
Board of Directors who have no personal interest in this Employment Agreement
shall discuss and vote on the approval and subsequent review of this Agreement.
In the event the Employee serves the full term of this Agreement, and
the Bank does not offer to renew this Agreement upon substantially the same
terms and conditions for an additional
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<PAGE>
five (5) year term, the Employee shall be entitled to a severance allowance of
up six (6) months of his then current base annual salary, plus such vested
employee benefits to which the Employee may be entitled when due and payable,
and the Bank shall have no further obligations to the Employee under this
Agreement, EXCEPT that in such event, the Bank shall provide, at the Employee's
request, out-placement services to the Employee through Drake, Beam, and Moran,
New York, New York, or such comparable out-placement service as the parties
shall select. The Bank's costs for such services shall not exceed 17% of the
Employee's then current base annual salary.
7. Loyalty; Noncompetition; Nondisclosure.
(a) Loyalty. During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote substantially all his full business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder; provided, however, from time to time, Employee may serve on the
boards of directors of, and hold any other offices or positions in, companies or
organizations, which will not present any conflict of interest with the Bank,
the Company or any of their subsidiaries or affiliates or unfavorably affect the
performance of Employee's duties pursuant to this Agreement, or will not violate
any applicable statute or regulation. "Full business time" is hereby defined as
that amount of time usually devoted to like companies by similarly situated
executive officers. Except with the prior written approval of the Board of
Directors of the Bank, the Executive shall not engage in any other business or
commercial activities, duties or pursuits, during the term of this Agreement.
Under no circumstances may the Employee engage in any business or commercial
activities, duties or pursuits which compete with the business or commercial
activities of the Bank nor may the Employee serve as a director or officer or in
any other capacity in a company or financial institution which competes with the
Bank. Investments and personal activities not resulting in material compensation
or a conflict of interest with the Bank shall not be deemed a breach of the
restrictions of this paragraph. Participation in trade associations, charitable,
civil or similar not-for-profit, philanthropic or eleemosynary organizations,
including service as an officer or director, shall not be deemed a breach of
this Agreement, but the total amount of time spent by the Employee in such
activities during normal working hours shall be periodically reviewed by the
Board of Directors of the Bank.
(b) Noncompetition. The Employee covenants and agrees as
follows: the Employee shall not directly or indirectly, within the marketing
area of the Bank or the Company (defined as Wayne County, Pennsylvania) or any
future marketing area of the Bank or the Company (defined as an area within
twenty (20) miles of any branch office located outside of Wayne County,
Pennsylvania and begun during the Employee's employment under the terms of this
Agreement), enter into or engage generally in competition with the Bank or the
Company either as a sole proprietor or as a partner or joint venturer, or as a
director, officer, shareholder (except as a shareholder of less than five
percent (5%) of the outstanding shares of a corporation if Executive is not an
employee, officer or director of such corporation), employee or agent for any
person, for a period of one (1) year after the date of termination of his
employment if (i)
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<PAGE>
the Employee's employment is terminated for Just Cause pursuant to Section 11 of
this Agreement, or (ii) such termination is the result of a resignation by the
Employee other than pursuant to subsection 11(d)(2) or subsection 13(a) of this
Agreement. The Employee agrees that any breach of restrictions set forth in this
paragraph shall result in irreparable injury to the Bank and the Company and for
which they shall have not adequate remedy at law and the Bank and the Company
shall be entitled to injunctive relief in order to enforce the provisions
hereof. In the event that this paragraph shall be determined by any court of
competent jurisdiction to be unenforceable in part by reason of it being too
great a period of time or covering too great a geographical area, it shall be in
full force and effect as to that period of time or geographical area determined
to be reasonable by the court.
(c) Unauthorized Disclosure. At no time during the period of his
employment hereunder and thereafter, shall the Employee, without the written
consent of the Boards of Directors of the Bank or a person authorized thereby,
knowingly disclose to any person, other than an employee of the Bank or the
Company or a person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by the Employee of his duties as an executive of
the Bank or the Company, any material confidential information obtained by him
while in the employ of the Bank or the Company with respect to any of the Bank's
or the Company's services, products, improvements, formulas, designs or styles,
processes, customers, methods of distribution of any business practices the
disclosure of which he knows will be materially damaging to the Bank or the
Company; provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by the Employee) or any information of a type not
otherwise considered confidential by persons engaged in the same business or a
business similar to that conducted by the Bank and the Bank.
(d) Nothing contained in this Section shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or the Company, or, solely as a
passive or minority investor, in any business.
8. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Boards of
Directors of the Bank and the Company may establish from time to time. The Bank
and the Company will provide Employee with the working facilities and staff
customary for similar executives and necessary for him to perform his duties.
9. Vacation and Sick Leave. At such reasonable times as the Board shall
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank, but not less than three weeks [Other Period]
in any calendar year (pro-rated in any calendar
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<PAGE>
year during which the Employee is employed hereunder for less than the entire
calendar year in accordance with the number of days in such year which he is so
employed).
(b) The Employee shall not receive any additional compensation
from the Bank or the Company on account of his failure to take a vacation or
sick leave, and the Employee shall not accumulate unused vacation or sick leave
from one fiscal year to the next, except in either case to the extent authorized
by the Board.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank and the Company for such additional
periods of time and for such valid and legitimate reasons as the Board may in
its discretion determine. Further, the Boards of Directors of the Bank and the
Company may grant to the Employee a leave or leaves of absence, with or without
pay, at such time or times and upon such terms and conditions as such Boards in
their discretion may determine.
(d) In addition, the Employee shall be entitled to an annual
sick leave benefit as established by the Board of Directors of the Bank and the
Company.
10. Termination and Termination Pay. Subject to Section 13 hereof, the
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
(b) Disability. The Bank and the Company may terminate the
Employee's employment if the Employee becomes totally and permanently disabled.
The Employee shall be deemed totally and permanently disabled if he becomes
unable to perform a substantial portion of his duties under this Agreement and a
physician selected by Bank determines such inability will continue for a period
of six (6) months or more and is likely to be permanent. The Employee shall be
deemed disabled if he qualifies to receive total disability benefits under
Bank's disability insurance plan. Such termination shall be without prejudice to
any right the Employee may have to receive benefits under any disability
insurance plan maintained by Bank or the Company.
(c) Just Cause. The Board may, by written notice to the
Employee, immediately terminate his employment at any time, for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. For the purposes of this Agreement, the
Bank shall have "Just Cause" to terminate the Employee's employment hereunder
upon:
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<PAGE>
(1) the willful failure by the Employee to substantially perform
his material duties hereunder other than any such failure resulting
from the Employee's incapacity due to physical or mental illness; or
(2) conviction of a felony; or
(3) the willful violation by the Employee of the provisions of
this Agreement; or
(4) the willful violation by the Employee of material Bank or
Company policy as formally expressed by the Board of Directors of the
Company or the Bank; or
(5) the violation of state or federal banking, tax or financial
laws, regulations or rules in his own conduct or in the operation of
the Bank or the Company, the result of which is materially adverse to
the Bank or the Company; or
(6) the failure, in each of three consecutive years, to meet the
projected net income before income taxes, goals set forth in annual
business plans and budgets by more than three percent (3%). The annual
business plans and budgets shall be prepared in accordance with Exhibit
I.
None of the above which are capable of being cured shall be grounds for
termination until Bank and the Company give notice thereof to the Employee and
the Employee fails to cure such failure or violation within thirty (30) days of
said notice, or if said failure or violation cannot be cured within thirty (30)
days, within a reasonable time thereafter if the Employee is diligently
attempting to cure the failure or violation.
Bank and the Company may terminate this Agreement without notice and
opportunity to cure upon receipt of a final written directive or order of any
governmental body or entity having jurisdiction over the Bank or the Company
requiring termination or removal of the Employee from the positions referenced
in Section 2 of this Agreement.
(d) Without Just Cause; Constructive Discharge. (1) The Boards
of Directors of the Bank and the Company may, by written notice to the Employee,
immediately terminate his employment at any time for a reason other than Just
Cause, in which event the Employee shall be entitled to receive the following
compensation and benefits (unless such termination occurs during the Protected
Period in which event the benefits and compensation provided for in Section 13
shall apply): (i) the salary provided pursuant to Section 3 hereof, up to the
earlier of the expiration date of this Agreement (including any renewal term) of
this Agreement and the date that is 12 months after the employee's last day of
employment, and (ii) long-term disability and such medical benefits as are
available to the Employee under the provisions of COBRA for twelve (12) months.
All amounts payable to the Employee shall be paid, at the option of the
Employee, either (I) in periodic payments through the Expiration Date, or (II)
in one lump sum within ten (10) days of such termination.
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<PAGE>
(2) The Employee shall be entitled to receive the
compensation and benefits payable under subsection 11(d)(1) hereof in the event
that the Employee voluntarily terminates employment within 90 days of an event
that constitutes Good Reason, (unless such voluntary termination occurs during
the Protected Period, in which event the benefits and compensation provided for
in Section 13 shall apply).
(e) Termination or Suspension Under Federal Law. (1) If the
Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in Section
3(x)(1) of FDIA), all obligations of the Bank under this Agreement shall
terminate as of the date of default; however, this Paragraph shall not affect
the vested rights of the parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of
the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits
the Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee. Subject to Section
13(a)(ii) hereof, the Employee may voluntarily terminate employment with the
Bank during the term of this Agreement, upon at least ninety (90) days' prior
written notice to the Board of Directors, in which case the Employee shall
receive only his compensation, vested rights and employee benefits up to the
date of his termination (unless such termination occurs pursuant to Section
11(d)(2) hereof or within the Protected Period, in which event the benefits and
compensation provided for in Sections 11(d) or 13, as applicable, shall apply).
11. No Mitigation. The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
12. Change in Control Severance Payments.
(a) Trigger Events. The Employee shall be entitled to collect
the severance benefits set forth in Subsection (b) hereof in the event that (i)
the Employee voluntarily terminates employment either for any reason within the
30-day period beginning on the date of a Change in Control, (ii) the Employee
voluntarily terminates employment within 90 days of an event that
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<PAGE>
both occurs during the Protected Period and constitutes Good Reason, or (iii)
the Bank or the Company or their successor(s) in interest terminate the
Employee's employment without his written consent and for any reason other than
Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes
entitled to collect severance benefits pursuant to Section 13(a) hereof, the
Bank shall pay the Employee:
(i) a severance benefit equal to the difference between the
Code ss.280G Maximum and the sum of any other "parachute
payments" as defined under Code ss.280G(b)(2) that the Employee
receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions
of COBRA, for eighteen (18) months (or such longer period, up to
24 months, if COBRA is amended).
Said sum shall be paid in one lump sum within ten (10) days of
the later of the date of the Change in Control and the Employee's last day of
employment with the Bank or the Company. In the event that the Employee, the
Bank, and the Company jointly agree that the Employee has collected an amount
exceeding the Code ss.280G Maximum, the parties may agree in writing that such
excess shall be treated as a loan ab initio which the Employee shall repay to
the Bank, on terms and conditions mutually agreeable to the parties, together
with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control. Not later
than ten business days after a Change in Control, the Bank shall (i) establish a
grantor trust (the "Trust") that is designed in accordance with Revenue
Procedure 92-64 and has a trustee independent of the Bank and the Company, (ii)
deposit in said Trust an amount equal to the Code ss.280G Maximum, unless the
Employee has previously provided a written release of any claims under this
Agreement, and (i) provide the trustee of the Trust with a written direction to
hold said amount and any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust. Upon the earlier of
the Trust's final payment of all amounts due under the following paragraph or
the date 15 months after the Change in Control, the trustee of the Trust shall
pay to the Bank the entire balance remaining in the segregated account
maintained for the benefit of the Employee. The Employee shall thereafter have
no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail return receipt requested. On the tenth
(10th) business day after mailing said notice to the Bank, the trustee of the
Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto
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<PAGE>
the Bank provides the trustee with a written notice directing the trustee to
withhold such payment. In the latter event, the trustee shall submit the dispute
to non-appealable binding arbitration for a determination of the amount payable
to the Employee pursuant to this Agreement, and the costs of such arbitration
shall be paid by the Bank. The trustee shall choose the arbitrator to settle the
dispute, and such arbitrator shall be bound by the rules of the American
Arbitration Association in making his determination. The parties and the trustee
shall be bound by the results of the arbitration and, within 3 days of the
determination by the arbitrator, the trustee shall pay from the Trust the
amounts required to be paid to the Employee and/or the Bank, and in no event
shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
Upon the earlier of (i) any payment from the Trust to the Employee, or
(ii) the date twelve (12) months after the date on which the Bank makes the
deposit referred to in the first paragraph of this subsection 11(d), the trustee
of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
13. Indemnification. The Bank and the Company agree that their
respective Bylaws shall continue to provide for indemnification of directors,
officers, employees and agents of the Bank and the Company, including the
Employee during the full term of this Agreement, and to at all times provide
adequate insurance for such purposes.
14. Additional Offices. The Employee agrees to serve without additional
compensation, if elected or appointed thereto, as an officer in one or more
offices or as a director of any subsidiary of the Company or the Bank; provided,
however, the Employee shall not be required to serve in such additional offices
or as a director of any subsidiary, if such service would expose him, as an
individual, to adverse financial conditions.
15. Reimbursement of Employee for Enforcement Proceedings. In the event
that any dispute arises between the Employee and the Bank as to the terms or
interpretation of this Agreement, whether instituted by formal legal proceedings
or otherwise, including any action that the Employee takes to defend against any
action taken by the Bank or the Company, the Employee shall be reimbursed for
all costs and expenses, including reasonable attorneys' fees, arising from such
dispute, proceedings or actions, provided that the Employee obtains either a
written settlement or a final judgement by a court of competent jurisdiction
substantially in his favor. Such reimbursement shall be paid within ten (10)
days of Employee's furnishing to the Bank written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Employee.
16. Federal Income Tax Withholding. The Bank and the Company may
withhold all federal and state income or other taxes from any benefit payable
under this Agreement as shall be required pursuant to any law or government
regulation or ruling.
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<PAGE>
17. Successors and Assigns.
(a) Bank and Company. This Agreement shall not be assignable by
the Bank and the Company, provided that this Agreement shall inure to the
benefit of and be binding upon any corporate or other successor of the Bank and
the Company which shall acquire, directly or indirectly, by merger,
consolidation, purchase or otherwise, all or substantially all of the assets or
stock of the Bank.
(b) Employee. Since the Bank and the Company are contracting for
the unique and personal skills of the Employee, the Employee shall be precluded
from assigning or delegating his rights or duties hereunder without first
obtaining the written consent of the Bank and the Company; provided, however,
that nothing in this paragraph shall preclude (i) the Employee from designating
a beneficiary to receive any benefit payable hereunder upon his death, or (ii)
the executors, administrators, or other legal representatives of the Employee or
his estate from assigning any rights hereunder to the person or persons entitled
thereunto.
(c) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
18. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
19. Applicable Law. Except to the extent preempted by Federal law, the
laws of the Commonwealth of Pennsylvania shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Entire Agreement. This Agreement, together with any understanding
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
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EXHIBIT 10.3
<PAGE>
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS AGREEMENT entered into this day of , 1996 (the
"Effective Date"), by and between Edward C. Kasper (the "Employee"), Wayne Bank
(the "Bank"), and Norwood Financial Corp. (the "Company").
WHEREAS, the Employee has heretofore been employed by the Bank and the
Company as an executive officer, and the Bank and the Company deem it to be in
their best interest to enter into this Agreement as additional incentive to the
Employee to continue as an executive employee of the Bank and the Company; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
change of control occurs with respect to the Bank or the Company.
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. Defined Terms
-------------
When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Existing Board") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the foregoing,
in the case of (i), (ii) and (iii) hereof, ownership or control of the Bank by
the Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
<PAGE>
(c) "Code ss.280G Maximum" shall mean product of 2.99 and
his "base amount" as defined in Code ss.280G(b)(3).
(c) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the Change in Control
or as the same may be increased from time to time; (iii) the failure by the Bank
or the Company to continue to provide the Employee with compensation and
benefits provided for on the date of the Change in Control, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the Bank
or the Company which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the Change in Control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Bank or the Company, if the Employee is serving on such Board
on the date of the Change in Control; (vi) a material diminution or reduction in
the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank or the
Company; or (vii) a material reduction in the secretarial or other
administrative support of the Employee.
(d) "Just Cause" shall mean, in the good faith determination
of the Bank's Board of Directors, the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. No act, or failure to
act, on the Employee's part shall be considered "willful" unless he has acted,
or failed to act, with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Bank and the
Company.
(e) "Protected Period" shall mean the period that begins on
the date six months before a Change in Control and ends on the later of the
first annual anniversary of the Change in Control or the expiration date of this
Agreement.
2. Trigger Events
--------------
The Employee shall be entitled to collect the severance benefits set
forth in Section 3 of this Agreement in the event that (i) the Employee
voluntarily terminates employment either for any reason within the 30-day period
beginning on the date of a Change in Control, (ii) the Employee voluntarily
terminates employment within 90 days of an event that both occurs during the
Protected Period and constitutes Good Reason, or (iii) the Bank or the Company
or their
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successor(s) in interest terminate the Employee's employment for any reason
other than Just Cause during the Protected Period.
3. Amount of Severance Benefit
---------------------------
If the Employee becomes entitled to collect severance benefits pursuant
to Section 2 hereof, the Employee shall receive from the Bank or the Company,
which shall be jointly and severally liable to the Employee, a severance benefit
equal to the difference between the Code ss.280G Maximum and the sum of any
other "parachute payments" as defined under Code ss.280G(b)(2) that the Employee
receives on account of the Change in Control. Said sum shall be paid in one lump
sum within ten (10) days of the later of the date of the Change in Control and
the Employee's last day of employment with the Bank or the Company.
In the event that the Employee, the Bank, and the Company jointly agree
that the Employee has collected an amount exceeding the Code ss.280G Maximum,
the parties may jointly agree in writing that such excess shall be treated as a
loan ab initio which the Employee shall repay to the Bank, on terms and
conditions mutually agreeable to the parties, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
4. Funding of Grantor Trust upon Change in Control
-----------------------------------------------
Not later than ten business days after a Change in Control, the Bank
shall (i) establish a grantor trust (the "Trust") designed in accordance with
Revenue Procedure 92-64 and having a trustee independent of the Bank and the
Company, (ii) deposit in said Trust an amount equal to the Code ss.280G Maximum,
unless the Employee has previously provided a written release of any claims
under this Agreement, and (i) provide the trustee of the Trust with a written
direction to hold said amount and any investment return thereon in a segregated
account for the benefit of the Employee, and to follow the procedures set forth
in the next paragraph as to the payment of such amounts from the Trust. Upon the
earlier of the Trust's final payment of all amounts due under the following
paragraph or the date 15 months after the Change in Control, the trustee of the
Trust shall pay to the Bank the entire balance remaining in the segregated
account maintained for the benefit of the Employee. The Employee shall
thereafter have no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail return receipt requested. On the tenth
(10th) business day after mailing said notice to the Bank, the trustee of the
Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto the Bank provides the trustee with a
written notice directing the trustee to withhold such payment. In the latter
event, the trustee shall submit the dispute to non-appealable binding
arbitration for a determination of the amount payable to the Employee pursuant
to this
-3-
<PAGE>
Agreement, and the costs of such arbitration shall be paid by the Bank. The
trustee shall choose the arbitrator to settle the dispute, and such arbitrator
shall be bound by the rules of the American Arbitration Association in making
his determination. The parties and the trustee shall be bound by the results of
the arbitration and, within 3 days of the determination by the arbitrator, the
trustee shall pay from the Trust the amounts required to be paid to the Employee
and/or the Bank, and in no event shall the trustee be liable to either party for
making the payments as determined by the arbitrator.
5. Term of the Agreement. This Agreement shall remain in effect for the
period commencing on the Effective Date and ending on the earlier of (i) the
date thirty-six months after the Effective Date, and (ii) the date on which the
Employee terminates employment with the Bank; provided that the Employee's
rights hereunder shall continue following the termination of this employment
with the Bank under any of the circumstances described in Section 2 hereof.
Additionally, on each annual anniversary date from the Effective Date, the term
of this Agreement shall be extended for an additional one-year period beyond the
then effective expiration date provided the Boards of Directors of the Bank and
the Company determine in duly adopted resolutions that the performance of the
Employee has met the requirements and standards of the respective Boards, and
that this Agreement shall be extended.
6. Termination or Suspension Under Federal Law.
-------------------------------------------
(a) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(b) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1)
of FDIA), all obligations of the Bank under this Agreement shall terminate as of
the date of default; however, this Paragraph shall not affect the vested rights
of the parties.
(d) If a notice served under Section 8(e)(3) or (g)(1) of
the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits
the Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank shall (i) pay the Employee all or part of the
compensation withheld while its contract obligations were suspended, and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
-4-
<PAGE>
7. Expense Reimbursement.
---------------------
In the event that any dispute arises between the Employee and the Bank
or the Company as to the terms or interpretation of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Agreement or to defend against
any action taken by the Bank or the Company, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement in favor of the Employee in a court of competent jurisdiction or
in binding arbitration under the rules of the American Arbitration Association.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank and the Company written evidence, which may be in the form, among
other things, of a cancelled check or receipt, of any costs or expenses incurred
by the Employee.
8. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Bank or the Company which
shall acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Bank or
Company.
(b) Since the Bank and the Company are contracting for the
unique and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank and the Company.
9. Joint and Several Liability
---------------------------
The Company hereby agrees that to the extent permitted by law, it shall
be jointly and severally liable for both the payment of all amounts due under
this Agreement, and the taking of any actions required under this Agreement.
10. Amendments
----------
No amendments or additions to this Agreement shall be binding unless
made in writing and signed by all of the parties, except as herein otherwise
specifically provided.
11. Applicable Law
--------------
Except to the extent preempted by Federal law, the laws of the State of
Pennsylvania shall govern this Agreement in all respects, whether as to its
validity, construction, capacity, performance or otherwise.
-5-
<PAGE>
12. Severability
------------
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
13. Entire Agreement
----------------
This Agreement, together with any understanding or modifications
thereof as agreed to in writing by the parties, shall constitute the entire
agreement between the parties hereto.
-6-
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), entered into this 26th day of
August, 1996 (the "Effective Date"), by and between Wayne Bank, Honesdale,
Pennsylvania (the "Bank") and Russell L. Ridd (the "Consultant").
WHEREAS, the Consultant has served for many years as the Bank's President,
Chief Executive Officer and as Chairman of its Board of Directors (the "Board of
Directors"), and has developed, as a result of such service, extensive
knowledge, expertise and goodwill regarding the business, industry, and
community in which the Bank operates and competes; and
WHEREAS, effective August 26, 1996, William Davis will commence employment
as the Bank's President, and the Bank desires to retain the services of Mr.
Ridd, in a consulting capacity (beyond the services provided by a director or
Chairman of the Board of the Bank), in order to assist Mr. Davis on a daily
basis during his first six months with the Bank, and thereby to protect the
continuity of the Bank's operations in the business, industry and community
during this transition period.
WHEREAS, the parties desire by this writing to set forth the engagement of
the Consultant by the Bank, upon the terms and conditions set forth below.
NOW, THEREFORE, it is AGREED as follows:
1. Duties. The Bank hereby agrees to retain the services of the Consultant
for the period set forth in Section 3 below in a consulting capacity. The
Consultant's responsibilities shall consist generally of assisting the Bank's
new President in managing the Bank as well as rendering such other executive,
administrative and management services for the Bank and its Board of Directors
as is requested from time to time by the Board of Directors, including rendering
advice, consultation, and analysis to the Bank with respect to solicitation of
deposits, branch operations, financial matters, real estate and commercial
lending transactions, business development, internal administration, securities
and investment transactions, the effect of legislative and regulatory
developments on the business and affairs of the Bank, and related activities,
all on an as needed basis, and he also shall be responsible for such other
additional consulting duties and special consulting assignments as from time to
time may be mutually agreed upon by the Bank's Board of Directors and the
Consultant.
The Consultant agrees that he will devote a sufficient amount of his
working time to faithfully, fully and satisfactorily perform all the consulting
services to the Bank required to him hereunder, and that he will perform such
services to the best of his ability.
2. Compensation. The Bank agrees to pay the Consultant for his services
hereunder a quarterly fee equal to $20,000. From the date the Consultant earns
his fee until it is paid to him (or his estate), the Bank shall accrue interest
thereon on a quarterly basis at a rate equal to the highest return paid on the
Bank's one-year certificates of deposit as of the January 1st preceding the date
on which such interest is credited. Such fee and accrued interest shall be paid
<PAGE>
to Consultant as soon as practicable after his attainment of age seventy-two
(72), or immediately to his estate upon his death prior to such date.
3. Term. The term of the Consultant's engagement under this Agreement
shall be he period commencing on the Effective Date and ending at the end of six
(6) months from the Effective Date. In addition, the Bank and Consultant may
agree to extend this Agreement for additional periods beyond its then effective
expiration date at an agreed upon compensation.
4. Loyalty; Noncompetition. During the term of the Consultant's engagement
under this Agreement, the Consultant shall not engage in any business or
activity contrary to the business affairs or interests of the Bank and shall not
serve any other depository institution as an officer, director or consultant.
Nothing contained in this Section 4 shall be deemed to prevent or limit the
right of the Consultant to invest in the capital stock or other securities of
any business dissimilar from that of the Bank, or, solely as a passive investor,
in any business.
5. Independent Contractor Status. The Bank and the Consultant agree that
for purposes of this Agreement and all other purposes (including but not limited
to Federal and State income tax withholding), the Consultant is an independent
contractor, and not an employee of the Bank, and shall be liable for all income
and employment taxes on his compensation. The Bank has no right to control or
direct the details, manner or means by which the Consultant performs services
under this Agreement, and, except as specifically set forth herein, the
Consultant is not entitled to any benefits that the Bank provides for its
employees. However, this Agreement shall not impair, reduce or limit in any
respect whatsoever (a) the retirement, pension and related benefits from the
Bank which the Consultant is entitled to receive as a retired officer of the
Bank; (b) the Consultant's rights, obligations, duties or compensation as a
director of the Bank; or (c) the Consultant's rights of indemnification as a
director of the Bank and/or as an agent of the Bank hereunder in accordance with
applicable law, regulation, or the Bank's charter or bylaws, it being explicitly
understood that the Consultant shall be entitled to such indemnification.
6. Termination of the Agreement. Unless sooner terminated in accordance
with this Section, or extended by agreement of the parties, this Agreement shall
terminate upon expiration of the term determined under Section 3 hereof.
(a) This Agreement shall automatically terminate upon the
Consultant's death, in which event his estate shall be entitled to receive the
compensation due the Consultant through the last day of the calendar month in
which his death occurred.
(b) For Just Cause, the Board of Directors may, by written notice to
the Consultant, immediately terminate this Agreement at any time. If terminated
for Just Cause, the Consultant shall be entitled to receive compensation to the
date of his termination on a pro rata basis. The Consultant shall have no right
to receive compensation or other benefits for any period after being terminated
for Just Cause. Termination for "Just Cause" shall include termination because
the Consultant's personal dishonesty, incompetence, willful misconduct,
2
<PAGE>
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses), or material breach of any
provision of this Agreement.
(c) For a reason other than Just Cause, the Board of Directors may
at any time, by written notice to the Consultant, immediately terminate his
performance of future services under this Agreement, in which event the
Consultant shall be entitled to receive the compensation and benefits otherwise
payable under this Agreement until the expiration date hereof.
(d) The Consultant may voluntarily terminate this Agreement, upon a
least 60 days prior to written notice to the Board of Directors, in which case
he shall receive only his compensation up to the date on which the Agreement
terminates on a pro rata basis.
7. Regulatory Requirements. The provisions of this Agreement shall be
subject to any regulation or order issued by a governmental agency having
jurisdiction over the Bank.
8. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Bank which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets of the Bank. Since the Bank is
contracting for the unique and personal expertise of the Consultant, the
Consultant shall be precluded from assigning or delegating his rights or duties
hereunder without first obtaining the written consent of the Bank.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by both parties, except as herein
otherwise specifically provided.
10. Applicable Law. This Agreement shall be governed in all respects,
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Pennsylvania.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as approved to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
3
EXHIBIT 13
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected Financial Data
Dollars in thousands except per share data For the years ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Summary of Operations
<S> <C> <C> <C> <C> <C>
Net interest income $10,189 $8,827 $7,651 $7,097 $7,515
Provision for loan losses 1,710 619 1,070 915 1,650
Gains on sale of securities 787 146 268 853 291
Non-interest income 1,055 948 829 690 473
Non-interest expense 7,981 6,852 5,935 5,450 4,139
------ ------ ------ ------ ------
Income before income taxes 2,340 2,450 1,743 2,275 2,490
Federal income tax 468 648 391 573 546
------ ------ ------ ------ ------
NET INCOME $1,872 $1,802 $1,352 $1,702 $1,944
====== ====== ====== ====== ======
Net income per share $2.19 $2.03 $1.50 $1.89 $2.16
Cash dividends declared 0.84 0.78 0.76 0.75 0.67
Return on average assets 0.78% 0.88% 0.69% 0.90% 1.06%
Return on average equity 8.44% 8.17% 6.25% 8.55% 10.32%
Balances at Year-End
- --------------------
Total assets $260,085 $217,899 $196,108 $193,607 $186,476
Total loans 174,554 152,094 140,701 135,995 135,911
Allowance for loan losses 2,615 2,125 1,893 1,864 2,342
Total deposits 229,329 187,299 168,487 166,053 162,300
Shareholders' equity 21,519 22,681 21,642 20,395 19,368
Book value per share $24.20 $25.77 $24.05 $22.65 $21.51
Shareholders' equity to total assets 8.27% 10.49% 11.04% 10.53% 10.39%
Tier 1 Capital to risk-adjusted assets 10.26% 13.93% 14.58% 14.06% 13.27%
Total Capital to risk-adjusted assets 11.51% 15.18% 15.83% 15.31% 14.52%
Allowance for loan losses to total loans 1.50% 1.40% 1.35% 1.37% 1.72%
</TABLE>
1
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
Introduction
This management discussion and analysis and related financial data are
presented to assist in the understanding and evaluation of the financial
condition and results of operations for Norwood Financial Corp. (the Company)
and its subsidiary Wayne Bank (the Bank) for the years ended December 31, 1996,
1995 and 1994. This section should be used in conjunction with the consolidated
financial statements and related foot notes.
The Company is a Pennsylvania corporation organized in November 1995 at
the direction of the Bank to facilitate the reorganization of the Bank into the
holding company form of organization. On March 29, 1996, the Bank completed the
reorganization and became a wholly owned subsidiary of the Company.
On March 23, 1996 the Bank completed an assumption of liabilities and
purchase of selected assets of three branches of Meridian Bank. Pursuant to the
transaction the Bank assumed $20,200,000 of deposits; acquired real estate and
an immaterial amount of loans. Management initially reinvested a substantial
portion of the $17.3 million of cash received in investment and mortgage-backed
securities with short to medium terms.
The Bank assumed deposits with an average cost of 3.68%.
Results of Operation - Summary
Net income for the Company for the year 1996 was $1,872,000 compared to
$1,802,000 for the year 1995. This represents an increase of $70,000 or 3.9%. On
an earnings per share basis, 1996 was $2.19 increasing from $2.03 earned in
1995. Return on average assets and return on average equity were .78% and 8.44%,
respectively for 1996 compared to .88% and 8.17%, respectively, in 1995.
Earnings for the year were favorably impacted by increase in net interest
income, higher levels of fee income and gains on investment securities. During
the year 1996 the Bank did incur higher provision for loan losses, expenses
associated with other real estate and costs of three branch offices acquired
from Meridian Bank. Net interest income of $10,189,000 for the year 1996 showed
an increase of $1,262,000 or 14.1% principally due to higher level of loans.
During the year, the Bank took aggressive action to bolster its allowance for
loan losses and reduce its level of non-performing loans and assets. This
resulted in a provision for loan losses of $1,710,000 in 1996 compared to
$619,000 in 1995. Fee income improved in 1996 with higher levels of service
charges on deposits and trust fees. Operating expenses of $7,981,000 increased
$1,100,000, or 16.0%. Increases were principally attributable to three new
branch offices, implementation of auto leasing product and costs associated with
resolving non-performing assets. Operating expenses were favorably impacted by
lower Federal Deposit Insurance Corporation (FDIC) assessment factor in 1996,
which was $218,000 less than 1995. During the year, the Company took advantage
of current stock market conditions to sell a portion of its portfolio of stock
holdings in other financial institutions at a gain on sale of $828,000. Total
net gains on investment securities sales were $787,000 in 1996 compared to
$146,000 in 1995.
Net income for the year 1995 was $1,802,000 compared to $1,352,000 for the
year 1994. This represents an increase of $450,000 or a 33.3% earnings growth in
1995. On an earnings per share basis, 1995 was $2.03, up from $1.50 per share
earnings in 1994. Return on average assets showed similar improvement in the
year 1995 with .88% compared to .69% in the prior year with a return on average
equity of 8.17% in 1995, compared to 6.25% in 1994.
Improved earnings in the year 1995, were principally due to growth in net
interest income and a lower provision for loan losses. Net interest income
increased $1,276,000 over the prior year, or 16.7% due to an increase in earning
assets, primarily loans. Improvement in asset quality , evidenced by a continued
decline in non-performing loans through 1995, and significant recoveries of
loans charged-off in prior periods, allowed a reduction in the loan loss
provision expense for 1995. The provision for loan losses at $619,000 was
$451,000 lower than 1994. Favorable net interest income and provision for loan
losses was partially offset during the year by lower non-recurring security
gains taken in 1995 and an increase in operating expenses of $946,000, or 15.9%.
Operating expenses increased principally due to higher salary and benefit costs,
expenses related to investment in technology and staff training, and costs
related to work-out of delinquent loans and other real estate. Operating
expenses were favorably impacted by a lower FDIC assessment factor in 1995,
which was $154,000 lower than 1994.
Financial Condition
Total Assets
Total assets at December 31, 1996 were $260.1 million compared to $217.3
million at year-end 1995, an increase of $42.8 million or 19.7%. The increase
was attributable to acquisition of offices from Meridian and a continued
increase in core deposit. For the year 1995, total assets increased $21.2
million or $10.8 to $217.3 million at year-end 1995 compared to $196.1 million
at year-end 1994.
6
<PAGE>
Loans and Leases
Loans and leases are the most significant component of the Company's
earning assets. At December 31, 1996 total loans and leases outstanding were
$174.6 million, an increase of $22.5 million or 14.8% over 1995. The Bank
initiated an auto leasing product in 1996 and at December 31, the portfolio
totaled $17.1 million. Significant loan volume was also generated by the Bank's
indirect lending program, with total indirect financing at $24.7 million
compared to $12.8 million at December 31, 1995. The mix of loans shifted to
higher percentage of consumer credits which represented 61.9% of total loans and
commercial and commercial real estate at 38.1% at December 31, 1996 compared to
51.7% and 48.3%, respectively at December 31, 1995. Commercial loans consist
principally of loans made to small businesses within the Company's market area
and are generally secured by real estate and other assets of the borrower.
For the year 1996, total loans averaged $160.5 million with a yield of
9.10% compared to $146.0 million and 9.18% during 1995. The yield on loans
decreased due to lower prime rate environment, and change in mix of loans. Total
interest income on loans on a fully taxable equivalent basis was $14,611,000 an
increase of 9.1% over 1995.
Non-Performing Assets and Allowance for Loan Losses
The Bank took aggressive action during 1996 to reduce its level of
non-performing loans. At December 31, 1996 non-performing loans totaled
$3,493,000 and represented 1.98% of loans and leases compared to $3,880,000, and
2.55% of loans at year-end 1995, and $8,205,000, or 5.83% of loans in 1994.
Total non-performing assets which include other real estate owned were
$5,776,000 at December 31 or 2.22% of total assets down from $5,824,000 and
2.68% in 1995.
The allowance for loan losses totaled $2,615,000 at year-end 1996 or 1.50%
of loans and leases compared to 1.40% in 1995 and 1.35% in 1994. Total loans
charged-off in 1996 were $1,366,000 compared to $925,000 in 1995. For 1996
recoveries of loans previously charged-off were $147,000, down significantly
from $537,000 recovered 1995. The year 1995 recoveries was principally
attributable to $420,000 recovered on two credits. The provision for loan and
lease losses was $1,710,000 in 1996 compared to $619,000 in 1995 and $1,070,000
in 1994. With the lower level of non-performing loans and higher allowance for
loan losses, the coverage ratio of allowance for loans losses to non-performing
loans improved to 74.9% in 1996 from 54.7% in 1995 and 23.1% at year-end 1994.
The Bank's Loan Review Function assesses the adequacy of the allowance for
loan losses on a quarterly basis. The process includes a review of the risks
inherent in the loan portfolio. It includes a credit review and gives
consideration to areas of exposure such as concentration of credit, economic and
industry conditions, trends in delinquencies, collections and collateral value
coverage. General reserve percentages are identified by loan type and credit
grading and allocated accordingly. Larger credit exposures are analyzed
individually. The allowance at December 31, 1996 is considered adequate for the
loan mix and classifications. While the allowance for loan losses as a
percentage of total loans is in line with the Bank's peer group and considered
adequate by management, prudence dictates it should be increased going forward
given the current level of non-performing loans. As a result the Bank may
continue to incur provisions to obtain the appropriate level. The following
table sets forth information with respect to the Bank's allowance for loan
losses at the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance balances at beginning of period $ 2,125 $1,893 $ 1,864 $ 2,342 $ 2,000
Charge-offs:
Commercial and all other (820) (448) (709) (767) (1,112)
Real estate (226) (353) (306) (587) (130)
Consumer (320) (123) (82) (79) (89)
------ ------- ------ ------ ------
Total (1,366) (924) (1,097) (1,433) (1,331)
Recoveries:
Commercial and all other 70 513 31 24 12
Real estate 16 3 3 - -
Consumer 60 21 22 16 11
------ ------- ------ ------ ------
Total 146 537 56 40 23
Provisions charged to expense 1,710 619 1,070 915 1,650
------ ------- ------ ------ ------
Allowance balance at end of period $2,615 $2,125 $1,893 $ 1,864 $ 2,342
------ ------- ------ ------ ------
Allowance for loan losses as a percent
of total loans outstanding 1.50% 1.40% 1.35% 1.37% 1.72%
Net loans charged off as a percent of
average loans outstanding 0.76% 0.27% 0.76% 1.03% 0.97%
Allowance for loan losses as a
percent of non-performing loans 74.9% 54.7% 23.1% 21.7% 34.8%
</TABLE>
7
<PAGE>
Other real estate owned (OREO) which represents foreclosed assets amounted
to $2,283,000 at December 31, 1996 compared to $1,944,000 in 1995. The increase
reflects the process of resolving non-performing loans through foreclosure and
the eventual sale of the assets. Expenses associated with OREO totaled $436,000
in 1996 which includes maintenance, taxes, legal fees, net losses on sale as
well as any adjustments to reflect carry values at the realizable market rates.
The following table sets forth information regarding non-performing
assets. The Bank had no troubled debt restructurings as defined in FAS No. 114.
As of December 31, 1996, there were no loans not previously discussed where
known information about possible credit problems of borrowers cause management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and all other $ 1,633 $1,572 $ 2,754 $ 3,276 $ 611
Real estate 1,790 2,205 2,175 2,631 2,078
Consumer 28 48 - - 1
------ ------- ------ ------ ------
Total $ 3,451 $3,825 $ 4,929 $ 5,907 $ 2,690
======= ====== ======= ======= =======
Accruing loans which are contractually
past due 90 days or more:
Commercial and all other $ 38 55 $ 553 $ 609 $ 2,444
Real estate - - 2,716 2,061 1,450
Consumer 4 - 7 5 141
------ ------- ------ ------ ------
Total $ 42 $ 55 $ 3,276 $ 2,675 $ 4,035
------- ------ ------- ------- -------
Total non-performing loans $ 3,493 $ 3,880 $ 8,205 $ 8,582 $ 6,725
Other real estate owned 2,283 1,944 1,377 1,715 1,520
------- ------- ------- ------- -------
Total non-performing assets $ 5,776 $ 5,824 $ 9,582 $10,297 $ 8,245
======= ======= ======= ======= =======
Total non-performing loans to total loans 1.98% 2.55% 5.83% 6.31% 4.95%
Total non-performing loans to total assets 1.34% 1.79% 4.18% 4.43% 3.61%
Total non-performing assets to total assets 2.22% 2.62% 4.89% 5.32% 4.42%
</TABLE>
Investment Securities
The investment portfolio consists principally of obligations of United
States Government agencies, including mortgage backed securities, U.S. Treasury
Securities and obligations of state and political subdivisions. In accordance
with Statement of Financial Accounting Standards #115 "Accounting for Certain
Investments in Debit and Equity Securities" the Company classifies its
investments into two categories - held-to- maturity and available-for-sale. The
Company does not have a trading account. Investments classified as
held-to-maturity are those in which the Bank has the ability and the intent to
hold until contractual maturity. At December 31, 1996 this account totaled
$8,805,000 and consisted of longer term municipal obligations. Investments
classified as available-for-sale are eligible to be sold at some point due to
liquidity needs or changes in interest rates. These securities are adjusted to
and carried at their market value with any unrealized gains or losses recorded
as an adjustment to capital. At December 31, 1996, $48,906,000 in securities
were so classified and carried at their market value.
At December 31, 1996, the Company's investment portfolio totaled
$57,711,000 with the percentage of obligations of U.S. Government agencies and
corporations 44.8%, mortgage-backed securities, 19.7%, municipal obligations,
24.2%, U.S. Treasuries 6.9% and others of 4.4%. At December 31, 1996, the
portfolio contained no collateralized mortgage obligations, structured notes,
step-up bonds and no off-balance sheet derivatives were in use.
The investment portfolio is used as a source of liquidity, tool for
interest-rate risk management and for interest income. During 1996, investments
averaged $54.6 million with a fully taxable equivalent yield of 7.06% compared
to average of $34 million in 1995 with yield of 6.09%. During 1996, a portion of
the funds generated from the acquisition of deposits associated from the
Meridian branches were invested in mortgage-backed securities, other U.S.
Government agency
8
<PAGE>
securities and municipals. The increase in the yield on the portfolio during
1996 was a result of lower yielding investments maturing invested at higher
rates as well as investments in longer term maturities.
Deposits
Total deposits at December 31, 1996 were $229.3 million an increase of $42
million or 22.4% over 1995. This growth in deposits includes $20.2 million in
deposits acquired from Meridian Bank in March 1996. Non-interest bearing demand
deposits represented 11.1% of total deposits compared to 10.5% at year-end 1995.
All categories of deposits experienced increases in 1996 with the most
significant in time deposits of 30.0%. Time deposits over $100,000 were $28.9
million in 1996 compared to $18.3 million in 1995 and principally related to
school district deposits and other public funds with maturities generally less
than one year.
The cost of interest-bearing deposits was 4.16% for the year a decrease of
5 basis points from 4.21% in 1995. The decrease was principally due to higher
costing time deposits maturing and repricing at lower rates and lower costing
transaction accounts. However, as time deposits increased faster than the less
expensive transaction accounts, the mix of deposits was correspondingly more
expensive than in 1995 and this partially offset the impact of the lower rate
environment.
At December 31, 1995 total deposits were $187,299,000 which was an increase
of $18,812,000 or 11.2% over year-end 1994. All categories showed increases with
most significant of 19.5% in time deposits. This was the result of several
promotions conducted by the Bank in 1995.
Interest-Sensitivity
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by the Bank's Asset and Liability Management Committee
(ALCO). The principal objective of ALCO is to maximize net interest income
within acceptable levels of risk which are established by policy. Interest rate
risk is managed by using financial modeling techniques to measure the impact of
changes in interest rates.
Net interest income, which is a primary source of the Bank's earnings, is
affected by interest rate movements. To manage the impact of the rate changes
the balance sheet must be structured so that repricing opportunities exist for
both assets and liabilities at approximately the same time intervals. ALCO
monitors these repricing characteristics and identifies strategies, including
management of liability costs and maturities, structure of the investment
portfolio, and various lending activities to insulate net interest income from
the effects of changes in interest rates. The Bank employs net interest
simulation modeling to assist in interest rate risk management. The process
includes simulating various interest rate environments and their impact on net
interest income. At December 31, 1996, the level of net interest income at risk
in a 200 basis points increase or decrease was within the policy limits.
Imbalance in repricing opportunities at a given point in time reflect
interest- sensitivity gaps - the difference between interest-sensitive assets
and interest-sensitive liabilities. These are static gap measurements that do
not take into account any future activity, and as such are principally used as
early indications of potential interest rate exposures over specific intervals.
At December 31, 1996, the Bank had a positive 90 day gap position of
$13,784,000. A positive gap means our interest-sensitive assets are higher than
our interest-sensitive liabilities at the time interval. This would indicate
that in a declining rate environment, the yield on earning assets would decrease
faster than the cost of interest-bearing liabilities in the 90 day time frame.
This risk is managed by ALCO strategies, including investment portfolio
structure, pricing of deposit liabilities, loan pricing and structure of fixed
and variable rate products.
The Bank analyzes and measures the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. Management believes that the assumptions used to
evaluate the vulnerability of the Bank's operations to changes in interest rates
are reasonable. The interest rate sensitivity of the Bank's assets and
liabilities could vary substantially if differing assumptions were used or if
actual experience differs from the assumptions used in the analysis. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in differing degrees to changes in market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Further, in the
event of a significant change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed. Finally, the
ability of borrowers to service their adjustable-rate debt may decrease in the
event of an interest rate increase.
Liquidity
Maintenance of liquidity is coordinated by ALCO. Bank liquidity can be
viewed as the ability to fund customers borrowing needs and their deposit
withdrawal requests while supporting asset growth. The Bank's primary sources of
liquidity include deposit generation, asset maturities and cash flow from loan
repayments and investments.
At December 31, 1996, the Company had cash and cash equivalents of $15.1
million in form of cash, due from banks and federal funds sold. The Company had
total securities available for sale of $48.9 million. This totals $64 million
and represents 24.5% of total assets compared
9
<PAGE>
to 19.8% at year-end 1995. The Company also monitors other liquidity measures
all of which were within policy guidelines at December 31, 1996. The Company
believes its liquidity position is adequate.
The Bank's primary source of liquidity is its ability to generate core
deposits. This has been a consistent source of funding and has been enhanced by
the acquisition and the opening of four new offices since 1994. Deposits,
excluding time deposits greater than $100,000, increased $31.2 million during
1996, which was more than adequate to fund loan growth of $22.5 million. Funds
from deposit growth in excess of loan needs are invested in shorter term
investment securities which provide cash flow through pre- payments and
scheduled maturities in future periods.
The Bank also maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The short-term borrowing capacity from FHLB was in excess of
$50 million. There were no balances outstanding on these lines as of year-end
1996.
Results of Operation
Net Interest Income
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest-bearing liabilities and is the most
significant source of revenue for the Bank. For the year-ended December 31,
1996, net interest income, on a fully taxable equivalent basis was $10,615,000,
an increase of $1,491,000, or 16.3% over 1995. The resultant tax equivalent net
interest spread and net interest margin for the year 1996 were 4.26% and 4.82%,
respectively, compared to 4.15% and 4.82%, respectively in 1995.
Interest income earned on loans and investments on a tax equivalent basis
for the year was $18,734,000 an increase of $2,715,000 or 16.7% over 1995. The
increase was principally due to growth in earning assets of $30.8 million or
16.3% with a yield of 8.50% in 1996 compared to 8.46% in 1995. A decrease in
yield on loans to 9.10% from 9.18% was offset by higher yielding investment
portfolio. The yield on loans declined due to lower prime rate environment and
change in mix of the loan portfolio. On average, loans and leases increased
$14.5 million or 10%. The increase consisted principally of growth in lower
yielding indirect automobile lending, $13.9 million and auto leasing, $5.4
million partially offset by lower levels of higher yielding real estate and
commercial lending. The Bank anticipates this trend to continue during 1997.
The total investment portfolio averaged $54.6 million in 1996 compared to
$34.0 million in 1995. The increase reflects the deployment of the deposits
acquired from the Meridian branches into the investment portfolio. The yield on
the portfolio improved to 7.06% from 6.09% principally due to an increase in
higher yielding municipal bonds and lengthening of maturities.
The mix in earning assets changed during 1996 reflecting the increase in
the investment portfolio. For 1996 loans comprised 72.8% of earning assets
compared to 77.1% during 1995. This change in mix lowered the over-all yield on
earning assets.
The Company funds its growth in earning assets principally from growth in
core deposits. Interest-bearing deposits increased $29.1 million on average in
1996. The costs of these deposits decreased to 4.16% in 1996 from 4.21% in 1995.
All categories of deposits decreased in cost. Savings deposits were 2.79% down
from 3.00% and time deposits declined to 5.43% from 5.51%. This decrease in cost
was partially offset by change in deposit mix as higher costing time deposits
represented 52% in 1996 compared to 50.1% in 1995. Other borrowed funds, which
includes federal funds purchased and securities sold under agreement to
repurchase averaged $4.9 million in 1996 at a rate of 5.03% compared to $2.6
million and 5.49% in 1995. Total interest expense for 1996 was $8,119,000 an
increase of $1,224,000 or 17.8% with cost of 4.24% in 1996 and 4.30% in 1995.
For the year ended December 31, 1995, net interest income was $9,124,000
compared to $7,859,000 in 1994, an increase of $1,265,000, or 16.1%. Interest
income earned on loans and investments for the year was $16,019,000, an increase
of $2,786,000, or 21.1%. The interest expense paid on deposits and other
borrowings for the year increased $1,521,000 in 1995 compared to 1994. The fully
taxable yield for earning assets for 1995 was 8.46% compared to 7.32% in 1994.
This increase in asset yield was a function of increasing yields on both the
loan portfolio and investment securities. In addition, the mix of earning assets
improved to sustain a higher yield as average loans increased $9.7 million, or
7.1% over prior year and represented a higher percentage of earning assets in
1995 than in 1994. In addition, improvements in credit quality evidenced by a
reduction in those loans in which the accrual of interest had stopped were
significantly lower in 1995 than in 1994. The cost of interest bearing
liabilities was 4.30% for the year, an increase of 81 basis points over the
3.49% paid in 1994. Cost of interest bearing deposits was more expensive in 1995
due to higher rates paid on interest bearing demand deposits and savings
deposits as well as a change in the mix of deposits. For the year, the more
expensive time deposits, principally certificates of deposit, increased $9.4
million, while the lower costing demand deposits decreased slightly on average
during 1995.
For 1995 the yield on earning assets increased more rapidly than the cost
of interest bearing liabilities, producing a tax equivalent net interest spread
of 4.15% compared to 3.82% in 1994. The net interest margin which factors in
non-interest bearing fund sources also improved at 4.82% for 1995 compared to
4.35% in 1994.
Non-Interest Income
Non-interest income excluding gains on investment sales was $1,055,000 for
1996, an increase of $174,000 or 19.7% over 1995. All categories of fee-based
income reflected improvement over 1995. Service charges on deposits of $511,000
increased $105,000 due to increase in certain fees in 1996 and volume. The Bank
periodically reviews all its fees and makes changes taking into account market
conditions, competition, level of service and operating costs. Trust fees
likewise were increased in 1996 and totaled $169,000 compared to $124,000 in
1995. The Bank, through Norwood Investment Corp., offers sales of mutual funds,
fixed and variable rate annuities. These products are not insured by the Federal
Deposit Insurance Corporation, not guaranteed by any government agency and may
include loss of principle. For 1996 income for sale of these products totaled
$32,000 compared to $14,000 in 1995. The company would anticipate an increase in
income related to these products in 1997.
Non-interest income excluding gains on investment sales was $881,000 for
1995 compared to $828,000 in 1994, an increase of $53,000, or 6.4%. The year
1995 reflected higher service charges on deposits due to increases in deposit
volumes and increases in fees on loans. Fees on loans increased due to new
Business Manager product
10
<PAGE>
as well as increases in other volumes. Trust income for the year was $124,000
compared to $148,000 in 1994 with total assets under Trust Administration of
approximately $33,000,000. Income related to the sale of annuity products was
significantly lower in 1995 at $14,000 compared to $112,000 in 1994.
Operating Expenses
Total operating expenses for the year were $7,981,000 compared to
$6,881,000 an increase of $1,100,000 or 16.0%. Expenses for 1996 were impacted
by the acquisition of the Meridian Offices which accounted for $475,000 of the
increase. Costs associated with non-performing assets increased in 1996 as OREO
costs totaled $436,000 compared to $374,000 in 1995. In addition the Bank
incurred legal fees of $173,000 related to problem loans compared to $144,000.
The Bank also had start-up expenses associated with its auto leasing product and
full year of staffing its indirect lending center of $175,000. There were
additional legal and consulting fees related to formation of the holding
company, initial registration to become a public company and changes to its
employee benefit plans.
FDIC insurance premiums decreased $218,000 for the year due to rate
reduction as a result of the Bank Insurance Fund (BIF) reaching its required
level of capitalization, thereby reducing deposit insurance premiums. On
September 30, 1996, the president signed into law the Deposit Insurance Funds
Act of 1996 (DIFA). DIFA includes provisions fully capitalizing the Savings
Association Insurance Fund (SAIF) and providing for the eventual merger of
thrift fund, SAIF, with BIF. The Bank is a member of BIF. DIFA requires
depository institutions to pay a one-time special assessment on their
SAIF-assessable deposits held as of March 31, 1995, neither the company nor its
banking subsidiary have any SAIF-assessable deposits. DIFA also requires that
all insured depository institutions share pro rata beginning in the year 2000,
the Financing Corp. (FICO) bond obligation. For the transition period from
January 1, 1997 until December 31, 1999 banks will pay semiannually on their BIF
deposit base 20% of the assessment rate imposed upon thrifts. According to
current FDIC estimates the FICO assessment will run 1.3 basis points for banks,
subject to change. On the Bank's deposit base as of December 1996, 1.3 basis
points equates to an assessment of $29,800. It should be noted that FICO
assessment is distinct from the insurance premium, (if any) paid by banks for
FDIC coverage.
Salary and employee benefit expense totaled $3,782,000 and represented
47.5% of non-interest expense compared to $3,288,000 and 47.8% in 1995. At
December 31, 1996, the company had total full-time equivalent staff of 124
compared to 113 in 1995, with the increase principally due to additional
branches. In February 1997 the Company has filed with the Pension Benefit
Guaranty Corporation to terminate its defined benefit plan. The Company plans to
settle the obligations under the defined benefit plan in 1997. The effects of
the settlement can not be determined at this time. In addition the bank has
amended its deferred profit sharing plan to allow eligible employees to make
401(K) contributions. The bank will match 100% of the first 2% of annual salary
contributed by the employee. The bank will continue its practice of making
discretionary year end contributions to the plan. The Bank also adopted an
Employee Stock Ownership Plan in 1996.
Total operating expenses for the year 1995 were $6,881,000 compared to
$5,935,000 in 1994, an increase of $946,000, or 15.9%. Staffing costs, which
consist of salary and benefits, are the largest percentage of operating expenses
for the Bank representing 48% of total expenses. For 1995, staffing costs were
$3,288,000, an increase of $383,000 or 13.2% over prior year. This was due to
increasing in staffing levels with total full-time equivalent employees of 113
in 1995 up from 100 in 1994. Increase in staff was principally in customer
service and sales including lending, branch and trust department staff. The FDIC
insurance assessment was $220,000 for 1995, reflecting a decrease of $154,000
from prior year due to a significant reduction in the rate assessment. Occupancy
and equipment costs increased $55,000 during 1995, principally due to the
opening of the Hamlin office in late 1994 and our continued investment in
customer service related technology, including new account and loan automation
systems. Expense for Other Real Estate Owned was $373,000 for 1995, an increase
of $45,000 over the prior year. This reflects expenses to maintain these
properties, as well as costs to write properties down to their realizable values
in order to facilitate a sale. Significant costs were also incurred during the
year to resolve the Bank's loan workout situations which required legal and
other professional fees. These fees are incurred up front in order to quickly
resolve problem loan situations.
Income Taxes
Income tax expense for the year 1996 was $468,000 for an effective tax
rate of 20.2% compared to an expense of $653,000 and an effective rate of 26.6%
in 1995. The lower level of taxes was principally due to a decrease in pre-tax
income of $114,000 and a higher level of obligations of state and political
subdivisions in 1996 which provide income which is partially exempt from federal
income taxes.
Stockholders' Equity and Dividends
A strong capital position is essential to support continued balance sheet
and earnings growth, to serve the needs of the Bank's depositors and borrowers
and to yield an attractive return to stockholders. In addition a strong capital
base provides added protection against unexpected losses.
Total stockholder equity for the company at December 31, 1996 was
$21,519,000 for a Tier 1 leverage ratio of 7.7%, Tier 1 capital 10.3% and total
risk- based capital 11.5%. The current minimum regulatory guidelines for Tier 1
leverage capital is 4% and minimums for Tier 1 and total risk-based capital
ratios are 4% and 8% respectively. At December 31, 1996 and 1995 the company and
the Bank exceeded the minimum ratios.
Common stock dividends declared in 1996 were $.84 per share compared to
$.76 per share in 1995, an increase of 10.5%. The following table sets forth the
price range and cash dividends paid per share regarding common stock for the
periods indicated:
Price Range
------------ Cash dividend
High Low paid per share
---- --- --------------
Year 1995
- ---------
First Quarter $24.00 $23.50 $ .19
Second Quarter 31.00 26.75 .19
Third Quarter 30.50 28.50 .19
Fourth Quarter 33.25 30.75 .21
Year 1996
- ---------
First Quarter $34.75 $33.25 $ .21
Second Quarter 34.00 32.50 .21
Third Quarter 33.50 32.25 .21
Fourth Quarter 33.50 32.25 .21
11
<PAGE>
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ -----------------------------
Average Ave Average Ave Average Ave
Balance(2) Interest(1) Rate Balance(2) Interest(1) Rate Balance(2) Interest(1) Rate
---------- ----------- ---- ---------- ----------- ---- ---------------------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal funds sold $ 4,585 $ 239 5.21% $ 8,252 $ 483 5.85 % $ 4,833 $ 197 4.08 %
Interest bearing deposits
with banks 532 29 5.45 1,152 70 0 0
Investment securities
available for sale 44,307 2,991 6.75 15,397 794 5.16 16,268 898
Investment securities:
Taxable investments 95 5 5.26 10,905 700 6.42 11,535 579 5.02
Tax-exempt securities 10,236 859 8.39 7,709 576 7.47 11,923 612 5.13
-------- ----- ---- -------- ----- ---- -------- --- -----
Total investment
securitis 10,331 864 8.36 18,614 1,276 6.85 23,458 1,191 5.08
Loans (3) (4) 160,517 14,611 9.10 145,990 13,396 9.18 136,314 10,947 8.03
-------- ------ ---- -------- ------ ---- ------- ------ -----
Total interest
earning assets 220,272 18,734 8.50 189,405 16,019 8.46 180,873 13,233 7.32
Non-interest earning assets:
Cash and due from banks 6,343 5,534 5,330
Allowance for loan losses (2,243) (2,118) (1,805)
Other assets 15,392 11,886 11,660
-------- -------- --------
Total non-interest
earning assets 19,492 15,302 15,185
-------- -------- --------
TOTAL ASSETS $239,764 204,707 196,058
======== ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing liablities:
Interest bearing demand
deposits $ 44,889 1,244 2.77 $ 39,056 1,101 2.82 $ 41,012 960 2.34
Savings deposits 43,402 1,213 2.79 38,296 1,148 3.00 39,815 1,069 2.68
Time deposits 95,679 5,197 5.43 77,535 4,274 5.51 68,142 3,046 4.47
-------- ----- ---- -------- ----- ---- -------- --- ----
Total interest
bearing deposits 183,970 7,654 4.16 154,887 6,523 4.21 148,969 5,075 3.41
Other borrowed funds 4,907 247 5.03 2,639 145 5.49 2,131 75 3.52
Long-term debt 2,581 218 8.45 2,706 227 8.39 2,795 224 8.01
-------- ----- ---- -------- ----- ---- -------- --- ----
Total interest bearing
liabilities 191,458 8,119 4.24 160,232 6,895 4.30 153,895 5,374 3.49
Non-interest bearing liabilities
Demand deposits 22,874 19,728 18,739
Other liabilities 3,282 2,635 1,388
-------- -------- --------
Total non-interest
bearing liabilities 26,156 22,363 20,127
Shareholders' equity 22,150 22,112 22,036
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $239,764 $204,707 $196,058
======== ======== ========
Net interest income(tax-equivalent
basis) 10,615 4.26 % 9,124 4.15 % 7,859 3.82 %
==== ==== ====
Tax-equivalent basis adjustment (427) (197) (208)
------ -------- -----
Net Interest Income 10,188 $ 8,927 7,651
====== ======== =====
Net Interest margin(tax-equivalent
basis) 4.82 % 4.82 % 4.35 %
==== ==== ====
</TABLE>
(1) Interest and yields are presented on a tax-equivalent basis using a marginal
tax rate of 34%.
(2) Average balances have been calculated based on daily balances.
(3) Loan balances include non-accrual loans and are net of unearned income.
(4) Loan yields include the effect of amortization of deferred fees, net of
costs.
<TABLE>
<CAPTION>
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and inteerst expense.
(dollars in thousands) Increase/(Decrease)
---------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
------------------------------ ------------------------
Variance due to Variance due to
------------------------------ ------------------------
Volume Rate Net Volume Rate Net
------ ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal funds sold ($196) ($48) ($244) $177 $109 $286
Interest bearing deposits with banks (34) (7) (41) 35 35 70
Investment securities available for sale 1,886 311 2,197 (47) (57) (104)
Investment securities:
Taxable investments (588) (107) (695) (33) 154 121
Tax-exempt securities 206 78 283 (259) 223 (36)
------ ---- ------ ---- ---- ------
Total investment securities (382) (29) (412) (292) 377 85
Loans 1,323 (108) 1,215 814 1,635 2,449
------ ---- ------ ---- ---- ------
Total interest earning assets 2,597 118 2,715 687 2,099 2,786
Interest bearing liablities:
Interest bearing demand deposits 162 (19) 143 (48) 189 141
Savings deposits 151 (79) 73 (43) 117 74
Time deposits 1,000 (63) 938 420 710 1,130
------ ---- ------ ---- ---- ------
Total interest bearing deposits 1,313 (160) 1,153 329 1,016 1,345
Other borrowed funds 115 (13) 102 21 49 70
Long-term debt (11) 2 (9) (7) 10 3
Total interest bearing liabilities 1,320 (102) 1,218 230 1,297 1,527
------ ---- ------ ---- ---- ------
Net interest income (tax-equivalent basis) $1,277 $220 $1,497 $457 $805 $1,262
====== ==== ====== ==== ==== ======
</TABLE>
(1) Changes in net interest income that could not be specifically identified as
either rate or volume change were allocated proportionately to changes in volume
and changes in rate.
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Norwood Financial Corp.
We have audited the accompanying consolidated balance sheet of Norwood
Financial Corp. and its subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norwood
Financial Corp. and its subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As explained in the notes to the consolidated financial statements, the
Company changed its method of accounting for the impairment of loans and related
allowance for loan losses effective January 1, 1995, and accounting for
investment securities, effective January 1, 1994.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 14, 1997
13
<PAGE>
NORWOOD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,071,642 $ 5,597,861
Interest bearing deposits with other institutions 1,187,206 -
Federal funds sold 6,850,000 850,000
Investment securities available for sale 48,905,515 36,671,320
Investment securities (estimated market value of $9,040,338
and $12,362,652) 8,804,889 12,210,582
Loans (net of unearned income of $6,011,164 and $1,798,108) 174,553,734 152,094,620
Less allowance for loan losses 2,615,864 2,125,489
-------------- ---------------
Net loans 171,937,870 149,969,131
Bank premises and equipment, net 7,779,389 7,016,648
Other real estate 2,282,661 1,944,417
Accrued interest receivable 1,557,843 1,504,737
Other assets 3,707,599 1,497,779
-------------- ---------------
TOTAL ASSETS $ 260,084,614 $ 217,262,475
============== ===============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 25,255,685 $ 19,655,970
Interest-bearing demand 20,201,610 16,783,462
Savings 43,815,551 39,394,067
Money market deposit accounts 26,681,690 24,244,298
Time 113,374,257 87,221,310
-------------- ---------------
Total deposits 229,328,793 187,299,107
Short-term borrowings 3,227,041 2,031,432
Other borrowings 2,441,707 2,581,707
Accrued interest payable 2,223,909 1,831,496
Other liabilities 1,343,848 736,275
-------------- ---------------
TOTAL LIABILITIES 238,565,298 194,480,017
-------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value in 1996 and $1.00 par
value in 1995; authorized 10,000,000 shares in 1996
and 1,800,000 shares in 1995; issued 900,346 shares
in 1996 and 900,296 shares in 1995 90,346 900,296
Surplus 4,443,614 3,568,434
Retained earnings 18,861,363 17,704,192
Treasury stock, at cost (11,230 and 19,754 shares) (344,570) (561,410)
Net unrealized gain on securities 418,563 1,170,946
Unearned Employee Stock Ownership Plan (ESOP) shares (1,950,000) -
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 21,519,316 22,782,458
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 260,084,614 $ 217,262,475
============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------- -------------- ----------------
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 14,611,078 $ 13,395,892 $ 10,947,397
Investment securities:
Taxable 2,617,801 1,508,372 1,479,704
Exempt from federal income tax 810,990 366,121 403,925
Interest-bearing deposits with other institutions 28,890 69,617 -
Federal funds sold 239,177 482,886 194,492
------------- -------------- ---------------
Total interest income 18,307,936 15,822,888 13,025,518
------------- -------------- ---------------
INTEREST EXPENSE
Deposits 7,654,402 6,523,179 5,074,652
Short-term borrowings 247,256 145,443 75,336
Other borrowings 217,464 226,885 224,330
------------- -------------- ---------------
Total interest expense 8,119,122 6,895,507 5,374,318
------------- -------------- ---------------
NET INTEREST INCOME 10,188,814 8,927,381 7,651,200
PROVISION FOR LOAN LOSSES 1,710,000 619,400 1,070,000
------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,478,814 8,307,981 6,581,200
------------- -------------- ---------------
OTHER INCOME
Service charges and fees 709,253 500,664 420,456
Trust department income 169,277 124,090 148,233
Investment securities gains, net 787,185 145,934 267,620
Other 176,629 256,382 261,028
------------- -------------- ---------------
Total other income 1,842,344 1,027,070 1,097,337
------------- -------------- ---------------
OTHER EXPENSES
Salaries and benefits 3,781,690 3,287,999 2,905,012
Occupancy expense, net 392,616 311,077 271,468
Equipment expense 716,914 528,538 545,381
Deposit insurance premiums 2,000 219,946 374,260
Other real estate owned operations 435,768 373,945 327,977
Advertising expense 205,089 181,137 204,501
Professional fees 444,737 335,436 182,166
Shares tax expense 221,241 200,480 560,200
Other 1,780,982 1,442,575 564,486
------------- -------------- ---------------
Total other expenses 7,981,037 6,881,133 5,935,451
------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 2,340,121 2,453,918 1,743,086
INCOME TAXES 468,389 652,266 391,271
------------- -------------- ---------------
NET INCOME $ 1,871,732 $ 1,801,652 $ 1,351,815
============= ============== ===============
EARNINGS PER SHARE $ 2.19 $ 2.03 $ 1.50
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized Unearned
Common Retained Treasury Gain (Loss) ESOP
Stock Surplus Earnings Stock on Securities Shares Total
---------- ---------- ----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 900,296 $3,568,434 $15,926,049 $ - $ - $ - $ 20,394,779
---------- ---------- ----------- ----------- ----------- ----------- ------------
Initial net unrealized
gain on securities 1,446,695 1,446,695
Net income 1,351,815 1,351,815
Cash dividends declared
($.76 per share) (684,226) (684,226)
Net unrealized gain on securities (866,885) (866,885)
---------- ---------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1994 900,296 3,568,434 16,593,638 - 579,810 - 21,642,178
Net income 1,801,652 1,801,652
Cash dividends declared
($.78 per share) (691,098) (691,098)
Acquisition of treasury stock (561,410) (561,410)
Net unrealized gain on securities 591,136 591,136
---------- ---------- ----------- ---------- ---------- ---------- ------------
Balance, December 31, 1995 900,296 3,568,434 17,704,192 (561,410) 1,170,946 - 22,782,458
Transfer in connection
with holding company
formation (810,000) 810,000 -
Net income 1,871,732 1,871,732
Cash dividends declared
($.84 per share) (714,561) (714,561)
Purchase of treasury stock (1,733,383) (1,733,383)
Sale of shares of common
stock to ESOP 52,123 1,947,877 (2,000,000) -
Reissuance of treasury shares 857 2,346 3,203
Stock options exercised 50 12,200 12,250
Release of earned ESOP shares 50,000 50,000
Net unrealized loss on securities (752,383) (752,383)
---------- ---------- ----------- ---------- ---------- ---------- ------------
Balance, December 31, 1996 $ 90,346 $4,443,614 $18,861,363 $ (344,570) $ 418,563 $(1,950,000) $ 21,519,316
========== ========== =========== =========== =========== =========== ============
</TABLE>
16
<PAGE>
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,871,732 $ 1,801,652 $ 1,351,815
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,710,000 619,400 1,070,000
Depreciation and amortization 522,078 640,131 863,424
Deferred income taxes 770,904 (218,926) 136,745
Investment securities gains, net (787,185) (145,934) (267,620)
Loss on sale of other real estate, net 163,703 217,674 219,744
Proceeds from sale of loans 5,114,774 3,362,900 --
Decrease (increase) in accrued interest receivable (53,106) 236,117 (373,138)
Increase in accrued interest payable 392,413 582,016 77,404
Increase (decrease) of income taxes payable (736,963) 526,641 (96,735)
Other, net 391,168 201,562 355,942
------------ ------------ ------------
Net cash provided by operating activities 9,359,518 7,823,233 3,337,581
------------ ------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 3,081,158 5,086,046 350,001
Proceeds from maturities 11,376,177 5,173,000 2,250,000
Purchases (27,022,574) (4,865,909) (9,553,459)
Investment securities:
Proceeds from maturities 3,665,000 20,695,000 22,269,687
Purchases (250,000) (35,440,621) (19,926,288)
Net increase in loans (30,582,046) (17,450,096) (6,744,742)
Purchase of bank premises and equipment, net (1,362,700) (586,973) (515,835)
Proceeds from sales of other real estate 1,475,500 1,208,949 873,962
Proceeds received from branch acquisition 17,715,680 -- --
------------ ------------ ------------
Net cash used for investing activities (21,903,805) (26,180,604) (10,996,674)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposit 22,584,070 18,812,475 2,433,799
Net decrease (increase) in short-term borrowings 1,195,609 441,970 (1,307,621)
Repayments of other borrowings (140,000) (130,000) (115,283)
Stock options exercised 12,250 -- --
Acquisition of treasury stock (1,733,383) (561,410) --
Sale of treasury stock 3,203 -- --
Cash dividends paid (716,475) (677,241) (684,226)
------------ ------------ ------------
Net cash provided by financing activities 21,205,274 17,885,794 326,669
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 8,660,987 (471,577) (7,332,424)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,447,861 6,919,438 14,251,862
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,108,848 $ 6,447,861 $ 6,919,438
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
NORWOOD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 12, 1995, the stockholders of the Wayne Bank (Bank) approved the
reorganization of the Bank into a bank holding company structure. After
approval by regulatory authorities, the reorganization was completed on March
29, 1996. Each issued and outstanding share of the common stock, par value
$1.00, of the Bank immediately prior to the reorganization was converted into
and exchanged for one share of common stock, par value $.10, of Norwood
Financial Corp. (Company). As a result of this transaction, the Bank and its
wholly-owned real estate subsidiary, WCB Realty Corp., became a wholly-owned
subsidiary of the Company. The Bank is a state-chartered bank located in
Honesdale, Pennsylvania. The Company derives substantially all of its income
from the banking and bank related services which include interest earnings on
commercial mortgage, residential real estate, commercial, and consumer loan
financings, as well as interest earnings on investment securities and deposit
services to its customers. The Company is subject to regulation and
supervision by the Federal Reserve Board while the Bank is subject to
regulation and supervision by the Federal Deposit Insurance Corporation and
Pennsylvania Department of Banking.
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiaries, WCB Realty Corp., and Norwood Investment Corp. All intercompany
transactions have been eliminated in consolidation. The investments in
subsidiaries on the Company's financial statements are carried at the
Company's equity in the underlying net assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment Securities
---------------------
The Company has classified investment securities into two categories: Held to
maturity and Available for Sale. Debt securities acquired with the intent and
ability to hold to maturity are stated at cost adjusted for amortization of
premium and accretion of discount which are computed using the interest
method and recognized as adjustments of interest income. Certain other debt
securities have been classified as available for sale to serve principally
for liquidity purposes. Unrealized holding gains and losses for available for
sale securities are reported as a separate component of stockholders' equity,
net of tax, until realized. Realized securities gains and losses are computed
using the specific identification method. Interest and dividends on
securities are recognized as income when earned.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
-----
Loans are stated at their principal amount, net of unearned discount,
unamortized loan fees and costs and the allowance for loan losses. Unearned
discount on consumer loans is recognized as income over the term of the loans
using a method of amortization which approximates a level yield. Interest on
real estate mortgages and commercial loans is recognized as income when
earned on the accrual method.
Loans are placed on nonaccrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of
interest is doubtful. Loans are returned to accrual status when past due
interest is collected and the collection of principal is probable.
Nonrefundable loan origination fees and certain direct loan origination costs
are being deferred and the net amounts are being amortized as an adjustment
to the related loan's yield. These amounts are being amortized over the
contractual life of the related loans.
The Company provides automobile financing to its customers through a variety
of lease arrangements. Direct financing leases are carried at the aggregate
of lease payments receivable plus estimated residual value less unearned
income. Unearned income on direct financing leases is amortized over the
terms by methods that approximate the interest method.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Company
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Company's financial position
or results of operation.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for
18
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
-------------------------------------
impairment and does not aggregate loans by major risk classifications. The
definition of "impaired loans" is not the same as the definition of
"nonaccrual loans," although the two categories overlap. The Company may
choose to place a loan on nonaccrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired if the
loan is not a commercial or commercial real estate loan. Factors considered
by management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount
of the loans. When foreclosure is probable, impairment is measured based on
the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan portfolio.
The allowance method is used in providing for loan losses. Accordingly, all
loan losses are charged to the allowance and all recoveries are credit to it.
The allowance for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is based on
management's periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the portfolio,
and other relevant factors. The estimates used in determining the adequacy of
the allowance for loan losses, including the amounts and timing of future
cash flows expected on impaired loans, are particularly susceptible to
changes in the near term.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on both the straight-line and declining balance
methods over the estimated useful lives of the assets. Expenditures for
maintenance and repairs are charged against income as incurred. Costs of
major additions and improvements are capitalized.
Trust Department
----------------
Trust Department assets held by the Bank in fiduciary or agency capacities
for its customers are not included in the accompanying balance sheet since
such items are not assets of the Bank. Commissions and fees for services
performed by the Trust Department in a fiduciary capacity are reported on a
cash basis. The annual results would not be materially different if such
income were accrued.
Other Real Estate
-----------------
Real estate acquired by foreclosure is classified separately on the balance
sheet at the lower of the recorded investment in the property or its fair
value minus estimated costs of sale. Prior to foreclosure, the value of the
underlying collateral is written down by a charge to the allowance for loan
losses if necessary. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income and
losses on their disposition, are included in other expenses.
Intangible Assets
-----------------
As of December 31, 1996, intangible assets are comprised of goodwill and core
deposit acquisition premiums. Goodwill is amortized using the straight-line
method over a fifteen year period. Core deposit acquisition premiums, which
were developed by specific core deposit life studies, are amortized using the
straight-line method over seven to nine years. The amortization of these
premiums approximated $116,000 in 1996. Annual assessments of the carrying
values and remaining amortization periods of intangible assets are made to
determine possible carrying value impairment, and appropriate adjustments, as
deemed necessary.
Pension Plan
------------
Salaries and employee benefits include contributions, determined actuarially,
to a retirement plan covering all eligible employees of the Bank.
Income Taxes
------------
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Earnings Per Share
------------------
Earnings per share computations are based on the weighted average number of
shares outstanding which was 853,045 889,570, and 900,296 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Cash Flow Information
---------------------
For the purposes of reporting cash flows, Cash and cash equivalents include
Cash and due from banks and Federal funds sold.
Cash payments for interest in 1996, 1995, and 1994 were $7,726,709,
$6,313,491, and $5,296,914, respectively. Cash payments for income taxes for
1996, 1995, and 1994 were $786,495, $620,000, and $627,000, respectively.
Noncash investing activity for 1996, 1995, and 1994 include foreclosed
mortgage loans transferred to real estate owned of $2,073,743, $2,043,038,
and $998,021, respectively.
19
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for prior years have been reclassified to conform
to current year presentation. Such reclassifications did not affect net
income.
Pending Accounting Pronouncement
--------------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
The provisions of Statement No. 125 are effective for transactions occurring
after December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and pledged
collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, an amendment of FASB Statement No. 125." The adoption
of these statements is not expected to have a material impact on financial
position or results of operations.
BRANCH ACQUISITIONS
On March 25, 1996, the Bank acquired certain assets and all the deposit
liabilities of the Lakewood, Shohola, and Thompson branch offices of Meridian
Bank. The transaction was accounted for as a purchase. The Bank assumed
deposit liabilities of $20,169,279, and acquired cash funds and premises and
equipment totaling $1,007,890.
The premium paid to acquire these offices amounted to $1,790,023. This amount
is shown in other assets and is amortized over seven to nine years for the
identifiable and fifteen years for the unidentifiable amounts.
INVESTMENT SECURITIES
Upon the adoption of Statement 115, the Bank initially transferred from the
investment securities portfolio to the available for sale account
classification investment securities with an amortized cost of $9,256,202 and
an estimated market value of $11,448,164. The net appreciation of these
securities, at adoption, was recorded net of federal income taxes to an
unrealized securities gain (loss) account which is a component of
stockholders' equity. During 1995, in accordance with the Financial
Accounting Standards Board Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Bank was permitted an additional one time reclassification
of investment securities. Accordingly, the Bank transferred from the held to
maturity classification to the available for sale classification securities
with an amortized cost of $23,825,388 and an estimated market value of
$24,227,864.
The amortized cost and estimated market values of investment securities are
as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------- ------------ --------------
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 4,001,012 $ 3,778 $ (11,330) $ 3,993,460
Obligations of U.S. Government
agencies and corporations 25,995,691 51,622 (189,733) 25,857,580
Obligations of state and political
subdivisions 5,218,846 18,306 (63,236) 5,173,916
Corporate obligations 499,480 3,435 -- 502,915
Mortgage-backed securities 11,476,914 1,509 (119,357) 11,359,066
----------- ----------- ---------- -------------
Total debt securities 47,191,943 78,650 (383,656) 46,886,937
Equity securities 1,050,629 967,949 -- 2,018,578
----------- ----------- ---------- -------------
Total $48,242,572 $ 1,046,599 $ (383,656) $ 48,905,515
=========== =========== ========== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- ------------
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 5,507,882 $ 16,846 $(3,168) $ 5,521,560
Obligations of U.S. Government
agencies and corporations 18,507,862 209,635 -- 18,717,497
Obligations of state and political
subdivisions 250,000 2,770 -- 252,770
Corporate obligations 498,489 13,386 -- 511,875
Mortgage-backed securities 8,982,019 45,759 -- 9,027,778
----------- ---------- ------- -----------
Total debt securities 33,746,252 288,396 (3,168) 34,031,480
Equity securities 1,150,907 1,488,933 -- 2,639,840
----------- ---------- ------- -----------
Total $34,897,159 $1,777,329 $(3,168) $36,671,320
=========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------------- ---------- -----------
HELD TO MATURITY
Obligations of state and political
<S> <C> <C> <C> <C>
subdivisions $ 8,804,889 $ 242,759 $ (7,310) $9,040,338
----------- --------- -------- ----------
Total $ 8,804,889 $ 242,759 $ (7,310) $9,040,338
=========== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ----------- ------------
HELD TO MATURITY
Obligations of state and political
<S> <C> <C> <C> <C>
subdivisions $ 11,750,853 $182,415 $ (30,759) $ 1,902,509
Corporate obligations 459,729 414 - 460,143
------------ -------- --------- -----------
Total $ 12,210,582 $182,829 $ (30,759) $12,362,652
============ ======== ========== ===========
</TABLE>
20
<PAGE>
INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 999,362 $ 1,003,895 $ 500,000 $ 499,455
Due after one year through five years 17,994,121 18,007,615 500,000 494,820
Due after five years through ten years 11,190,999 11,044,128 -- --
Due after ten years 5,530,547 5,472,233 7,804,889 8,046,063
----------- ----------- ----------- -----------
35,715,029 35,527,871 8,804,889 9,040,338
Mortgage-backed securities 11,476,914 11,359,066 -- --
----------- ----------- ----------- -----------
Total $47,191,943 $46,886,937 $ 8,804,889 $ 9,040,338
=========== =========== =========== ===========
</TABLE>
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities:
For the Year Ended
1996 1995 1994
------------ ----------- -----------
Proceeds from sales $3,081,158 $5,086,146 $ 350,001
Gross gains 830,315 318,934 267,620
Gross losses 43,130 173,000 -
Investment securities with amortized costs and market value of approximately
$27,994,898 and $28,096,760 at December 31, 1996, and $21,020,969 and
$21,326,542 at December 31, 1995, were pledged as collateral to secure U.S.
Treasury demand notes, public deposits, securities sold under agreements to
repurchase, and certain other deposits as required by law.
LOANS
Major classifications of loans are summarized as follows:
1996 1995
-------------- ---------------
Real estate:
Residential $ 54,547,014 $ 55,560,062
Commercial 36,851,822 39,261,588
Construction 1,602,349 1,380,070
Commercial, financial, and agricultural 29,679,553 33,890,672
Consumer loans to individuals 37,502,691 23,800,336
Lease financing 16,981,082 -
-------------- ---------------
177,164,511 153,892,728
Less:
Unearned income 2,610,777 1,798,108
Allowance for loan losses 2,615,864 2,125,489
-------------- ---------------
Net loans $ 171,937,870 $ 149,969,131
============== ===============
In the normal course of business, loans are extended to directors and executive
officers and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness. A summary of loan activity for those
directors, executive officers, and their associates with loan balances in excess
of $60,000 for the year ended December 31, 1996, is as follows:
December 31, Amounts December 31,
1995 Additions Collected 1996
------------ --------- --------- ------------
$4,536,067 $832,015 $ 907,503 $ 4,460,579
The Company's primary activity is with customers located within its local trade
area of Wayne and Pike counties. Commercial, residential, consumer, and
agricultural loans are granted. Although the Bank has a diversified loan
portfolio at December 31, 1996 and 1995, loans outstanding to individuals and
businesses are dependent upon the local economic conditions in its immediate
area.
At December 31, 1996 and 1995, the recorded investment in loans which are
considered to be impaired in accordance with Statement Nos. 114 and 118 was
$2,877,248 and $3,713,104, respectively. Included in this amount is $439,964 and
$611,107 of impaired loans for which the related allowance for loan losses is
$51,899 and $34,432 at December 31, 1996 and 1995, respectively. Impaired loans
for which no allowance for loan losses has been allocated due to the loans being
collateral dependent and the fair value of the collateral exceeding the recorded
investment in the related loans amounted to $2,437,284 and $3,101,997,
respectively, at December 31, 1996 and 1995.
The average recorded investment in impaired loans during the year ended December
31, 1996 and 1995 were $3,228,069 and $3,378,316. For the years ended December
31, 1996 and 1995, interest income totaling $11,918 and $116,913, was recognized
on impaired loans.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1996 and 1995, are as follows:
1996 1995 1994
---------- ---------- ----------
Balance, January 1 $2,125,489 $1,893,440 $1,863,690
Add:
Provision 1,710,000 619,400 1,070,000
Recoveries 146,975 537,362 56,853
Less loans charged off 1,366,600 924,713 1,097,103
---------- ---------- ----------
Balance, December 31 $2,615,864 $2,125,489 $1,893,440
========== ========== ==========
21
<PAGE>
PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
1996 1995
-------------- ----------------
Land $ 1,004,227 $ 942,085
Buildings 7,579,125 6,725,218
Furniture and fixtures 3,887,005 3,448,378
-------------- ---------------
12,470,357 11,115,681
Less accumulated depreciation 4,690,968 4,099,033
-------------- ---------------
Total $ 7,779,389 $ 7,016,648
============== ===============
Depreciation expense amounted to $601,204, $469,058, and $434,279 for the
years ended December 31, 1996, 1995, and 1994, respectively.
DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $28,890,000 and $18,337,000 at December 31,
1996 and 1995, respectively.
SHORT-TERM BORROWINGS
The outstanding balances and related information of other borrowings which
includes securities sold under agreements to repurchase, federal funds
purchased, and U.S. Treasury demand notes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
Amount Rate Amount Rate
----------- ------ ------------ ------
<S> <C> <C> <C> <C>
Balance at year end $ 3,227,041 4.62% $ 2,031,432 4.64%
Average balances outstanding during
the year 4,901,934 5.0 2,630,878 5.53
Maximum amount outstanding at any
month end 11,968,856 9,277,000
</TABLE>
Average amounts outstanding during the year represent daily average balances
and average interest rates represent interest expense divided by the related
average balance.
Investment securities with amortized costs and market values of $5,047,476
and $5,124,295 at December 31, 1996, and $3,258,924 and $3,338,582 at
December 31, 1995, were pledged as collateral for these agreements.
The Bank maintains a revolving line of credit with a borrowing limit of
approximately $5.3 million with the Federal Home Loan Bank of Pittsburgh.
This credit line is subject to annual renewal, incurs no service charges, and
is secured by a blanket security agreement on outstanding residential
mortgage loans. At December 31, 1996, there were no outstanding borrowings on
this line of credit.
OTHER BORROWINGS
The Company's long-term debt consists of a mortgage bond with the Wayne
County Development Authority at an average interest rate of 7.79% over the
life of the bond issue. These bonds were issued to finance the Company's main
office headquarters facility which is security for the bonds and requires
annual debt service payments through the year 2007. At December 31, 1996, the
book value of the assets securing the bonds was approximately $3,794,000.
Scheduled maturities for long-term debt of each of the five years subsequent
to December 31, 1996, are $150,000 in 1997, $160,000 in 1998, $175,000 in
1999, $190,000 in 2000, and $200,000 in 2001. The Company has the option to
redeem the debt, at par value, after December 15, 1997.
<PAGE>
INCOME TAXES
The provision for federal income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Currently payable (refundable) $ (302,515) $ 871,192 $ 254,526
Deferred 770,904 (218,926) 136,745
---------- ----------- ----------
Total provision for income taxes $ 468,389 $ 652,266 $ 391,271
========== =========== ==========
</TABLE>
The components of the net deferred tax assets (liabilities) at December 31,
1996 and 1995, are as follows:
1996 1995
---------- --------
Deferred Tax Assets:
Allowance for loan losses $ 488,401 $420,115
Deferred loan origination fees 84,708 175,402
Allowance for other real estate losses 104,074 112,442
Accrued pension 134,199 100,664
Allowance for loss on other assets 85,000 85,000
Deferred compensation/incentives 109,835 51,524
Core deposit intangible 43,430 25,574
Partnership credit carryforward 58,000 -
Minimum tax credit carryforward 74,428 -
---------- --------
Total gross deferred tax assets 1,182,075 970,721
---------- --------
Deferred Tax Liabilities:
Net unrealized gain on securities 244,380 603,215
Premises and equipment 222,412 206,646
Lease financings 966,781 -
Other 2,605 2,894
---------- --------
Total gross deferred tax liabilities 1,436,178 812,755
---------- --------
Net deferred tax assets (liabilities) $ (254,103) $157,966
========== ========
22
<PAGE>
INCOME TAXES (Continued)
A reconciliation between the expected statutory income tax rate and the
effective income tax rate on income before income taxes follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- ---------------------- ------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
----------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed at statutory rate $ 795,641 34.0 % 834,332 34.0 % 592,649 34.0 %
Effect of tax-free income (276,355) (11.8) (129,384) (5.3) (140,916) (8.1)
Non-deductible interest to
carry tax-exempt assets 32,420 1.4 17,748 0.7 20,096 1.2
Low-income housing tax credit (58,000) (2.5) (58,043) (2.4) (56,200) (3.2)
Other, net (25,317) (1.1) (12,387) (.4) (24,358) (1.4)
---------- ---- ------- ---- ------- ----
Income tax expense and
effective rate $ 468,389 10.0 % 652,266 26.6 % 391,271 22.5 %
========== ==== ======= ==== ======= ====
</TABLE>
COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, there are various outstanding commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of
a customer to a third party. These commitments were comprised of the
following:
1996 1995
------------ -----------
Commitments to extend credit $ 25,346,000 $16,821,000
Commercial letters of credit and financial guarantees 1,144,000 1,215,000
------------ -----------
Total $ 26,490,000 $18,036,000
============ ===========
Such commitments and standby letters of credit involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized
in the consolidated financial statements.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. Substantially all of the
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for loan losses. Since many of the
commitments are expected to expire without without being drawn upon, the
total contractual amounts do not necessarily represent future funding
requirements.
Contingent Liabilities
----------------------
The Company is involved in various legal actions from normal business
activities. Management believes that the liability, if if any, arising from
such actions will not have a material adverse effect on the Company's
financial position.
EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
----------------------------
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be
paid to eligible employees at retirement based primarily upon years of
service with the subsidiary bank and compensation during the last five years
of employment. The Bank's funding policy is to make annual contributions as
needed based upon the funding formula developed by the plan's actuary.
Pension expense includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service cost $ 170,345 $ 139,615 $ 165,306
Interest cost on projected benefit obligation 183,003 170,358 163,519
Return on plan assets (211,468) (182,645) (182,855)
Net amortization (5,485) (5,485) (6,602)
------------ ----------- -----------
Net periodic pension costs $ 136,395 $ 121,843 $ 139,368
============ =========== ===========
</TABLE>
The actuarial present value of accumulated benefit obligations at December
31, 1996 and 1995, was $2,151,919 and $1,977,567 including vested benefit
obligations of $2,111,999 and $1,950,957. The following table sets forth the
funded status and amounts recognized in the balance sheet at:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Projected benefit obligation $ 2,900,868 $ 2,706,520
Plan assets at fair value (2,761,574) (2,493,331)
----------- -----------
Projected benefit obligation in excess of plan assets 139,294 213,189
Unrecognized prior service costs (21,190) (22,307)
Unrecognized transition amounts 112,818 119,420
Unrecognized net gain from past experience different from that as 89,828 (22,397)
----------- -----------
Accrued pension costs $ 320,750 $ 287,905
=========== ===========
</TABLE>
The weighted discount rate used to measure the projected obligation is 7.00%
for December 31, 1996 and 7.50% for December 31, 1995 and 1994 and the rate
of future increase in future compensation levels is 6.00%, and the long-term
rate of return on assets is 8.00% as of December 31, 1996 and 8.50% as of
December 31, 1995 and 1994.
On February 11, 1997, the Company decided to discontinue to provide the
benefits under the defined benefit plan. The Company plans to settle the
obligations under the defined benefit plan during 1997. The effects of the
settlement cannot be determined at this time.
23
<PAGE>
Profit Sharing Plan
-------------------
The Company maintains a deferred profit sharing plan for all eligible
employees. Contributions to the plan are made at the discretion of the Board
of Directors. Contributions to the plan were $170,061, $139,901, and $155,887
for 1996, 1995, and 1994, respectively.
Effective November 1, 1996, the Company amended the profit sharing plan to
include the adoption of an integrated 401(k) plan. The plan permits employees
to make pre-tax contributions up to 15% of the employee's compensation. The
Company may make matching contributions as approved at the discretion of the
Board of Directors. All employees over the age of 21 are eligible to
participate in the plan after one year of employment. Employee contributions
are vested at all times, and any Company contributions are fully vested after
five years.
Employee Stock Ownership Plan (ESOP)
------------------------------------
On August 27, 1996, the Board of Directors approved the creation of a
leveraged employee stock ownership plan ("ESOP") for the benefit of employees
who meet the eligibility requirements which include having completed one year
of service with the Company and having attained age twenty-one. The ESOP
Trust purchased shares of the Company's common stock with proceeds from a
loan from the Company. The Company makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan
payments. The loan bears interest at the prime rate, adjusted annually.
Interest is payable annually and principal is payable in equal annual
installments over ten years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The Company accounts for its leveraged ESOP in accordance with Statement of
Position 93-6. Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in the consolidated balance sheet. As shares are
released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
earnings per share computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt.
Compensation expense for the ESOP is $50,758 for the year ended December 31,
1996.
1996
------------
Allocated shares $ 1,515
Shares released for allocation -
Unreleased shares 59,091
------------
Total ESOP shares 60,606
============
Fair value of unreleased shares $ 1,905,685
============
REGULATORY RESTRICTIONS
Cash Requirements
-----------------
Included in cash and due from banks are required federal reserves of
$1,116,000 and $852,000 and at December 31, 1996 and 1995, respectively, for
facilitating the implementation of monetary policy by the Federal Reserve
System. The required reserves are computed by applying prescribed ratios to
the classes of average deposit balances. These are held in the form of cash
on hand and/or balances maintained directly with the Federal Reserve Bank.
Dividends
---------
The Pennsylvania Banking Code restricts the availability of surplus for
dividend purposes. At December 31, 1996, surplus funds of $3,568,434 were not
available for dividends.
Capital Requirements
--------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Company and the Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1996, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the federal
regulators has categorized the Company and the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Company and the Bank must maintain minimum Total
risk-based, Tier I risk-based and Tier I leverage ratios at least 100 to 200
basis points above those ratios set forth in the table. There have been no
conditions or events since that notification that management believes have
changed the Bank's category.
24
<PAGE>
CAPITAL REQUIREMENTS (Continued)
The following table reflects the Company's ratios at December 31 (the Bank's
ratios do not significantly differ from the Company):
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Total Capital (to Risk
Weighted Assets)
- -------------------------------
<S> <C> <C> <C> <C>
Actual $ 21,784,370 11.5% $ 23,445,111 15.2%
For Capital Adequacy
Purposes 15,144,038 8.0 12,353,938 8.0
Tier I Capital (to Risk
Weighted Assets)
- -------------------------------
Actual $ 19,415,032 10.3% $ 21,512,398 13.9%
For Capital Adequacy
Purposes 7,572,019 4.0 6,176,969 4.0
Tier I Capital (to Average
Assets)
- -------------------------------
Actual $ 19,415,032 7.7% 21,512,398 10.5%
For Capital Adequacy
Purposes 10,098,012 4.0 8,177,522 4.0
</TABLE>
STOCK OPTION PLAN
In December, 1994, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees of the Company which was approved by
stockholders at the annual meeting held on April 25, 1995. An aggregate of
250,000 shares of authorized but unissued common stock of the Company were
reserved for future issuance under the plan. The stock options typically have
expiration terms ranging between one and ten years subject to certain
extensions and early terminations. The per share exercise price of a stock
option shall be, at a minimum, equal to the fair value of a share of common
stock on the date the option is granted. Proceeds from the exercise of the
stock options are credited to common stock for the aggregate par value and
the excess is credited to additional paid in capital.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the Company to
recognize compensation expense for all awards of equity instruments issued
after December 31, 1995. The statement establishes a fair value based method
of accounting for stock-based compensation plans. The standard applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities in amounts based on the price of the
entity's common stock or other equity instruments. Statement No. 123 permits
companies to continue to account for such transactions under Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees", but
requires disclosure in a note to the financial statements pro forma net
income and earnings per share as if the Company had applied the new method of
accounting.
Under APB Opinion 25, no compensation expense has been recognized with
respect to the options granted under the stock option plan. Had compensation
expense been determined on the basis of fair value pursuant to Statement No.
123, net income and earnings per share would have been reduced as follows:
1996 1995
-------------- -------------
Net Income:
As reported $ 1,871,732 $ 1,801,652
============== =============
Pro forma $ 1,796,041 $ 1,731,327
============== =============
Earnings Per Share:
As reported $ 2.19 $ 2.03
============== =============
Pro forma $ 2.11 $ 1.95
============== =============
The following table presents share data related to the stock option plan:
<TABLE>
<CAPTION>
Shares Under Option
-----------------------
1996 1995
------ ------
<S> <C> <C>
Outstanding, January 1 14,985 -
Granted 9,875 14,985
Exercised (500) -
Forfeited (3,550) -
Outstanding, December 31 (at prices ranging from $32.25 to $33.25 20,810 14,985
</TABLE>
FAIR VALUE DISCLOSURE
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 7,071,642 $ 7,071,642 $ 5,597,861 $ 5,597,861
Interest-bearing deposits with other
institutions 1,187,206 1,187,206 -- --
Federal funds sold 6,850,000 6,850,000 850,000 850,000
Investment securities available for 48,905,515 48,905,515 36,671,320 36,671,320
Investment securities 8,804,889 9,040,338 12,210,582 12,362,652
Net loans 154,956,789 161,795,000 149,969,131 155,343,000
Accrued interest receivable 1,557,843 1,557,843 1,504,737 1,504,737
------------ ------------ ------------ ------------
Total $229,333,884 $236,407,544 $206,803,631 $212,329,570
============ ============ ============ ============
Financial liabilities:
Deposits $229,328,793 $229,347,000 $187,299,107 $187,603,000
Short-term borrowings 3,227,041 3,227,041 2,031,432 2,031,432
Other borrowings 2,441,707 2,632,000 2,581,707 2,962,000
Accrued interest payable 2,223,909 2,223,909 1,831,496 1,831,496
------------ ------------ ------------ ------------
Total $237,221,450 $237,429,950 $193,743,742 $194,427,928
============ ============ ============ ============
</TABLE>
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future
estimated losses and other factors as determined through various option
pricing formulas or simulation modeling.
25
<PAGE>
FAIR VALUE DISCLOSURE (Continued)
As many of these assumptions result from judgments made by management based
upon estimates which are inherently uncertain, the resulting estimated fair
values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on
the resulting estimated fair values.
As certain assets and liabilities such as lease receivables, deferred tax
assets, and premises and equipment are not considered financial instruments,
the estimated fair value of financial instruments would not represent the
full value of the Bank.
The Bank employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available
based upon the following assumptions:
Cash and Due From Banks, Interest-Bearing Deposits With Other Institutions,
-----------------------------------------------------------------------------
Federal Funds Sold, Accrued Interest Receivable, Short-Term Borrowings, and
-----------------------------------------------------------------------------
Accrued Interest Payable.
------------------------
The fair value is equal to the current book value.
Investment Securities
---------------------
The fair value of investment securities available for sale and held to
maturity is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price for
similar securities.
Loans, Deposits, and Other Borrowings
-------------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality, and prepayment risk. Demand, savings,
and money market deposit accounts are valued at the amount payable on demand
as of year end. Fair values for time deposits and other borrowings are
estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market
rates being offered for deposits and borrowings of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently charged
to enter into similar agreements with similar credit risk, are not considered
material for disclosure. The contractual amounts of unfunded commitments and
letters of credit are presented at Commitments and Contingent Liabilities.
PARENT COMPANY
On March 29, 1996, the reorganization of the Bank into a holding company
structure was completed. Each outstanding share of the common stock of the
Bank, with a par value of $1.00 was converted into and exchanged for one
common share of common stock of Norwood Financial Corp., with a par value of
$.10. As a result of this transaction the Bank became a wholly-owned
subsidiary of the Company.
<PAGE>
CONDENSED BALANCE SHEET
December 31,
1996
-----------------
ASSETS
Cash on deposit in subsidiary bank $ 395,426
Investment securities available for sale 207,175
Investment in subsidiary 21,050,547
Other assets 61,332
---------------
Total assets $ 21,714,480
===============
LIABILITIES $ 195,164
STOCKHOLDERS' EQUITY 21,519,316
---------------
Total liabilities and stockholders' equity $ 21,714,480
===============
<TABLE>
<CAPTION>
For the Period
March 29 to
December 31,
1996
-----------------
INCOME
<S> <C>
Dividends from subsidiary bank $ 2,549,096
Interest income 41,250
Gain on sale of investment securities 1,862
---------------
Total income 2,592,208
---------------
EXPENSES 14,603
---------------
Income before income taxes 2,577,605
Income tax benefit (3,049)
---------------
Income before equity in undistributed earnings of subsidiary 2,580,654
Equity in undistributed earnings of subsidiary (1,189,908)
---------------
NET INCOME $ 1,390,746
===============
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
March 29 to
December 31,
1996
-----------------
OPERATING ACTIVITIES
<S> <C>
Net income $ 1,390,746
Adjustment to reconcile net income to net cash provided:
Undistributed earnings of subsidiary 1,189,908
Other, net (13,194)
---------------
Net cash provided by operating activities 2,567,460
---------------
INVESTING ACTIVITIES
Sale of investment securities available for sale 81,960
Purchase of investment securities available for sale (282,023)
Net cash used for investing activities (200,063)
FINANCING ACTIVITIES
Proceeds from sale of treasury stock 3,203
Acquisition of treasury stock (1,447,263)
Stock options exercised 12,250
Cash dividends paid (540,161)
---------------
Net cash used for financing activities (1,971,971)
---------------
Increase in cash and cash equivalents 395,426
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -
---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 395,426
===============
</TABLE>
26
<PAGE>
Investor Information
Stock ListinNorwood Financial Corp. stock is traded under the symbol NWFL.
The following firms are known to make a market in the Company's stock:
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
717-560-3015
Legg Mason Wood Walker, Inc.
The Stadium Office Park
330 Montage Mountain Road
Suite 201
Scranton, PA 18507
717-346-9300
Sandler O'Neill & Partners, LP
2 World Trade Center, 104th Floor
New York, NY 10048
212-466-7800
Janney Montgomery Scott, Inc.
1801 Market Street
Philadelphia, PA 19103
215-665-6000
F.J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103
215-563-8500
Transfer Agent: Wayne Bank acts as the transfer agent for the company stock.
Stock holders who may have questions regarding their stock ownership should
contact the Bank at (717)253-1455.
Dividend Calendar: Dividends on Norwood Financial Corp. common stock, if
approved by the Board of Directors are customarily paid on February 1, May 1,
August 1 and November 1.
SEC Reports and additional information upon written request of any
stockholder, investor or analyst, a copy of the Company's report on Form 10-K
for its fiscal year ended December 31, 1995 including financial statements and
schedules thereto, required to be filed with the Securities and Exchange
Commission may be obtained by contacting Lewis J. Critelli, Senior Vice
President and Chief Financial Officer, Norwood Financial Corp. 717 Main Street,
P.O. Box 269, Honesdale, PA 18431, (717)253-8512.
29
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,072
<INT-BEARING-DEPOSITS> 1,187
<FED-FUNDS-SOLD> 6,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,906
<INVESTMENTS-CARRYING> 8,805
<INVESTMENTS-MARKET> 9,040
<LOANS> 174,554
<ALLOWANCE> 2,616
<TOTAL-ASSETS> 260,085
<DEPOSITS> 229,329
<SHORT-TERM> 3,227
<LIABILITIES-OTHER> 3,568
<LONG-TERM> 2,442
0
0
<COMMON> 90
<OTHER-SE> 21,429
<TOTAL-LIABILITIES-AND-EQUITY> 260,085
<INTEREST-LOAN> 14,611
<INTEREST-INVEST> 3,429
<INTEREST-OTHER> 268
<INTEREST-TOTAL> 18,308
<INTEREST-DEPOSIT> 7,654
<INTEREST-EXPENSE> 8,119
<INTEREST-INCOME-NET> 10,189
<LOAN-LOSSES> 1,710
<SECURITIES-GAINS> 787
<EXPENSE-OTHER> 7,981
<INCOME-PRETAX> 2,340
<INCOME-PRE-EXTRAORDINARY> 2,340
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,872
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.19
<YIELD-ACTUAL> 4.82
<LOANS-NON> 3,451
<LOANS-PAST> 42
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,125
<CHARGE-OFFS> 1,366
<RECOVERIES> 146
<ALLOWANCE-CLOSE> 2,616
<ALLOWANCE-DOMESTIC> 2,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 635
</TABLE>
