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 [FEE REQUIRED] For the fiscal year
ended December 31, 1999,
-----------------
[ ] 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 .
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Commission File No. 0-28366
Norwood Financial Corp.
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( Exact Name of Registrant as specified 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
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (717) 253-1455
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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
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(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 16, 1999, there were 1,781,477 shares outstanding of the
registrant's Common Stock.
The Registrant's voting stock trades on the NASDAQ National Market 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 14, 2000, was $27,083,000 ($19.75 per share based
on 1,371,285 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. The Company undertakes no obligation to publicly release the results
of any revisions to those forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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, two offices in Pike County and one office in Monroe County. The
Bank primarily serves the Pennsylvania counties of Wayne, Pike and Monroe to a
much lesser extent, the counties of Lackawanna and Susquehanna. These offices
include two offices acquired from Meridian Bank as of March 23, 1996, one each
in the counties of Wayne and Pike In addition, the Bank operates ten automated
teller machines with eight in branch locations and two remote service
facilities.
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, 1999, the Bank had total assets, deposits, and
stockholders equity of $314.4 million, $244.0 million, and $26.0 million,
respectively.
Competition
The Company's primary market area of Wayne, Pike and Monroe 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 and other tourism related activities. Wayne
County has become
1
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more accessible to the western areas of Scranton and Wilkes-Barre with the
completion 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 driving distance of the New
York/Northern New Jersey Metropolitan area. The Company also does business in
Monroe County, which is one of the fastest growing counties in Pennsylvania,
with an influx of population from neighboring New Jersey. Proposed commuter rail
service between Monroe and the New York City area will also enhance the
development of the area.
The Bank is one of 20 financial institutions serving its immediate market
area. The competition for deposit products comes from 13 commercial banks in the
market area, some of which are considerably larger than the Company, two savings
associations 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.
The Bank is in a competitive environment for loan products. Competition for
loans comes not only from banks, but also from mortgage brokers, auto dealer
financing companies and other non-bank lenders. The Bank prices its loans to be
competitive with local and regional competition, while remaining aware of risk
elements.
2
<PAGE>
Personnel
As of December 31, 1999, the Bank had 112 full-time and 14 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, longer term fixed
rate mortgage products which may be sold, servicing retained, in the secondary
market through the Federal National Mortgage Association (Fannie Mae) or held in
the Bank's portfolio subject to certain internal guidelines. Fixed rate home
equity loans are originated on terms up to 180 months, as well as offering a
home equity line of credit tied to prime rate. The Bank does a significant level
of indirect dealer financing of automobiles, boats, and recreational vehicles
through a network of over 60 dealers in Northeast Pennsylvania.
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 a limited amount of letter of
credit facilities. The structure may be fixed, immediately repricing tied to the
prime rate or adjustable at set intervals.
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.
Consumer lending, including indirect financing provides benefits to the
Bank's asset/liability management program by reducing the Bank's exposure to
interest rate changes, due to their generally shorter terms, and higher yields.
Such loans may entail additional credit risks compared to owner-occupied
residential mortgage lending. However, the Bank believes that the higher yields
and shorter terms compensate the Bank for the increased credit risk associated
with such loans.
Commercial lending including real-estate related loans entail significant
additional risks when compared with residential real estate 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
market conditions for commercial office, retail, and warehouse space. In periods
of decreasing cash flows, the commercial borrower may permit a lapse in general
maintenance of the property causing the value of the underlying collateral to
deteriorate. The liquidation of commercial property is often more costly and may
involve more time to sell than residential real estate.
Due to the type and nature of the collateral, and, in some cases the
absence of collateral, consumer lending generally involves more credit risk when
compared with residential real estate lending. Consumer
3
<PAGE>
lending collections are typically dependent on the borrower's continuing
financial stability, and thus, are more likely to be adversely affected by job
loss, divorce, illness and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency is usually
turned over to a collection agency.
Leasing entails residual value risk in addition to credit risk. The
residual value is the pre-determined value of the vehicle at the end of the
lease term established at the inception of the lease. The Bank sets the residual
value based on the Automotive Leasing Guide (ALG). At the end of the lease a
customer may buy the vehicle at the residual value, use as a trade-in for
another vehicle or return it to the Bank. The Bank disposes of returned vehicles
through various dealer and automobile auctions. The Bank is no longer
originating automobile leases.
4
<PAGE>
Types of Loans. 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,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ------------- --------------- ------------- --------------
$ % $ % $ % $ % $ %
(Dollars in Thousands)
Type of Loans:
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural.. $ 17,430 8.5 $25,539 13.6 $26,589 14.2 $29,680 16.7 $33,891 22.0
Real Estate-construction................ 3,339 1.6 3,046 1.6 2,046 1.1 1,602 0.9 1,380 0.9
residential............ 56,723 27.6 52,038 27.8 54,227 29.0 54,547 30.8 55,718 36.2
commercial............. 49,575 24.2 30,555 16.3 32,986 17.7 36,852 20.8 39,103 25.4
Leases to Individuals................... 23,974 11.7 33,860 18.1 33,877 18.1 17,048 9.6 -- --
Installment Loans to Individuals........ 54,201 26.4 42,266 22.6 37,082 19.9 37,503 21.2 23,800 15.5
------ ---- ------ ---- ------ ---- ------ ---- ------ -----
Total Loans............................. 205,242 100.0 187,304 100.0 186,807 100.0 177,232 100.0 153,892 100.0
===== ===== ===== ===== =====
Less unearned income.................... 82 385 1,167 2,611 1,798
Allowance for loan losses............... 3,344 3,333 3,250 2,616 2,125
----- ----- ----- ----- -----
Total loans, net........................ $201,816 183,586 $182,390 $172,005 $149,969
======== ======= ======= ======= =======
</TABLE>
5
<PAGE>
Maturities and Sensitivities of Loans to Changes in Interest Rates. The
following table sets forth maturities and interest rate sensitivity for selected
categories of loans as of December 31, 1999. 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 $2,026 $ 7,121 $8,283 $17,430
Real Estate-
Construction 3,339 --- --- 3,339
Commercial 6,282 17,283 26,010 49,575
----- ------ ------ ------
Total $11,647 $24,404 $34,293 $70,344
====== ======= ====== ======
Loans with fixed-rate $1,363 $ 7,944 $8,935 $18,242
Loans with floating
rates 10,284 16,460 25,358 52,102
------ ------ ------ ------
Total $11,647 $24,404 $34,293 $70,344
====== ====== ====== ======
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<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,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and all other........................ $ 64 $65 $ 963 $1,633 $1,572
Real estate..................................... 513 503 1,112 1,790 2,205
Consumer........................................ 19 20 33 28 48
---- ----- ----- ----- -----
Total $ 596 $588 $2,108 $3,451 $3,825
===== === ===== ===== ======
Accruing loans which are contractually past-
due 90 days or more:
Commercial and all other $ -- $ -- $ 44 $ 38 $ 55
Real estate -- -- -- -- --
Consumer 61 34 23 4 --
---- ----- ----- ----- -----
Total $ 61 $ 34 $ 67 $ 42 55
===== ===== ===== ==== =====
Total non-performing loans....................... $ 657 $622 2,175 $3,493 3,880
Other real estate owned 110 204 537 $2,283 1,944
---- ----- ----- ----- -----
Total non-performing assets...................... $ 767 $826 $2,712 $5,776 5,824
====== === ====== ===== =====
Total non-performing loans to total loans .32% .33% 1.17% 2.00% 2.55%
Total non-performing loans to total assets .21% .22% .83% 1.34% 1.79%
Total non-performing assets to total assets .24% .30% 1.03% 2.22% 2.68%
</TABLE>
Potential Problem Loans. As of December 31, 1999, 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, 1999, there were no loans considered
impaired requiring an allowance for loan losses in accordance with Statement No.
114 and 118.
7
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at the dates
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total loans receivable .............................. $205,159 186,919 $185,640 $174,621 $152,094
Average loans receivable............................. 196,005 186,877 183,625 160,517 145,990
Allowance balance at beginning of period............. $ 3,333 $3,250 $2,616 $2,125 $ 1,893
Charge-offs:
Commercial and all other.......................... (12) (294) (380) (820) (448)
Real estate....................................... (17) (14) (119) (226) (353)
Consumer.......................................... (419) (366) (264) (320) (123)
Leases............................................ (184) (115) (67) -- --
------- ------- -------- -------- --------
Total................................................ (632) (789) (830) (1,366) (924)
Recoveries:
Commercial and all other........................... 74 89 72 71 513
Real estate........................................ -- 7 3 16 3
Consumer........................................... 83 50 34 60 21
Leasing............................................ 16 6 -- -- --
------- ------- -------- -------- --------
Total............................................. 173 152 109 147 537
------- ------- -------- -------- --------
Provision expense.................................... 470 720 1,355 1,710 619
------- ------- -------- -------- --------
Allowance balance at end of period................... $3,344 $3,333 $3,250 $2,616 $2,125
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of total loans outstanding......................... 1.63% 1.78% 1.75% 1.50% 1.40%
Net loans charged off as a percent of
average loans outstanding.......................... .23% .34% .39% .76% .27%
</TABLE>
8
<PAGE>
Allocation of the Allowance For Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans at the date indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ----------------- ---------------- ------------------
(Dollars in thousands) % 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 $ 376 7.6% $ 346 13.6% $ 610 14.2% $ 871 16.7% $ 927 22.0
Real estate - construction 31 1.6 23 1.6 15 1.1 38 0.9 14 0.9
Real estate - mortgage 1,171 52.7 647 44.1 641 46.7 727 51.6 909 61.6
Installment loans to individuals 551 26.4 442 22.6 276 19.9 260 21.2 155 15.5
Leases 180 11.7 254 18.1 169 18.1 85 9.6 -- --
Unallocated 1,035 -- 1,621 -- 1,539 -- 635 -- 120 --
------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Total $3,344 100.0% $3,333 100.0% $3,250 100.0% $2,616 100.0% $2,125 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
- --------------------
(1) Includes specific reserves for assets classified as loss.
</TABLE>
9
<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
----------------------------------
(Dollars in thousands) 1999 1998 1997
----------------------------------
Securities:
(carrying value)
U.S. Treasury Securities........ $3,988 $ 5,581 $8,034
U.S. Government
Agencies........................ 18,170 19,628 18,024
State and political
subdivisions................... 12,151 11,456 9,621
Corporate Notes and bonds....... 2,307 1,789 0
Mortgage-backed Securities...... 45,523 28,326 18,961
Equity Securities............... 4,213 3,135 2,891
----- ----- -----
Total Securities $86,352 $69,915 $57,531
====== ====== ======
Fair value of
Securities...................... $86,286 $70,421 $57,888
====== ====== ======
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<PAGE>
Maturity Distribution of Securities. The following table sets forth certain
information regarding carrying values, weighted average yields, and maturities
of the Company's securities portfolio at December 31, 1999. Yields on tax-exempt
securities 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
on mortgage backed securities 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
One Year or Less Five Years Ten Years After Ten Years Total 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>
(Dollars in thousands)
U.S. Government Securities $3,988 5.89 $ -- -- $ -- -- $ --- --- $3,988 5.89
U.S. Government Agencies 1,280 6.23 11,141 6.02 4,201 6.52 1,548 6.37 18,170 6.18
State and political 385 5.76 780 6.90 -- -- 10,986 8.62 12,151 8.42
subdivisions(3)
Mortgage-backed Securities(1) 3,341 6.44 13,363 6.44 15,535 6.47 13,284 6.57 45,523 6.49
Corporate Securities -- -- 998 6.55 439 6.68 870 7.70 2,307 7.01
Equity Securities(2) 4,213 4.72 -- -- -- -- -- -- 4,213 4.72
------- ------- ------- ------- -------
Total Investment Securities $13,207 5.69% $26,282 6.28% $20,175 6.48% $26,688 7.44 $86,352 6.60%
======= ===== ======= ==== ======= ===== ======= ===== ======= =====
</TABLE>
(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 $7,477 in securities classified as held-to-maturity with a market
value of $7,411
11
<PAGE>
Deposit Activities.
General. The Bank provides a full range of deposit products to its retail
and business customers. These include interest-bearing and noninterest 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 which are typically on a competitive bid basis. Other
services the Bank offers it's customers on a limited basis include cash
management, direct deposit and ACH activity. The Bank operates ten 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,
1999.
(Dollars in thousands) Certificates
Maturity Period of Deposit
- --------------- ----------
Within three months........................ $17,994
Over three through six months.............. 5,857
Over six through twelve months............. 2,788
Over twelve months......................... 5,848
------
$32,487
======
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, Federal Home
Loan Bank advances and U.S. Treasury demand notes, that the Company had during
the periods indicated.
(Dollars in thousands) Year ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Short-term borrowings:
Average balance outstanding................ $8,187 $7,645 $7,726
Maximum amount outstanding at any
month-end during the period.............. 26,462 14,284 13,456
Weighted average interest rate during
the period................................. 3.66% 4.64% 4.84%
Total short-term borrowings at end of
period..................................... $8,600 $7,776 $4,990
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<PAGE>
Trust Activities
The Bank operates a Trust Department which provides estate planning,
investment management and financial planning to customers. At December 31, 1999,
the Bank acted as trustee for $57.0 million of assets of which $28.9 million is
non-discretionary with no investment authority.
Subsidiary Activities
The Bank, a Pennsylvania chartered bank, is the only wholly owned
subsidiary of the Company. Norwood Investment Corp. ("NIC"), incorporated in
1996, a Pennsylvania licensed insurance agency, is a wholly-owned subsidiary of
the Bank. NIC's business is annuity and mutual fund sales and discount brokerage
activities 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 BISYS Brokerage a registered broker/dealer. NIC
had sales volume of $6.4 million in 1999, generating revenues of $149,000.
WCB Realty Corp. is a wholly-owned real estate subsidiary of the Bank whose
principal asset is the administrative offices of the Company.
WTRO Properties Inc. is a wholly-owned real estate subsidiary of the Bank
established to hold title to certain real estate upon which the Bank through
WTRO foreclosed upon in 1998. The majority of the foreclosed real estate was
sold in the third quarter of 1998. The Company had little activity in 1999.
Regulation
Set forth below is a brief description of certain laws that 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.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act") which, effective March 11, 2000, permits
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature or incidental to a financial
activity. The GLB Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve Board ("FRB") has determined to be closely
related to banking. A bank holding company may elect to be treated as a
financial holding company only if all depository institution subsidiaries of the
holding company are and continue to be well-capitalized and well-managed and
have at least a satisfactory rating under the Community Reinvestment Act.
The GLB Act also authorizes national banks to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company and any activity that is determined to be financial in nature or
incidental to a financial activity, except insurance underwriting, real estate
development, real estate investment (except as otherwise permitted by law),
insurance company portfolio investments and merchant banking activities. The
authority of a national bank to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank
must be well-managed and well-capitalized (after deducting from capital the
bank's outstanding investments in financial subsidiaries).
13
<PAGE>
The GLB Act further provides that a state bank may invest in financial
subsidiaries, assuming the requisite investment authority under state law,
subject to the same conditions that apply to national bank investments in
financial subsidiaries.
In addition, the GLB Act enacts a number of consumer protections, including
provisions intended to protect privacy of bank customers' financial information
and provisions requiring disclosure of ATM fees imposed by banks on customers of
other banks.
Regulation of the Company
- -------------------------
General. As a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "BHC Act") and the Pennsylvania Banking Code of 1965,
the Company is subject to regulation and examination by the FRB and the PDB. In
addition, the FRB has enforcement authority over the Company and its non-bank
subsidiaries, which authority 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.
The Company must obtain the prior approval of the FRB before it may acquire
all or substantially all of the assets of another bank or bank holding company,
merge or consolidate with another bank holding company, or acquire direct or
indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the policy of the FRB that a
bank holding company should stand ready to use available resources to provide
adequate capital to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the FRB to be
an unsafe and unsound banking practice or a violation of the FRB regulations, or
both.
Non-Banking Activities. As a bank holding company, the Company is
prohibited under the BHC Act, with certain exceptions, from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of a company
that is not a bank or a bank holding company, or from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or providing services for its subsidiaries. The principal exceptions to
these prohibitions involve certain non-bank activities that, by statute or by
FRB regulation or order, have been identified as activities closely related to
the business of banking or managing or controlling banks.
The GLB Act greatly expands the scope of non-banking activities permissible
for bank holding companies by enacting authority for "financial holding
companies." Effective March 11, 2000, the GLBA Act
14
<PAGE>
permits a bank holding company, upon classification as a financial holding
company and assuming such holding company's subsidiary banks meet certain
requirements, to engage in activities that are defined by statute as "financial
in nature" or are approved by the FRB as financial in nature or incidental to a
financial activity. See "-- Financial Modernization Legislation."
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 BHC Act. The FRB's holding company capital adequacy guidelines are similar
to those imposed on the Bank by the FDIC. See "Regulation of the Bank -
Regulatory Capital Requirements."
Regulation of the Bank
- ----------------------
General. As a Pennsylvania-chartered, BIF-insured bank, the Bank is subject
to extensive regulation and regular examination by the FDIC, which insures its
deposits to the maximum extent permitted by law and the PDB. The federal and
state laws and regulations applicable to banks regulate, among other things, the
scope of their business, their investments, 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 are intended primarily for the protection of depositors
rather than of stockholders.
Pennsylvania Banking Law. The Pennsylvania 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 Pennsylvania 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.
Federal Deposit Insurance. The Bank's deposit accounts are insured by the
BIF to a maximum of $100,000 for each insured account (as defined by statute and
regulation). The Bank is required to pay insurance premiums based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the BIF. The FDIC also maintains another insurance fund, the Savings Institution
Insurance Fund ("SAIF"), which insures savings association deposits. The FDIC
has set the deposit insurance assessment rates for BIF-member institutions for
the first six months of 2000 at 0% to .027% of insured deposits on an annualized
basis, with the assessment rate for most banks set at 0%.
In addition, all FDIC-insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. The FDIC has promulgated capital adequacy
requirements for state banks that, like the Bank, are not members of the Federal
Reserve System, and the FRB has established substantially similar capital
adequacy guidelines applicable to bank holding companies. These capital
regulations impose two sets of capital requirements: risk-based capital rules,
which require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets, and minimum leverage rules, which require banks and bank
holding companies to maintain a specified minimum ratio of capital to total
assets.
The required minimum ratio of total capital to risk-weighted assets
(including off-balance sheet
15
<PAGE>
activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be Tier 1 capital, consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder (Tier 2
capital) may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
The leverage capital rules of the FDIC and the FRB require state-chartered
banks and bank holding companies, respectively, to maintain a minimum leverage
ratio of Tier 1 capital to total assets of 3% for those banks and bank holding
companies that have the highest regulatory examination ratings and are not
contemplating or experiencing significant growth or expansion. All other banks
and bank holding companies are required to maintain a leverage ratio of at least
1% to 2% above the 3% stated minimum.
At December 31, 1999, the Company and the Bank exceeded all applicable
regulatory capital requirements. The following table sets forth the Company's
regulatory capital position as of December 31, 1999 as compared to the minimum
capital requirements imposed by the FRB. The Bank's ratios do not differ
materially from the Company's ratios presented below.
Percent of
Amount Adjusted Assets
--------- ---------------
(Dollars in Thousands)
Leverage Capital................... $ 26,978 9.15%
Required......................... 11,797 4.00%
-------- ------
Excess........................... $ 15,181 5.15%
======== ======
Tier 1 Capital $ 26,978 11.98%
Required......................... 9,011 4.00%
-------- ------
Excess........................... $ 17,967 7.98%
======== ======
Total Capital $ 30,401 13.50%
Required......................... 18,021 8.00%
-------- ------
Excess........................... $ 12,380 5.50%
======== ======
The Bank is also subject to more stringent PDB capital guidelines. Although
it has not adopted formal capital regulations, the PDB utilizes capital
standards requiring a minimum of 6.5% leverage capital and 10% risk-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 with these
Pennsylvania capital requirements at December 31, 1999.
In addition to the federal regulatory capital requirements, the FDIC has
issued a regulation that classifies insured banks by capital levels and provides
that the FDIC will take various prompt corrective actions, including the
imposition of significant operational restrictions, against any bank subject to
its
16
<PAGE>
regulation that fails to meet the regulation's capital standards. Under this
prompt corrective action regulation, a "well capitalized" bank is one that has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, a leverage capital ratio of 5%, and is not subject to any
order or directive requiring the institution to improve its capital level. A
bank falls within the "adequately capitalized" category if it has a total
risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at
least 4%, and a leverage capital ratio of at least 4%. Institutions with lower
capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their actual
capital levels. A bank that falls within any of the three undercapitalized
categories is subjected to severe regulatory sanctions under the FDIC prompt
corrective action regulation. At December 31, 1999, the Bank was classified as
"well capitalized."
Affiliate Transaction Restrictions. Federal laws strictly limit the ability
of banks to engage in transactions with their affiliates, including their bank
holding companies. Such transactions between a subsidiary bank and its parent
company or the nonbank subsidiaries of the holding company are limited to 10% of
a bank subsidiary's capital and surplus and, with respect to such parent company
and all such nonbank subsidiaries, to an aggregate of 20% of the bank
subsidiary's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
Federal Reserve System. The FRB requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily non-interest and 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, 1999, the Bank met its
reserve requirements.
Regulatory Dividend Restrictions
- --------------------------------
The Pennsylvania Banking Code states, in part, that dividends may be
declared and paid only out of accumulated net earnings and may not be declared
or paid unless surplus (retained earnings) is at least equal to contributed
capital. The Bank has not declared or paid any dividends that cause the Bank's
retained earnings to be reduced below the amount required. Finally, dividends
may not be declared or paid if the Bank is in default in payment of any
assessment due the FDIC.
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that the holding company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB's policy
statement also indicates that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the federal prompt corrective action regulations, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Item 2. Description of Properties
- -----------------------------------
The Bank operates from its main office located at 717 Main Street,
Honesdale, Pennsylvania and seven additional branch offices. The Bank's total
investment in office property and equipment is $10.6 million with a net book
value of $6.7 million at December 31, 1999. The Bank currently operates
automated
17
<PAGE>
teller machines at eight of its branch offices and two automated teller machine
only facilities. The Bank leases two of its locations with minimum lease
commitments of $468,000 through 2006. Both locations have various renewal
options.
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.
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 "Capital and Dividends" in the
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1999("Annual Report") on page 24 and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Summary of Selected
Financial and Other Data" in the Annual Report on page 3, and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
on pages 10 through 27 and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
on pages 16 through 18 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 Beard & Company, Inc. appears
in the Annual Report on pages 28 through 50 and are incorporated herein by
reference.
18
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I-- Election of
Directors" and "-- Biographical Information" in the 2000 Proxy Statement are
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof and "Proposal I -- Election of
Directors" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" and "Proposal I -- Election of Directors" of
the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions".
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
- -----------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report, and are incorporated by reference.
19
<PAGE>
1. The consolidated balance sheets of Norwood Financial Corp. and
subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three year
period ended December 31, 1999, together with the related notes
and the independent auditor's report of Beard & Company,
Inc.,independent accountants.
2. Schedules omitted as they are not applicable.
3. Exhibits
3(i) Articles of Incorporation of Norwood Financial Corp.*
3(ii) Bylaws of Norwood Financial Corp.*
4.0 Specimen Stock Certificate of Norwood Financial Corp.*
10.1 Amended Employment Agreement with William W.Davis, Jr.
10.2 Amended Employment Agreement with Lewis J. Critelli
10.3 Form of Change-in-Control Severance Agreement with nine key
employees of the Bank*
10.4 Consulting Agreement with Russell L. Ridd**
10.5 Wayne Bank Stock Opton Plan*
10.6 Salary Continuation Agreement between the Bank and William
W. Davis, Jr.
10.7 Salary Continuation Agreement between the Bank and Lewis J.
Critelli
10.8 Salary Continuation Agreement between the Bank and Edward C.
Kasper
10.9 1999 Directors Stock Compensation Plan
13 Portions of the Annual Report to Stockholders
21 Subsidiaries of Norwood Financial Corp. (see Item 1.
Business General and - Subsidiary Activity)
23 Consent of Beard & Co., Inc. Independent Auditor
27 Financial Data Schedule (electronic filing only)
(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.
** Incorporated herein by reference into this document from the Exhibits
to the Registrant's Form 10-K filed with the Commission on March 31,
1997, File No. 0-28366.
20
<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 23, 2000 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 Executive Vice President and Chief Financial Officer
and Director (Principal Financial and Accounting Officer)
(Principal Executive Officer)
Date: March 23, 2000 Date: March 23, 2000
By: By:/s/ John E. Marshall
--------------------------------- -------------------------------
Charles E. Case John E. Marshall
Director Director
Date: March __, 2000 Date: March 23, 2000
By:/s/ Daniel J. O'Neill By: /s/ Dr. Kenneth A. Phillips
--------------------------------- -------------------------------
Daniel J. O'Neill Dr. Kenneth A. Phillips
Director Director
Date: March 23, 2000 Date: March 23, 2000
By:/s/ Gary P. Rickard By:/s/ Russell L. Ridd
--------------------------------- -------------------------------
Gary P. Rickard Russell L. Ridd
Director Director
Date: March 23, 2000 Date: March 23, 2000
By:/s/ Harold A. Shook By:
--------------------------------- -------------------------------
Harold A. Shook Richard L. Snyder
Director Director
Date: March 23, 2000 Date: March __, 2000
</TABLE>
EXHIBIT 10.1
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 15th day of September, 1999, (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),
<PAGE>
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.
(c) "Codess.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)
-2-
<PAGE>
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.
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 $ 170,000.00 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 2000, 2001, 2002, 2003, 2004. 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
-3-
<PAGE>
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 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
a 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.
-4-
<PAGE>
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 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
-5-
<PAGE>
(defined as an area within fifty (50) 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) 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.
-6-
<PAGE>
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 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.
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<PAGE>
(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:
(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 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 12
shall apply): (I) the salary provided pursuant to Section 3 hereof, up to the
later 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
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<PAGE>
(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).
(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.
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<PAGE>
(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:
(I) a severance benefit equal to the maximum 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.
(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
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<PAGE>
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.
(d) Indemnification. The Bank shall indemnify and hold the Executive
harmless from any and all loss, expense or liability that he may incur due to
his services for the Company (including any liability he may ever incur under
Code ss. 4999, or a successor, as the result of benefits he collects pursuant to
Sections 10 or 12).
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.
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<PAGE>
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.
(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 15th day of September, 1999 (the
"Effective Date"), by and between Lewis J. Critelli (the "Employee"), Wayne Bank
(the "Bank"), and Norwood Financial Corp. (the "Company").
WHEREAS, the Executive continues to serve the bank in an executive
capacity under the terms and conditions set forth in this agreement; and
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:
Description of Duties: Responsible for managing the Finance and Operations Group
in an effective manner. Primary duties include ongoing management of finance,
accounting and investment activities; timely and accurate filing of all
regulatory reports; an appropriate budgeting process and asset/liability and
interest rate risk management. Managing the Operations Division in order to
provide efficient, accurate and cost-effective technical and operational support
services. Managing the Bank marketing efforts, coordinating investor relations
function and oversight of the Bank non-deposit product sales. Supervising
assigned personnel; communicating and interfacing with other divisions and
management personnel. Reports to the President and Chief Executive Officer.
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
<PAGE>
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.
(c) "Codess.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 or within the protected period; (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)
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<PAGE>
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.
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 $110,000.00 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 $3,000.00 per year for
2000, 2001, 2002, 2003, 2004. 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
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<PAGE>
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,
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 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) 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 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 twelve 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
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<PAGE>
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 fifty (50) 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) 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
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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 than three weeks in any calendar year
(pro-rated in any calendar year during which the
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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 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 and the Employee
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 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 12 shall
apply): (I) the salary provided pursuant to Section 3 hereof, up to the later 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
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termination occurs during the Protected Period, in which event the benefits and
compensation provided for in Section 12 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 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.
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(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:
(I) a severance benefit equal to the maximum 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.
(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
(iii) 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 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.
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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.
(d) Indemnification. The Bank shall indemnify and hold the Executive
harmless from any and all loss, expense or liability that he may incur due to
his services for the Company (including any liability he may ever incur under
Code ss. 4999, or a successor, as the result of benefits he collects pursuant to
Sections 10 or 12).
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 canceled 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
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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 10.6
<PAGE>
WAYNE BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made effective this First day of October 1999, by and
between WAYNE BANK, a state bank located in Honesdale, Pennsylvania (the
"Company") and William W. Davis, Jr. (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more
than 25% of the Company's or the Corporation's voting stock, (ii) the
acquisition of the ability to control the election of a majority of the
Company's or the Corporation's directors, (iii) the acquisition of a
controlling influence over the management or policies of the Company or
the Corporation 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,
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individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Company or the Corporation
(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
Company by the Corporation 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.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Corporation" means Norwood Financial Corp.
1.1.4 "Disability" means the Executive 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 and the Executive qualifies to receive
total disability benefits under Bank's disability insurance plan.
1.1.5 "Early Termination" means the Termination of Employment before
Normal Retirement Age for reasons other than death, Disability, Termination
for Cause or following a Change of Control.
1.1.6 "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.7 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.8 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.9 "Plan Year" means each twelve-month period commencing with the
effective date of this Agreement.
1.1.10 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Employment" means that the Executive ceases to
be employed by the Company for any reason whatsoever other than by reason
of a leave of absence which is approved by the Company. For purposes of
this Agreement, if there is a
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dispute over the employment status of the Executive or the date of the
Executive's Termination of Employment, the Company shall have the sole and
absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the Executive the benefit described in this Section 2.1 in lieu of any other
benefit under this Agreement.
2.1.1 Amount of Benefit. The annual Normal Retirement Benefit under
this Section 2.1 is $61,000 (sixty-one thousand dollars). The Company may
increase the annual benefit under this Section 2.1 at the sole and absolute
discretion of the Company's Board of Directors. Any increase in the annual
benefit shall require the recalculation of all the amounts on Schedule A
attached hereto. The annual benefit amounts on Schedule A are calculated by
amortizing the annual normal retirement benefit using the interest method
of accounting, a 7.50% discount rate, monthly compounding and monthly
payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Date and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the
first benefit payment, and continuing on each subsequent anniversary, the
Company's Board of Directors, in its sole discretion, may increase the
benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company
shall pay to the Executive the benefit described in this Section 2.2 in
lieu of any other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is
the Early Termination Annual Benefit set forth in Schedule A for the Plan
Year ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Age and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
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2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.3 in lieu of any other
benefit under this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section 2.3 is
the Disability Benefit amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.3.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments commencing within 90 days
after the date of the Executive's Termination of Employment and continuing
for 179 additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.4 Change of Control Benefit. If the Executive is in the active
service of the Company at the time of a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.4 in
lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is
the Normal Retirement Benefit described in Section 2.1.1.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following Normal Retirement Age and
continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3
2.4.4 Rabbi Trust. Within 10 days of a Change of Control, a rabbi
trust shall be established and shall at all times be funded with assets at
least equal to the present value of the unpaid balance of the Normal
Retirement Benefit. A discount rate no greater then the ten year Treasury
note shall be used in calculating present value.
2.4.5 Excise tax Reimbursement. The Company shall indemnify and hold
the Executive harmless from any and all loss, expense or liability that he
may ever incur under Code ss. 4999, or a successor, as the result of
benefits he collects pursuant to this Agreement.
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Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3.1. This benefit shall be paid in lieu of the
Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is
the Normal Retirement Benefit described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the beneficiary in 12 equal monthly installments payable on the first day
of each month commencing with the month following the Executive's death and
continuing for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving
all such payments, the Company shall pay the remaining benefits to the
Executive's beneficiary at the same time and in the same amounts they would
have been paid to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement,
but dies prior to receiving said benefits, the Company shall pay to the
Executive's beneficiary the same benefits, in the same manner, they would
have been paid to the Executive had the Executive survived; however, said
benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of
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the benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
5.1 Excess Parachute or Golden Parachute Payment. Notwithstanding any
provision of this Agreement to the contrary, the Company shall not pay any
benefit under this Agreement to the extent the benefit would be a
prohibited golden parachute payment pursuant to 12 C.F.R.ss.357.2 and for
which the appropriate federal banking agency has not given written consent
to pay pursuant to 12 C.F.R.ss.359.4.
5.2 Termination for Cause. Notwithstanding any provision of this
Agreement to the contrary, the Company shall not pay any benefit under this
Agreement, if the Company terminates the Executives employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving
moral turpitude; or
5.2.3 Fraud, disloyalty, dishonesty or willful violation of any
law or significant Company policy committed in connection with the
Executive's employment and resulting in an adverse effect on the
Company.
5.2.4 Removal. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this
Agreement if the Executive is subject to a final removal or
prohibition order issued by an appropriate federal banking agency
pursuant to Section 8(e) of the Federal Deposit Insurance Act.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
violates the following described restrictive covenants.
5.3.1 Non-compete Provision. The Executive shall not, for the
term of this Agreement and until all benefits have been distributed,
directly or indirectly, either as an individual or as a proprietor,
stockholder, partner, officer, director, employee, agent, consultant
or independent contractor of any individual, partnership, corporation
or other entity (excluding an ownership interest of one percent (1%)
or less in the stock of a publicly traded company):
(i) become employed by, participate in, or be connected in any
manner with the ownership, management, operation or control
of any bank, savings and loan or
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other similar financial institution if the Executive's
responsibilities will include providing banking or other
financial services; or (ii) participate in any way in hiring
or otherwise engaging, or assisting any other person or
entity in hiring or otherwise engaging, on a temporary,
part-time or permanent basis, any individual who was
employed by the Corporation or any of its subsidiaries
during the three (3) year period immediately prior to the
termination of the Executive's employment; or
(iii)assist, advise, or serve in any capacity, representative or
otherwise, any third party in any action against the
Corporation or any of its subsidiaries or transaction
involving the Corporation or any of its subsidiaries; or
(iv) sell, offer to sell, provide banking or other financial
services, assist any other person in selling or providing
banking or other financial services, or solicit or otherwise
compete for, either directly or indirectly, any orders,
contract, or accounts for services of a kind or nature like
or substantially similar to the services performed or
products sold by the Corporation or any of its subsidiaries
(the preceding hereinafter referred to as "Services"), to or
from any person or entity from whom the Executive or the
Corporation or any of its subsidiaries provided banking or
other financial services, sold, offered to sell or solicited
orders, contracts or accounts for Services during the three
(3) year period immediately prior to the termination of the
Executive's employment; or
(v) divulge, disclose, or communicate to others in any manner
whatsoever, any confidential information of the Corporation
or any of its subsidiaries, including, but not limited to,
the names and addresses of customers of the Corporation or
any of its subsidiaries, as they may have existed from time
to time or of any of the Corporation's or any of its
subsidiaries prospective customers, work performed or
services rendered for any customer, any method and/or
procedures relating to projects or other work developed for
the Corporation or any of its subsidiaries, earnings or
other information concerning the Corporation or any of its
subsidiaries. The restrictions contained in this
subparagraph (v) apply to all information regarding the
Corporation or any of its subsidiaries, regardless of the
source who provided or compiled such information.
Notwithstanding anything to the contrary, all information
referred to herein shall not be disclosed unless and until
it becomes known to the general public from sources other
than the Executive.
5.3.2 Judicial Remedies. In the event of a breach or threatened
breach by the Executive of any provision of these restrictions, the
Executive recognizes the substantial and immediate harm that a breach
or threatened breach will impose upon the Corporation or any of its
subsidiaries, and further recognizes that in such event monetary
damages may be inadequate to fully protect the Corporation or any of
its subsidiaries. Accordingly, in the
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event of a breach or threatened breach of this Agreement, the
Executive consents to the Corporation's or any of its subsidiaries
entitlement to such ex parte, preliminary, interlocutory, temporary or
permanent injunctive, or any other equitable relief, protecting and
fully enforcing the Corporation' or any of its subsidiaries rights
hereunder and preventing the Executive from further breaching any of
his obligations set forth herein. The Executive expressly waives any
requirement, based on any statute, rule of procedure, or other source,
that the Corporation or any of its subsidiaries post a bond as a
condition of obtaining any of the above-described remedies. Nothing
herein shall be construed as prohibiting the Corporation or any of its
subsidiaries from pursuing any other remedies available to the
Corporation or any of its subsidiaries at law or in equity for such
breach or threatened breach, including the recovery of damages from
the Executive. The Executive expressly acknowledges and agrees that:
(i) the restrictions set forth in Section 5.3.1 are reasonable, in
terms of scope, duration, geographic area, and otherwise, (ii) the
protections afforded the Corporation or any of its subsidiaries in
Section 5.3.1 are necessary to protect its legitimate business
interest, (iii) the restrictions set forth in Section 5.3.1 will not
be materially adverse to the Executive's employment with the Company,
and (iv) his agreement to observe such restrictions forms a material
part of the consideration for this Agreement.
5.3.3 Overbreadth of Restrictive Covenant. It is the intention of
the parties that if any restrictive covenant in this Agreement is
determined by a court of competent jurisdiction to be overly broad,
then the court should enforce such restrictive covenant to the maximum
extent permitted under the law as to area, breadth and duration.
5.3.4 The non-compete provision detailed in Section 5.3.1 shall
not be enforceable following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the insurance company denies coverage for material
misstatements of fact made by the Executive on any application for life
insurance purchased by the Company, or any other reason; provided, however
that the Company shall evaluate the reason for the denial, and upon advice
of legal counsel and in its sole discretion, consider judicially
challenging any denial.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing,
within ninety (90) days of Claimant's written application for benefits, of
his or her eligibility or noneligibility for benefits under the Agreement.
If the Company determines that the Claimant is not eligible for benefits or
full benefits, the notice shall set forth (1) the specific reasons for such
denial, (2) a specific
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reference to the provisions of the Agreement on which the denial is based,
(3) a description of any additional information or material necessary for
the Claimant to perfect his or her claim, and a description of why it is
needed, and (4) an explanation of the Agreement's claims review procedure
and other appropriate information as to the steps to be taken if the
Claimant wishes to have the claim reviewed. If the Company determines that
there are special circumstances requiring additional time to make a
decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and
may extend the time for up to an additional ninety-day period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that he or she is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall state the specific
reasons which the Claimant believes entitle him or her to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and
counsel, if any) an opportunity to present his or her position to the
Company orally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written in a manner calculated to
be understood by the Claimant and the specific provisions of the Agreement
on which the decision is based. If, because of the need for a hearing, the
sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Claimant.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written
agreement signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain
an employee nor interfere with the Executive's right to terminate
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employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the
extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Executive's
life is a general asset of the Company to which the Executive and
beneficiary have no preferred or secured claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to
and on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the beneficiary receiving such benefit under the terms of the
Agreement, an amount by which the total estate tax due by the Executive's
estate, exceeds the total estate tax which would have been payable if the
value of such benefit had not been included in the Executive's gross
estate. If there is more than one person receiving such benefit, the right
of recovery shall be against each such person. In the event the beneficiary
has a liability hereunder, the beneficiary may petition the Company for a
lump sum payment in an amount not to exceed the beneficiary's liability
hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No
rights are granted to the Executive by virtue of this Agreement other than
those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the
Agreement;
8.9.3 Maintaining a record of benefit payments; and 8.9.4
Establishing rules and prescribing any forms necessary or desirable to
administer the Agreement.
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EXHIBIT 10.7
<PAGE>
WAYNE BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made effective this First day of October 1999, by and
between WAYNE BANK, a state bank located in Honesdale, Pennsylvania (the
"Company") and Lewis J. Critelli (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more
than 25% of the Company's or the Corporation's voting stock, (ii) the
acquisition of the ability to control the election of a majority of the
Company's or the Corporation's directors, (iii) the acquisition of a
controlling influence over the management or policies of the Company or
the Corporation 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,
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individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Company or the Corporation
(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
Company by the Corporation 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.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Corporation" means Norwood Financial Corp.
1.1.4 "Disability" means the Executive 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 and the Executive qualifies to receive
total disability benefits under Bank's disability insurance plan.
1.1.5 "Early Termination" means the Termination of Employment before
Normal Retirement Age for reasons other than death, Disability, Termination
for Cause or following a Change of Control.
1.1.6 "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.7 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.8 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.9 "Plan Year" means each twelve-month period commencing with the
effective date of this Agreement.
1.1.10 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Employment" means that the Executive ceases to
be employed by the Company for any reason whatsoever other than by reason
of a leave of absence which is approved by the Company. For purposes of
this Agreement, if there is a
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dispute over the employment status of the Executive or the date of the
Executive's Termination of Employment, the Company shall have the sole and
absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the Executive the benefit described in this Section 2.1 in lieu of any other
benefit under this Agreement.
2.1.1 Amount of Benefit. The annual Normal Retirement Benefit under
this Section 2.1 is $61,000 (sixty-one thousand dollars). The Company may
increase the annual benefit under this Section 2.1 at the sole and absolute
discretion of the Company's Board of Directors. Any increase in the annual
benefit shall require the recalculation of all the amounts on Schedule A
attached hereto. The annual benefit amounts on Schedule A are calculated by
amortizing the annual normal retirement benefit using the interest method
of accounting, a 7.50% discount rate, monthly compounding and monthly
payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Date and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the
first benefit payment, and continuing on each subsequent anniversary, the
Company's Board of Directors, in its sole discretion, may increase the
benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company
shall pay to the Executive the benefit described in this Section 2.2 in
lieu of any other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is
the Early Termination Annual Benefit set forth in Schedule A for the Plan
Year ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Age and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
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2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.3 in lieu of any other
benefit under this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section 2.3 is
the Disability Benefit amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.3.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments commencing within 90 days
after the date of the Executive's Termination of Employment and continuing
for 179 additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.4 Change of Control Benefit. If the Executive is in the active
service of the Company at the time of a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.4 in
lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is
the Normal Retirement Benefit described in Section 2.1.1.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following Normal Retirement Age and
continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3
2.4.4 Rabbi Trust. Within 10 days of a Change of Control, a rabbi
trust shall be established and shall at all times be funded with assets at
least equal to the present value of the unpaid balance of the Normal
Retirement Benefit. A discount rate no greater then the ten year Treasury
note shall be used in calculating present value.
2.4.5 Excise tax Reimbursement. The Company shall indemnify and hold
the Executive harmless from any and all loss, expense or liability that he
may ever incur under Code ss. 4999, or a successor, as the result of
benefits he collects pursuant to this Agreement.
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Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3.1. This benefit shall be paid in lieu of the
Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is
the Normal Retirement Benefit described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the beneficiary in 12 equal monthly installments payable on the first day
of each month commencing with the month following the Executive's death and
continuing for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving
all such payments, the Company shall pay the remaining benefits to the
Executive's beneficiary at the same time and in the same amounts they would
have been paid to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement,
but dies prior to receiving said benefits, the Company shall pay to the
Executive's beneficiary the same benefits, in the same manner, they would
have been paid to the Executive had the Executive survived; however, said
benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of
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the benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
5.1 Excess Parachute or Golden Parachute Payment. Notwithstanding any
provision of this Agreement to the contrary, the Company shall not pay any
benefit under this Agreement to the extent the benefit would be a
prohibited golden parachute payment pursuant to 12 C.F.R.ss.357.2 and for
which the appropriate federal banking agency has not given written consent
to pay pursuant to 12 C.F.R.ss.359.4.
5.2 Termination for Cause. Notwithstanding any provision of this
Agreement to the contrary, the Company shall not pay any benefit under this
Agreement, if the Company terminates the Executives employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving
moral turpitude; or
5.2.3 Fraud, disloyalty, dishonesty or willful violation of any
law or significant Company policy committed in connection with the
Executive's employment and resulting in an adverse effect on the
Company.
5.2.4 Removal. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this
Agreement if the Executive is subject to a final removal or
prohibition order issued by an appropriate federal banking agency
pursuant to Section 8(e) of the Federal Deposit Insurance Act.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
violates the following described restrictive covenants.
5.3.1 Non-compete Provision. The Executive shall not, for the
term of this Agreement and until all benefits have been distributed,
directly or indirectly, either as an individual or as a proprietor,
stockholder, partner, officer, director, employee, agent, consultant
or independent contractor of any individual, partnership, corporation
or other entity (excluding an ownership interest of one percent (1%)
or less in the stock of a publicly traded company):
(i) become employed by, participate in, or be connected in any
manner with the ownership, management, operation or control
of any bank, savings and loan or
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other similar financial institution if the Executive's
responsibilities will include providing banking or other
financial services; or (ii) participate in any way in hiring
or otherwise engaging, or assisting any other person or
entity in hiring or otherwise engaging, on a temporary,
part-time or permanent basis, any individual who was
employed by the Corporation or any of its subsidiaries
during the three (3) year period immediately prior to the
termination of the Executive's employment; or
(iii)assist, advise, or serve in any capacity, representative or
otherwise, any third party in any action against the
Corporation or any of its subsidiaries or transaction
involving the Corporation or any of its subsidiaries; or
(iv) sell, offer to sell, provide banking or other financial
services, assist any other person in selling or providing
banking or other financial services, or solicit or otherwise
compete for, either directly or indirectly, any orders,
contract, or accounts for services of a kind or nature like
or substantially similar to the services performed or
products sold by the Corporation or any of its subsidiaries
(the preceding hereinafter referred to as "Services"), to or
from any person or entity from whom the Executive or the
Corporation or any of its subsidiaries provided banking or
other financial services, sold, offered to sell or solicited
orders, contracts or accounts for Services during the three
(3) year period immediately prior to the termination of the
Executive's employment; or
(v) divulge, disclose, or communicate to others in any manner
whatsoever, any confidential information of the Corporation
or any of its subsidiaries, including, but not limited to,
the names and addresses of customers of the Corporation or
any of its subsidiaries, as they may have existed from time
to time or of any of the Corporation's or any of its
subsidiaries prospective customers, work performed or
services rendered for any customer, any method and/or
procedures relating to projects or other work developed for
the Corporation or any of its subsidiaries, earnings or
other information concerning the Corporation or any of its
subsidiaries. The restrictions contained in this
subparagraph (v) apply to all information regarding the
Corporation or any of its subsidiaries, regardless of the
source who provided or compiled such information.
Notwithstanding anything to the contrary, all information
referred to herein shall not be disclosed unless and until
it becomes known to the general public from sources other
than the Executive.
5.3.2 Judicial Remedies. In the event of a breach or threatened
breach by the Executive of any provision of these restrictions, the
Executive recognizes the substantial and immediate harm that a breach
or threatened breach will impose upon the Corporation or any of its
subsidiaries, and further recognizes that in such event monetary
damages may be inadequate to fully protect the Corporation or any of
its subsidiaries. Accordingly, in the
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event of a breach or threatened breach of this Agreement, the
Executive consents to the Corporation's or any of its subsidiaries
entitlement to such ex parte, preliminary, interlocutory, temporary or
permanent injunctive, or any other equitable relief, protecting and
fully enforcing the Corporation' or any of its subsidiaries rights
hereunder and preventing the Executive from further breaching any of
his obligations set forth herein. The Executive expressly waives any
requirement, based on any statute, rule of procedure, or other source,
that the Corporation or any of its subsidiaries post a bond as a
condition of obtaining any of the above-described remedies. Nothing
herein shall be construed as prohibiting the Corporation or any of its
subsidiaries from pursuing any other remedies available to the
Corporation or any of its subsidiaries at law or in equity for such
breach or threatened breach, including the recovery of damages from
the Executive. The Executive expressly acknowledges and agrees that:
(i) the restrictions set forth in Section 5.3.1 are reasonable, in
terms of scope, duration, geographic area, and otherwise, (ii) the
protections afforded the Corporation or any of its subsidiaries in
Section 5.3.1 are necessary to protect its legitimate business
interest, (iii) the restrictions set forth in Section 5.3.1 will not
be materially adverse to the Executive's employment with the Company,
and (iv) his agreement to observe such restrictions forms a material
part of the consideration for this Agreement.
5.3.3 Overbreadth of Restrictive Covenant. It is the intention of
the parties that if any restrictive covenant in this Agreement is
determined by a court of competent jurisdiction to be overly broad,
then the court should enforce such restrictive covenant to the maximum
extent permitted under the law as to area, breadth and duration.
5.3.4 The non-compete provision detailed in Section 5.3.1 shall
not be enforceable following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the insurance company denies coverage for material
misstatements of fact made by the Executive on any application for life
insurance purchased by the Company, or any other reason; provided, however
that the Company shall evaluate the reason for the denial, and upon advice
of legal counsel and in its sole discretion, consider judicially
challenging any denial.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing,
within ninety (90) days of Claimant's written application for benefits, of
his or her eligibility or noneligibility for benefits under the Agreement.
If the Company determines that the Claimant is not eligible for benefits or
full benefits, the notice shall set forth (1) the specific reasons for such
denial, (2) a specific
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reference to the provisions of the Agreement on which the denial is based,
(3) a description of any additional information or material necessary for
the Claimant to perfect his or her claim, and a description of why it is
needed, and (4) an explanation of the Agreement's claims review procedure
and other appropriate information as to the steps to be taken if the
Claimant wishes to have the claim reviewed. If the Company determines that
there are special circumstances requiring additional time to make a
decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and
may extend the time for up to an additional ninety-day period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that he or she is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall state the specific
reasons which the Claimant believes entitle him or her to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and
counsel, if any) an opportunity to present his or her position to the
Company orally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written in a manner calculated to
be understood by the Claimant and the specific provisions of the Agreement
on which the decision is based. If, because of the need for a hearing, the
sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Claimant.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written
agreement signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain
an employee nor interfere with the Executive's right to terminate
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employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the
extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Executive's
life is a general asset of the Company to which the Executive and
beneficiary have no preferred or secured claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to
and on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the beneficiary receiving such benefit under the terms of the
Agreement, an amount by which the total estate tax due by the Executive's
estate, exceeds the total estate tax which would have been payable if the
value of such benefit had not been included in the Executive's gross
estate. If there is more than one person receiving such benefit, the right
of recovery shall be against each such person. In the event the beneficiary
has a liability hereunder, the beneficiary may petition the Company for a
lump sum payment in an amount not to exceed the beneficiary's liability
hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No
rights are granted to the Executive by virtue of this Agreement other than
those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the
Agreement;
8.9.3 Maintaining a record of benefit payments; and 8.9.4
Establishing rules and prescribing any forms necessary or desirable to
administer the Agreement.
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EXHIBIT 10.8
<PAGE>
WAYNE BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made effective this First day of October 1999, by and
between WAYNE BANK, a state bank located in Honesdale, Pennsylvania (the
"Company") and Edward C. Kasper (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more
than 25% of the Company's or the Corporation's voting stock, (ii) the
acquisition of the ability to control the election of a majority of the
Company's or the Corporation's directors, (iii) the acquisition of a
controlling influence over the management or policies of the Company or
the Corporation 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,
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individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Company or the Corporation
(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
Company by the Corporation 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.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Corporation" means Norwood Financial Corp.
1.1.4 "Disability" means the Executive 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 and the Executive qualifies to receive
total disability benefits under Bank's disability insurance plan.
1.1.5 "Early Termination" means the Termination of Employment before
Normal Retirement Age for reasons other than death, Disability, Termination
for Cause or following a Change of Control.
1.1.6 "Early Termination Date" means the month, day and year in which
Early Termination occurs.
1.1.7 "Normal Retirement Age" means the Executive's 62nd birthday.
1.1.8 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.9 "Plan Year" means each twelve-month period commencing with the
effective date of this Agreement.
1.1.10 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Employment" means that the Executive ceases to
be employed by the Company for any reason whatsoever other than by reason
of a leave of absence which is approved by the Company. For purposes of
this Agreement, if there is a
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dispute over the employment status of the Executive or the date of the
Executive's Termination of Employment, the Company shall have the sole and
absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the Executive the benefit described in this Section 2.1 in lieu of any other
benefit under this Agreement.
2.1.1 Amount of Benefit. The annual Normal Retirement Benefit under
this Section 2.1 is $61,000 (sixty-one thousand dollars). The Company may
increase the annual benefit under this Section 2.1 at the sole and absolute
discretion of the Company's Board of Directors. Any increase in the annual
benefit shall require the recalculation of all the amounts on Schedule A
attached hereto. The annual benefit amounts on Schedule A are calculated by
amortizing the annual normal retirement benefit using the interest method
of accounting, a 7.50% discount rate, monthly compounding and monthly
payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Date and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the
first benefit payment, and continuing on each subsequent anniversary, the
Company's Board of Directors, in its sole discretion, may increase the
benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company
shall pay to the Executive the benefit described in this Section 2.2 in
lieu of any other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is
the Early Termination Annual Benefit set forth in Schedule A for the Plan
Year ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal
Retirement Age and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
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2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.3 in lieu of any other
benefit under this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section 2.3 is
the Disability Benefit amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.3.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments commencing within 90 days
after the date of the Executive's Termination of Employment and continuing
for 179 additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3.
2.4 Change of Control Benefit. If the Executive is in the active
service of the Company at the time of a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.4 in
lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is
the Normal Retirement Benefit described in Section 2.1.1.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit to
the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following Normal Retirement Age and
continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 2.1.3
2.4.4 Rabbi Trust. Within 10 days of a Change of Control, a rabbi
trust shall be established and shall at all times be funded with assets at
least equal to the present value of the unpaid balance of the Normal
Retirement Benefit. A discount rate no greater then the ten year Treasury
note shall be used in calculating present value.
2.4.5 Excise tax Reimbursement. The Company shall indemnify and hold
the Executive harmless from any and all loss, expense or liability that he
may ever incur under Code ss. 4999, or a successor, as the result of
benefits he collects pursuant to this Agreement.
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Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3.1. This benefit shall be paid in lieu of the
Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is
the Normal Retirement Benefit described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to
the beneficiary in 12 equal monthly installments payable on the first day
of each month commencing with the month following the Executive's death and
continuing for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving
all such payments, the Company shall pay the remaining benefits to the
Executive's beneficiary at the same time and in the same amounts they would
have been paid to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement,
but dies prior to receiving said benefits, the Company shall pay to the
Executive's beneficiary the same benefits, in the same manner, they would
have been paid to the Executive had the Executive survived; however, said
benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of
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the benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
5.1 Excess Parachute or Golden Parachute Payment. Notwithstanding any
provision of this Agreement to the contrary, the Company shall not pay any
benefit under this Agreement to the extent the benefit would be a
prohibited golden parachute payment pursuant to 12 C.F.R.ss.357.2 and for
which the appropriate federal banking agency has not given written consent
to pay pursuant to 12 C.F.R.ss.359.4.
5.2 Termination for Cause. Notwithstanding any provision of this
Agreement to the contrary, the Company shall not pay any benefit under this
Agreement, if the Company terminates the Executives employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving
moral turpitude; or
5.2.3 Fraud, disloyalty, dishonesty or willful violation of any
law or significant Company policy committed in connection with the
Executive's employment and resulting in an adverse effect on the
Company.
5.2.4 Removal. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this
Agreement if the Executive is subject to a final removal or
prohibition order issued by an appropriate federal banking agency
pursuant to Section 8(e) of the Federal Deposit Insurance Act.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
violates the following described restrictive covenants.
5.3.1 Non-compete Provision. The Executive shall not, for the
term of this Agreement and until all benefits have been distributed,
directly or indirectly, either as an individual or as a proprietor,
stockholder, partner, officer, director, employee, agent, consultant
or independent contractor of any individual, partnership, corporation
or other entity (excluding an ownership interest of one percent (1%)
or less in the stock of a publicly traded company):
(i) become employed by, participate in, or be connected in any
manner with the ownership, management, operation or control
of any bank, savings and loan or
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other similar financial institution if the Executive's
responsibilities will include providing banking or other
financial services; or (ii) participate in any way in hiring
or otherwise engaging, or assisting any other person or
entity in hiring or otherwise engaging, on a temporary,
part-time or permanent basis, any individual who was
employed by the Corporation or any of its subsidiaries
during the three (3) year period immediately prior to the
termination of the Executive's employment; or
(iii)assist, advise, or serve in any capacity, representative or
otherwise, any third party in any action against the
Corporation or any of its subsidiaries or transaction
involving the Corporation or any of its subsidiaries; or
(iv) sell, offer to sell, provide banking or other financial
services, assist any other person in selling or providing
banking or other financial services, or solicit or otherwise
compete for, either directly or indirectly, any orders,
contract, or accounts for services of a kind or nature like
or substantially similar to the services performed or
products sold by the Corporation or any of its subsidiaries
(the preceding hereinafter referred to as "Services"), to or
from any person or entity from whom the Executive or the
Corporation or any of its subsidiaries provided banking or
other financial services, sold, offered to sell or solicited
orders, contracts or accounts for Services during the three
(3) year period immediately prior to the termination of the
Executive's employment; or
(v) divulge, disclose, or communicate to others in any manner
whatsoever, any confidential information of the Corporation
or any of its subsidiaries, including, but not limited to,
the names and addresses of customers of the Corporation or
any of its subsidiaries, as they may have existed from time
to time or of any of the Corporation's or any of its
subsidiaries prospective customers, work performed or
services rendered for any customer, any method and/or
procedures relating to projects or other work developed for
the Corporation or any of its subsidiaries, earnings or
other information concerning the Corporation or any of its
subsidiaries. The restrictions contained in this
subparagraph (v) apply to all information regarding the
Corporation or any of its subsidiaries, regardless of the
source who provided or compiled such information.
Notwithstanding anything to the contrary, all information
referred to herein shall not be disclosed unless and until
it becomes known to the general public from sources other
than the Executive.
5.3.2 Judicial Remedies. In the event of a breach or threatened
breach by the Executive of any provision of these restrictions, the
Executive recognizes the substantial and immediate harm that a breach
or threatened breach will impose upon the Corporation or any of its
subsidiaries, and further recognizes that in such event monetary
damages may be inadequate to fully protect the Corporation or any of
its subsidiaries. Accordingly, in the
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event of a breach or threatened breach of this Agreement, the
Executive consents to the Corporation's or any of its subsidiaries
entitlement to such ex parte, preliminary, interlocutory, temporary or
permanent injunctive, or any other equitable relief, protecting and
fully enforcing the Corporation' or any of its subsidiaries rights
hereunder and preventing the Executive from further breaching any of
his obligations set forth herein. The Executive expressly waives any
requirement, based on any statute, rule of procedure, or other source,
that the Corporation or any of its subsidiaries post a bond as a
condition of obtaining any of the above-described remedies. Nothing
herein shall be construed as prohibiting the Corporation or any of its
subsidiaries from pursuing any other remedies available to the
Corporation or any of its subsidiaries at law or in equity for such
breach or threatened breach, including the recovery of damages from
the Executive. The Executive expressly acknowledges and agrees that:
(i) the restrictions set forth in Section 5.3.1 are reasonable, in
terms of scope, duration, geographic area, and otherwise, (ii) the
protections afforded the Corporation or any of its subsidiaries in
Section 5.3.1 are necessary to protect its legitimate business
interest, (iii) the restrictions set forth in Section 5.3.1 will not
be materially adverse to the Executive's employment with the Company,
and (iv) his agreement to observe such restrictions forms a material
part of the consideration for this Agreement.
5.3.3 Overbreadth of Restrictive Covenant. It is the intention of
the parties that if any restrictive covenant in this Agreement is
determined by a court of competent jurisdiction to be overly broad,
then the court should enforce such restrictive covenant to the maximum
extent permitted under the law as to area, breadth and duration.
5.3.4 The non-compete provision detailed in Section 5.3.1 shall
not be enforceable following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this
Agreement, or if the insurance company denies coverage for material
misstatements of fact made by the Executive on any application for life
insurance purchased by the Company, or any other reason; provided, however
that the Company shall evaluate the reason for the denial, and upon advice
of legal counsel and in its sole discretion, consider judicially
challenging any denial.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing,
within ninety (90) days of Claimant's written application for benefits, of
his or her eligibility or noneligibility for benefits under the Agreement.
If the Company determines that the Claimant is not eligible for benefits or
full benefits, the notice shall set forth (1) the specific reasons for such
denial, (2) a specific
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reference to the provisions of the Agreement on which the denial is based,
(3) a description of any additional information or material necessary for
the Claimant to perfect his or her claim, and a description of why it is
needed, and (4) an explanation of the Agreement's claims review procedure
and other appropriate information as to the steps to be taken if the
Claimant wishes to have the claim reviewed. If the Company determines that
there are special circumstances requiring additional time to make a
decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and
may extend the time for up to an additional ninety-day period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that he or she is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall state the specific
reasons which the Claimant believes entitle him or her to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and
counsel, if any) an opportunity to present his or her position to the
Company orally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Company shall notify the
Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written in a manner calculated to
be understood by the Claimant and the specific provisions of the Agreement
on which the decision is based. If, because of the need for a hearing, the
sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Claimant.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written
agreement signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain
an employee nor interfere with the Executive's right to terminate
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employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the
extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Executive's
life is a general asset of the Company to which the Executive and
beneficiary have no preferred or secured claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to
and on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the beneficiary receiving such benefit under the terms of the
Agreement, an amount by which the total estate tax due by the Executive's
estate, exceeds the total estate tax which would have been payable if the
value of such benefit had not been included in the Executive's gross
estate. If there is more than one person receiving such benefit, the right
of recovery shall be against each such person. In the event the beneficiary
has a liability hereunder, the beneficiary may petition the Company for a
lump sum payment in an amount not to exceed the beneficiary's liability
hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No
rights are granted to the Executive by virtue of this Agreement other than
those specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the
Agreement;
8.9.3 Maintaining a record of benefit payments; and 8.9.4
Establishing rules and prescribing any forms necessary or desirable to
administer the Agreement.
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EXHIBIT 10.9
<PAGE>
NORWOOD FINANCIAL CORP.
1999 DIRECTORS STOCK COMPENSATION PLAN
1. Purpose of the Plan. The Plan shall be known as the NORWOOD FINANCIAL
CORP. ("Company") 1999 Directors Stock Compensation Plan (the "Plan"). The
purpose of the Plan is to retain and reward qualified personnel for positions of
substantial responsibility as members of the Board of Directors of the Company
or any present or future parent or subsidiary of the Company to promote the
success of the business. The Plan is intended to provide for the grant of Stock
Options that are not "Incentive Stock Options," within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Definitions. The following words and phrases when used in this Plan with
an initial capital letter, unless the context clearly indicates otherwise, shall
have the meaning as set forth below. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural.
(a) "Award" means the grant by the Committee or in accordance with the
terms of the Plan of a Stock Option.
(b) "Bank" shall mean Wayne Bank, or any successor corporation thereto.
(c) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto.
(d) "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.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
(f) "Committee" shall mean the Board or the Stock Option Committee
appointed by the Board in accordance with Section 5(a) of the Plan.
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(g) "Common Stock" shall mean the common stock of the Company, or any
successor or parent corporation thereto.
(h) "Company" shall mean the NORWOOD FINANCIAL CORP., the parent
corporation of the Savings Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the Company, or any
successor or parent corporation thereto.
(j) "Director Emeritus" shall mean a person serving as a director emeritus,
advisory director, consulting director, or other similar position as may be
appointed by the Board of Directors of the Savings Bank or the Company from time
to time.
(k) "Disability" means any physical or mental impairment which renders the
Participant incapable of continuing in the employment or service of the Savings
Bank or the Parent in his then current capacity as determined by the Committee.
(l) "Effective Date" shall mean December 14, 1999.
(m) "Employee" shall mean any person employed by the Company or any present
or future Parent or Subsidiary of the Company. "Non-Employee" shall mean an
individual not employed by the Company or any present or future Parent or
Subsidiary of the Company.
(n) "Fair Market Value" shall mean the last reported sale price of such
Common Stock on such date or within the preceding 20 business days, or if there
is no reported sale price during such period, then the mean of the last reported
bid and ask price during such period. If no such bid and ask price is available,
then the Fair Market Value shall be determined by the Committee in good faith.
(o) "Option" or "Stock Option" shall mean an Award granted pursuant to this
Plan providing the holder of such Option with the right to purchase Common
Stock.
(p) "Optioned Stock" shall mean stock subject to an Option granted pursuant
to the Plan.
(q) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(r) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Sections 424(e) and (g) of the Code.
(s) "Participant" means any director of the Company or any Parent or
Subsidiary of the Company or any other person providing a service to the Company
who is selected by the Committee to receive an Award, or who by the express
terms of the Plan is granted an Award.
(t) "Plan" shall mean the Norwood Financial Corp. 1999 Directors Stock
Compensation Plan.
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(u) "Share" shall mean one share of the Common Stock.
(v) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Sections 424(f) and (g) of
the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 17,600 Shares.
Such Shares may either be from authorized but unissued shares or shares
purchased in the market for Plan purposes. If an Award shall expire, become
unexercisable, or be forfeited for any reason prior to its exercise, new Awards
may be granted under the Plan with respect to the number of Shares as to which
such expiration has occurred.
4. Six Month Holding Period. Except in the event of the death or disability
of the Optionee or a Change in Control of the Company, a minimum of six months
must elapse between the date of the grant of an Option and the date of the sale
of the Common Stock received through the exercise of such Option.
5. Administration of the Plan.
--------------------------
(a) Composition of the Committee. The Plan shall be administered by the
Board of Directors of the Company or a Committee which shall consist of not less
than two Directors of the Company appointed by the Board and serving at the
pleasure of the Board. All persons designated as members of the Committee shall
meet the requirements of a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended, as found at 17 CFR
ss.240.16b-3. (b) Powers of the Committee. The Committee is authorized (but only
to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall be designated
by the Committee are hereby authorized to execute written agreements evidencing
Awards on behalf of the Company and to cause them to be delivered to the
Participants. Such agreements shall set forth the Option exercise price, the
number of shares of Common Stock subject to such Option, the expiration date of
such Options, and such other terms and restrictions applicable to such Award as
are determined in accordance with the Plan or the actions of the Committee.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
3
<PAGE>
6. Eligibility for Awards and Limitations.
--------------------------------------
(a) The Committee shall from time to time determine the Participants who
shall be granted Awards under the Plan and the number of Awards to be granted to
each such persons. In selecting Participants and in determining the number of
Shares of Common Stock to be granted to each such Participant, the Committee may
consider the nature of the prior and anticipated future services rendered by
each such Participant, each such Participant's current and potential
contribution to the Company and such other factors as the Committee may, in its
sole discretion, deem relevant. Participants who have been granted an Award may,
if otherwise eligible, be granted additional Awards.
(b) In no event shall Shares subject to Options granted to any Participant
exceed more than 15% of the total number of Shares authorized for delivery under
the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of ten
(10) years and 1 day from the Effective Date, unless the Plan is terminated by
the Board in accordance with the Plan.
8. Terms and Conditions of Stock Options. Stock Options may be granted or
awarded only to Participants. Each Stock Option granted pursuant to the Plan
shall be evidenced by an instrument in such form as the Committee shall from
time to time approve. Each Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
(a) Option Price. The price per Share at which each Stock Option granted by
the Committee under the Plan may be exercised shall not, as to any particular
Stock Option, be less than the Fair Market Value of the Common Stock on the date
that such Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock purchased upon the
exercise of any Stock Option granted under the Plan shall be made at the time of
exercise of each such Stock Option and shall be paid in cash (in United States
Dollars), Common Stock or a combination of cash and Common Stock. Common Stock
utilized in full or partial payment of the exercise price shall be valued at the
Fair Market Value at the date of exercise. The Company shall accept full or
partial payment in Common Stock only to the extent permitted by applicable law.
No Shares of Common Stock shall be issued until full payment has been received
by the Company, and no Optionee shall have any of the rights of a stockholder of
the Company until Shares of Common Stock are issued to the Optionee.
(c) Term of Stock Option. The term of exercisability of each Stock Option
granted pursuant to the Plan shall be not more than ten (10) years from the date
each such Stock Option is granted.
(d) Cashless Exercise. Subject to vesting requirements, if applicable, an
Optionee who has held an Stock Option for at least six months may engage in the
"cashless exercise" of the Option. Upon a cashless exercise, an Optionee shall
give the Company written notice of the exercise of the Option together with an
order to a registered broker-dealer or equivalent third party, to sell part or
all of the Optioned Stock and to deliver enough of the proceeds to the Company
to pay the Option exercise price and any applicable withholding taxes. If the
Optionee does not sell the Optioned Stock through a registered broker-dealer or
equivalent third party, the Optionee can give the Company written notice of the
exercise of the Option and the third party purchaser of the Optioned Stock shall
pay the Option exercise price plus any applicable withholding taxes to the
Company.
4
<PAGE>
(e) Transferability. An Stock Option granted pursuant to the Plan shall be
exercised during an Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution.
9. Awards to Directors. As of the close of business on the day of the first
regularly scheduled Board meeting in December of each year, Stock Options to
purchase shares of Common Stock shall be granted to each Non-employee Director
of the Company or the Bank then serving as of such date and annually thereafter
("Date of Grant"). Such Options shall be exercisable at a price equal to the
Fair Market Value of the Common Stock as of the date of grant of such Options.
Such Options will be first exercisable as of the one year anniversary of such
Date of Grant. Except as limited by Section 10 hereof, such Options shall
continue to be exercisable for a period of ten years and one day following the
date of grant. Unless otherwise inapplicable, or inconsistent with the
provisions of this paragraph, the Options to be granted to Directors hereunder
shall be subject to all other provisions of this Plan. The number of options to
be awarded to each Director shall be determined by the Committee.
10. Effect of Termination of Service, Disability or Death on Incentive
Stock Options.
(a) Termination of Service. In the event that any Optionee's employment or
other service provided to the Company or the Bank shall terminate for any
reason, other than Permanent and Total Disability (as such term is defined in
Section 22(e)(3) of the Code) or death, all of any such Optionee's Options, and
all of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Option or (ii) the expiration of not
more than three (3) months after the date of such termination as director or
such service, but only if, and to the extent that, the Optionee was entitled to
exercise any such option at the date of such termination. In the event of
removal in accordance with the Company's or the Bank's Articles of Incorporation
or Bylaws, as the case may be, the Option shall automatically terminate on the
date of such termination.
(b) Disability. In the event that any Optionee's directorship or other
service with the Company or the Bank shall terminate as the result of the
Permanent and Total Disability of such Optionee, such Optionee may exercise any
Options granted to him pursuant to the Plan at any time prior to the earlier of
(i) the respective expiration dates of any such Options or (ii) the date which
is six (6) months after the date of such termination, but only if, and to the
extent that, the Optionee was entitled to exercise any such Options at the date
of such termination.
(c) Death. In the event of the death of an Optionee, any Options granted to
such Optionee may be exercised by the person or persons to whom the Optionee's
rights under any such Options pass by will or by the laws of descent and
distribution (including the Optionee's estate during the period of
administration) at any time prior to the earlier of (i) the respective
expiration dates of any such Options or (ii) the date which is six (6) months
after the date of death of such Optionee but only if, and to the extent that,
the Optionee was entitled to exercise any such Options at the date of death. For
purposes of this Section 10(c), any Option held by an Optionee shall be
considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Option at the date of death is
the passage of a specified period of time. At the discretion of the Committee,
upon exercise of such Options in the event of death, such persons may receive
Shares or cash or combination thereof. If cash shall be paid in lieu of Shares,
such cash shall be equal to the difference between the fair market value of such
Shares and the exercise price of such Options on the exercise date.
5
<PAGE>
11. Withholding Tax. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options under the
Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option, the Company shall have the right to
require the Participant or such other person to pay the Company the amount of
any taxes which the Company is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or to sell without notice, a number of such
Shares sufficient to cover the amount required to be withheld.
12. Recapitalization, Merger, Consolidation, Change in Control and Other
Transactions.
(a) Adjustment. Subject to any required action by the stockholders of the
Company, within the sole discretion of the Committee, the aggregate number of
Shares of Common Stock for which Options may be granted hereunder, the number of
Shares of Common Stock covered by each outstanding Option, and the exercise
price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become immediately
exercisable in the event of a Change in Control of the Company, as determined by
the Committee. In the event of such a Change in Control, the Committee and the
Board of Directors will take one or more of the following actions to be
effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent options shall
be substituted, ("Substitute Options") by the acquiring or succeeding
corporation (or an affiliate thereof), provided that: the shares of stock
issuable upon the exercise of such Substitute Options shall constitute
securities registered in accordance with the Securities Act of 1933, as amended,
("1933 Act") or such securities shall be exempt from such registration in
accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively,
"Registered Securities"), or in the alternative, if the securities issuable upon
the exercise of such Substitute Options shall not constitute Registered
Securities, then the Optionee will receive upon consummation of the Change in
Control transaction a cash payment for each Option surrendered equal to the
difference between (1) the Fair Market Value of the consideration to be received
for each share of Common Stock in the Change in Control transaction times the
number of shares of Common Stock subject to such surrendered Options, and (2)
the aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which the holders of
the Common Stock of the Company will receive upon consummation thereof a cash
payment (the "Merger Price") for each share of Common Stock exchanged in the
Change in Control transaction, to make or to provide for a cash payment to the
Optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such Options held by each Optionee (to the
extent then exercisable at prices not in excess of the Merger Price) and (B) the
aggregate exercise price of all such surrendered Options in exchange for such
surrendered Options.
6
<PAGE>
(c) Extraordinary Corporate Action. Notwithstanding any provisions of the
Plan to the contrary, subject to any required action by the stockholders of the
Company, in the event of any Change in Control, recapitalization, merger,
consolidation, exchange of Shares, spin-off, reorganization, tender offer,
partial or complete liquidation or other extraordinary corporate action or
event, the Committee, in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock subject to
each Option, the Option exercise price per Share of Common Stock, and the
consideration to be given or received by the Company upon the exercise of any
outstanding Option;
(ii) cancel any or all previously granted Options, provided that
appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan as the
Committee, in its sole discretion, deems necessary, desirable, appropriate or
advisable.
(d) Acceleration. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
(e) Non-recurring Dividends. Upon the payment of a special or non-recurring
cash dividend that has the effect of a return of capital to the stockholders,
the Option exercise price per share shall be adjusted proportionately and in an
equitable manner.
Except as expressly provided in Sections 12(a), 12(b) and 12(e) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 12.
13. Time of Granting Options. The date of grant of an Option under the Plan
shall, for all purposes, be the date specified in accordance with the Plan or
the date on which the Committee makes the determination of granting such Option.
Notice of the grant of an Option shall be given to each individual to whom an
Option is so granted within a reasonable time after the date of such grant in a
form determined by the Committee.
14. Modification of Options. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on the Optionee by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 15 hereof.
15. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or discontinue the
Plan.
(b) Change in Applicable Law. Notwithstanding any other provision contained
in the Plan, in the event of a change in any federal or state law, rule or
regulation which would make the exercise of all or part of any previously
granted Option unlawful or subject the Company to any penalty,
7
<PAGE>
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
16. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
Cancellation of Option Rights.
(a) Shares shall not be issued with respect to any Option granted under the
Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary authorizations,
approvals or letters of non-objection from any regulatory body or authority
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares issuable hereunder shall relieve the Company of any liability with
respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the termination
of employment or service of an Optionee by the Company or its Subsidiaries for
"cause" within the sole discretion of the Board, all Options held by such
Participant shall cease to be exercisable as of the date of such termination of
employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
17. Reservation of Shares. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
18. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
8
<PAGE>
19. No Employment Rights. No Director, Employee or other person shall have
a right to be selected as a Participant under the Plan. Neither the Plan nor any
action taken by the Committee in administration of the Plan shall be construed
as giving any person any rights of employment or retention as an Employee,
Director or in any other capacity with the Company, the Savings Bank or other
Subsidiaries.
20. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, except to the
extent that federal law shall be deemed to apply.
EXHIBIT 13
<PAGE>
(Five Year Financial Summary)---------------------------------------------------
Summary of Selected Financial Data
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Operations
- ---------------------
Net interest income $12,134 $11,741 $11,064 $10,142 $8,927
NET INCOME $3,508 $3,236 $2,706 $1,872 $1,802
Net income per share-Basic $2.09 $1.93 $1.63 $1.10 $1.01
Diluted $2.08 $1.91 $1.63 $1.10 $1.01
Cash dividends declared 0.59 0.50 0.44 0.42 0.39
Return on average assets 1.19% 1.21% 1.04% 0.78% 0.88%
Return on average equity 12.81% 12.38% 11.92% 8.45% 8.17%
Balances at Year-End
- --------------------
Total assets $314,827 $279,017 $263,149 $260,572 $217,262
Loans receivable 205,160 186,919 185,640 174,621 152,094
Total deposits 243,507 233,767 226,754 229,462 187,299
Shareholders' equity 26,654 27,728 24,594 21,519 22,782
Allowance for loan losses to total loans 1.63% 1.78% 1.75% 1.50% 1.40%
Non-performing assets to total assets 0.24% 0.30% 1.03% 2.22% 2.68%
Tier 1 Capital to risk-adjusted assets 11.98% 12.30% 11.27% 10.26% 13.93%
Total Capital to risk-adjusted assets 13.50% 14.00% 12.53% 11.51% 15.18%
</TABLE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
- --------------------------------------------------(Norwood Financial Corp)-----3
<PAGE>
[BOX GRAPHIC OMITTED] 1999 Annual Report
- ---------------------(Management's Discussion and Analysis)
Introduction
This management's 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, 1999,
1998 and 1997. This section should be used in conjunction with the consolidated
financial statements and related footnotes.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward- looking statements. When used in this
discussion, the words "believes," anticipates," "contemplates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operation - Summary
Net income for the Company for the year 1999 was $3,508,000 compared to
$3,236,000 for the year 1998. This represents an increase of $272,000 or 8.4%
over prior year. Basic and diluted earnings per share for 1999 were $2.09 and
$2.08 respectively increasing from $1.93 and $1.91 respectively in 1998. Return
on average equity showed similar improvement at 12.81% in 1999 increasing from
12.38% in 1998. The return on average assets for the current year was 1.19%
compared to 1.21% in 1998.
The increase in earnings was principally attributable to higher levels
of fee income, growth in net interest income and reduction in the provision for
loan losses. Net interest income on a fully taxable equivalent basis (fte)
totaled $12,475,000 for 1999, an increase of $454,000 or 3.8% from 1998. The
improvement in net interest income was due to $25.9 million growth in average
earning assets during 1999, and a lower cost of funds which partially offset a
decline in asset yields. The Company made continued progress in reducing its
level of non-performing assets during 1999, which totaled $767,000 at December
31, 1999, or .24% of total
[GRAPHICS OMITTED]
Graph discloses [Diluted]Earnings per Share
95 $1.01
96 $1.10
97 $1.63
98 $1.91
99 $2.08
10
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
assets, compared to $826,000 and .30% at year-end 1998. As a result, the Company
reduced its provision for loan losses to $470,000 in 1999 compared to $720,000
in 1998.
Other income excluding securities gains for 1999 was $1,875,000 an
increase of $248,000 or 15.2% over 1998. Other income represented 13.1% of total
revenues in 1999, improving from 11.9% in 1998. Gains on sales of securities
were $59,000 in 1999 compared to $48,000 in 1998.
During 1999 other expenses increased $509,000 or 6.3% over 1998 to
$8,576,000. The increase was principally due to increase in data processing
costs related to new information systems, increase in losses related to
disposing of automobiles from the leasing portfolio; $409,000 in 1999 compared
to $157,000 in 1998, and the cost of opening a branch; $230,000. Expenses were
favorably impacted by lower level of other real estate costs and less legal fees
related to non-performing assets.
Net income for the Company for the year 1998 was $3,236,000 compared to
$2,706,000 for the year 1997. This represents an increase of $530,000 or 19.6%
over prior year. Basic and diluted earnings per share for 1998 were $1.93 and
$1.91 respectively increasing from $1.63 in 1997. Return on average assets and
return on average equity showed similar improvement at 1.21% and 12.38%
respectively in 1998 compared to 1.04% and 11.92% respectively in 1997.
The increase in earnings was principally attributable to growth in net
interest income, reduction in the provision for loan losses and higher levels of
fee income. Net interest income (fte) totaled $12,021,000 for 1998, an increase
of $602,000 or 5.3% from 1997. The improvement in net interest income was due to
$10.0 million growth in average earning assets during 1998, increase in earning
asset ratio, and lower cost of funds which offset a decline in asset yields. The
Company made continued progress in reducing its level of non-performing loans
during 1998, which totaled $622,000 at December 31, 1998, or .33% of total
loans, compared to $2,175,000 and 1.17% at year-end 1997. As a result, the
Company reduced its provision for loan losses to $720,000 in 1998 compared to
$1,355,000 in 1997.
Other income excluding securities gains for 1998 was $1,627,000 an
increase of $369,000 or 29.2% over 1997. During 1997, the Company recorded a
non-recurring gain on the termination of pension plan of $597,000 which was
$343,000 after related taxes with no such gains in 1998. Gains on sales of
securities were $48,000 in 1998 compared to $70,000 in 1997.
During 1998, other expenses increased 2.6% over 1997 to $8,066,000. The
increase was principally due to additional costs related to data processing
system conversion. Expenses were favorably impacted by lower level of other real
estate costs and legal fees related to non-performing assets.
[GRAPHICS OMITTED]
Graph discloses Net Income ($ In Thousands)
95 $1,802
96 $1,872
97 $2,706
98 $3,236
99 $3,508
- ------------------------------------------------(Norwood Financial Corp)------11
<PAGE>
[BOX GRAPHIC OMITTED] 99 Annual Report
Financial Condition
Total Assets
Total assets at December 31, 1999 were $314.8 million compared to
$279.0 million at year-end 1998, an increase of $35.8 million or 12.8%. The
Company funded an $18.3 million growth in loans and $16.6 million increase in
investments available for sale with borrowings from the Federal Home Loan Bank
of Pittsburgh (FHLB) of $28.0 million and growth in deposits of $9.7 million.
Loans Receivable
Loans receivable, which include automobile leases represent the largest
percentage of the Company's earning assets. At December 31, 1999 total loans
receivable were $205.2 million compared to $186.9 million in 1998, an increase
of $18.3 million or 9.8%. Loan growth in retail lending which was centered in
home equity financings, and indirect automobile lending was partially offset by
lower levels of automobile leases. Residential mortgages totaled $38.8 million
at year-end increasing from $36.1 million at December 31, 1998. This increase is
net of pre-payments and refinancings principally in the adjustable rate mortgage
portfolio. Fixed rate mortgage products were more favorable during the first
half of 1999 due to lower interest rate environment with the fixed rate
portfolio increasing $4.8 million to $14.1 million at December 31, 1999. With
the increase in long-term interest rates during the third and fourth quarter of
1999, which impacts residential mortgage rates, the Company had a lower level of
mortgage originations during the period. In the current interest rate
environment, the Company may experience a continued slow down in mortgage
lending in early 2000. There can be no assurances however to the direction of
interest rates or the local real estate market. The Company sells a portion of
its longer term fixed rate residential loan production for interest rate risk
management, with $1.7 million sold in the secondary market during the year. The
Company services $15.5 million of mortgage loans that it has previously sold
into secondary market.
The Company's indirect portfolio which consists of loans made through
dealers increased $10.8 million to total $45.1 million at year-end, with the
growth principally in used automobiles. The weighted average maturity of the
portfolio is 47 months with an average life of 23 months.
The Company began slowing down its volume of automobile lease
originations in late 1997 and stopped originations entirely during the third
quarter of 1999. This was done to monitor experience in early terminations, the
amount of off-lease vehicles returned and the market values of vehicles returned
compared to residual values. As a result, total leases declined $9.9 million in
1999 to $24.0 million at December 31, 1999.
[GRAPHICS OMITTED]
Graph discloses Total Assets ($ In Millions)
95 $217
96 $261
97 $263
98 $279
99 $315
[GRAPHICS OMITTED]
Graph discloses Total Loans ($ In Millions)
95 $152
96 $175
97 $186
98 $187
99 $205
12
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Residual losses totaled $381,000 for 1999. The Company's reserve for residual
losses totaled $311,000 at December 31, 1999 with residual value of $17.8
million compared to $307,000 and $24.1 million at prior year end. The Company
liquidates its returned off-lease vehicles through various used car dealers and
automobile auction centers. At December 31, 1999 the Company had an inventory of
automobiles to liquidate of $974,000.
Commercial loans consist principally of loans made to small businesses
within the Company's market which are usually secured by real estate and other
assets of the borrower.
Commercial and commercial real estate loans totaled $67.2 million at
year-end 1999 compared to $56.3 million in 1998, an increase of $10.9 million or
17.6%. The Company opened a new office in Monroe County in June 1999, which
accounted for $5.3 million of the increase in commercial loans.
For the year 1999, total loans averaged $196.0 million with an fte
yield of 8.32% compared to $186.9 million and 8.73% during 1998. Total interest
income on loans (fte) was $16,303,000 compared to $16,316,000 in 1998.
Non-Performing Assets and Allowance for Loan Losses
Non-performing assets consist of non-performing loans and real estate
acquired through foreclosure which is held for sale. Loans are placed on
non-accrual status when management believes that a borrower's financial
condition is such that collection of interest is doubtful. Commercial and real
estate related loans are generally placed on non-accrual when interest is 90
days delinquent. When loans are placed on non-accrual, accrued interest income
is reversed from current earnings.
At December 31, 1999, non-performing loans totaled $657,000 and
represented .32% of total loans receivable compared to $622,000 and .33% at
year-end 1998. Total non-performing assets which includes other real estate
totaled $767,000 and represented .24% of total assets decreasing from $826,000
and .30% at December 31, 1998. At year-end 1999, non-performing assets consisted
principally of residential real estate loans, with the largest such loan
totaling $299,000.
The allowance for loan losses totaled $3,344,000 at year-end 1999 and
represented 1.63% of total loans receivable compared to $3,333,000 or 1.78% at
year-end 1998. Net charge-offs for 1999 were $459,000, consisting principally of
losses in the consumer loan and lease portfolios, decreasing from $637,000 in
1998. With the continued low level of non-performing loans and less charge-offs,
the Company reduced its provision for loan losses to $470,000 from $720,000 in
1998. The coverage ratio of allowance for loan losses to non-performing loans
was 508.9% at December 31, 1999.
[GRAPHICS OMITTED]
Graph discloses Nonperforming Assets to Total Assets
95 2.68%
96 2.22%
97 1.03%
98 .30%
99 .24%
- -------------------------------------------------Norwood Financial Corp-------13
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The Company's loan review process 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 in specific
industries, economic and industry conditions, trends in delinquencies,
collections and collateral value coverage. General reserve percentages are
identified by loan type and credit grading and are allocated accordingly. Larger
credit exposures are analyzed individually. Management considers the allowance
at December 31,1999 adequate for the loan mix and classifications.
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance balance at beginning of period $3,333 $3,250 $2,616 $2,125 $1,893
Charge-Offs:
Commercial and all other (12) (294) (380) (820) (448)
Real Estate (17) (14) (119) (226) (353)
Installment (419) (366) (264) (320) (123)
Lease Financing (184) (115) ( 67) -- --
------ ------ ------- ------ ------
Total (632) $ (789) (830) (1,366) (924)
Recoveries:
Commercial and all other 74 89 72 71 513
Real Estate -- 7 3 16 3
Installment 84 50 34 60 21
Lease Financing 16 6 -- -- --
------ ------ ------- ------ ------
Total 173 152 109 147 537
Provision expense 470 720 1,355 1,710 619
------ ------ ------- ------ ------
Allowance balance at end of period 3,344 $3,333 $3,250 $2,616 $2,125
===== ====== ====== ====== ======
Allowance for loan losses as a percent
of total loans outstanding 1.63% 1.78% 1.75% 1.50% 1.40%
Net loans charged off as a percent of
average loans outstanding .23% .34% 0.39% 0.76% 0.27%
Allowance for loan losses as a
percent of non-performing loans 508.9% 535.8% 149.5% 74.9% 54.7%
</TABLE>
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, 1999, there were no loans not previously discussed where
known information about possible credit problems of borrowers caused management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
14
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--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and all other $ 64 $ 65 $ 963 $1,633 $1,572
Real estate 513 503 1,112 1,790 2,205
Installment 19 20 33 28 48
------ ------ ------ ------ ------
Total $ 596 $ 588 $2,108 $3,451 $3,825
Accruing loans which are contractually
past due 90 days or more:
Commercial and all other $ -- $ -- $ 44 $ 38 $ 55
Real estate -- -- -- -- --
Installment/leases 61 34 23 4 --
------ ------ ------ ------ ------
Total $ 61 $ 34 $ 67 $ 42 $ 55
====== ====== ====== ====== ======
Total non-performing loans $ 657 $ 622 $2,175 $3,493 $3,880
Other real estate owned 110 204 537 2,283 1,944
------ ------ ------ ------ ------
Total non-performing assets $ 767 $ 826 $2,712 $5,776 $5,824
====== ====== ====== ====== ======
Non-performing loans to total loans .32% .33% 1.17% 2.00% 2.55%
Non-performing loans to total assets .21% .22% .83% 1.34% 1.79%
Non-performing assets to total assets .24% .30% 1.03% 2.22% 2.68%
</TABLE>
Securities
The securities portfolio consists principally of United States
Government agencies issues, including mortgage backed securities, U.S. Treasury
securities, municipal obligations, and corporate debt. In accordance with
SFAS#115 "Accounting for Certain Investments in Debt and Equity Securities" the
Company classifies its investments into two categories: held to maturity (HTM)
and available for sale (AFS). The Company does not have a trading account.
Securities classified as HTM are those in which the Company has the ability and
the intent to hold until contractual maturity. At December 31, 1999, this
account totaled $7.5 million and consisted of longer term municipal obligations.
Securities classified as AFS are eligible to be sold due to liquidity needs or
changes in interest rates. These securities are adjusted to and carried at their
fair value with any unrealized gains or losses recorded as an adjustment to
capital and reported in the equity section of the balance sheet as other
comprehensive income. At December 31, 1999, $78.9 million in securities were so
classified and carried at their fair value.
During the second quarter of 1999, the Company funded $15 million of
security purchases, principally mortgage-backed issues, with borrowings from the
FHLB. The transaction generated $147,000 of net interest income for 1999. Any
changes in interest rates could affect the yield and prepayment rates on the
investments and cost of the borrowings.
- -------------------------------------------------Norwood Financial Corp-------15
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Interest rates increased during 1999 with the benchmark 30 Year
Treasury Bill yielding over 6.40% by year-end compared to 5.00% late in 1998.
This increase in rates caused a slow down in the cashflow received from
mortgage-backed securities and therefore extended the modified duration of the
securities. At December 31, 1999, the modified duration was 4.9 years compared
to 3.5 years at the prior year-end. Generally in a raising interest rate
environment the fair value of the Company's available for sale portfolio
decreases.
At December 31, 1999, the Company's securities portfolio (HTM and AFS)
totaled $86.3 million with the percentage of obligations of U.S. Government
agencies 21.0%; mortgage-backed securities, 52.7%; municipal obligations, 14.1%;
U.S. Treasuries, 4.6% and other of 7.6%. At December 31, 1999, the portfolio
contained no collateralized mortgage obligations (CMOs), structured notes,
step-up bonds and no off-balance sheet derivatives were in use. The portfolio
totaled $69.9 million at year-end 1998.
Deposits
Total deposits at December 31, 1999 were $243.5 million compared to
$233.8 million at year-end 1998, an increase of $9.7 million or 4.2%. The
increase was principally in core transaction accounts and time deposits over
$100,000. The new branch office in Monroe County contributed $3.7 million of the
increase in deposits. Interest bearing demand deposits increased $2.7 million or
11.4% to $26.7 million, reflecting growth in new retail checking account
products. The tiered rate Investor Account for high-balance accounts totaled
$10.5 million compared to $9.3 million at year-end 1998.
Time deposits over $100,000, which consist principally of school
district and other public funds with maturities generally less than one year,
were $32.5 million at December 31, 1999, increasing from $27.6 million at
year-end 1998. These deposits are subject to competitive bid and the Company
bases its bid on current interest rates, loan demand, investment portfolio
structure and relative cost of other funding sources. In addition to demand
deposits of $26.8 million the Company has $7.6 million of cash management
accounts which represent commercial customers excess funds invested in
over-night securities, which the Company considers core-funding.
Market Risk
Interest rate sensitivity and the repricing characteristics of assets
and liabilities are managed by the 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 monitored and managed by using financial modeling techniques to measure
the impact of changes in interest rates.
16
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--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Net interest income, which is the primary source of the Company's
earnings, is impacted by changes in interest rates and the relationship of
different interest rates. 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. The Company uses net
interest simulation 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, 1999, 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 reflects
interest-sensitivity gaps measured as the difference between rate-sensitive
assets and rate-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, 1999, the Bank had a negative 90 day interest
sensitivity gap of $14.3 million or 4.5% of total assets. A negative gap means
that interest-sensitive liabilities are higher than interest-sensitive assets at
the time interval. This would indicate that in a rising rate environment, the
cost of interest-bearing liabilities would increase faster than the yield on
earning assets in the 90 day time frame. This risk is managed by ALCO
strategies; including shortening the investment portfolio, pricing of deposit
liabilities to attract longer term time deposits, loan pricing to encourage
variable rate products and evaluation of loan sales of longer term mortgages.
The Company analyzes and measures the time periods in which rate
sensitive assets (RSA) and rate sensitive liabilities (RSL) will mature or
reprice in accordance with their contractual terms and assumptions. Management
believes that the assumptions used are reasonable. The interest rate sensitivity
of 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. The operating results of the
Company are not subject to Foreign Currency exchange or commodity price risk.
- -------------------------------------------------Norwood Financial Corp-------17
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The following table displays interest-sensitivity as of December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
3 Months 3 Through 1 Through Over
Or Less 12 Months 3 Years 3 Years Total
------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Federal funds sold and int
bearing deposits $ 2,368 $ -- $ -- $ -- $ 2,368
Securities (1) 4,878 8,587 30,083 42,804 86,352
Loans receivable (1) 43,842 47,331 98,907 15,080 205,160
------ ------ ------ ------ -------
Total rate sensitive assets
(RSA) $51,088 $55,918 $128,990 $ 57,884 $293,880
======= ======= ======== ======== ========
Non-interest bearing demand(2) $ 3,356 $10,068 $13,424 $ -- $ 26,848
Interest bearing demand/savings (2) 6,692 9,780 39,123 13,157 68,752
Money Market deposit
accounts (2) 4,798 14,394 12,795 -- 31,987
Time deposits 33,282 37,399 45,179 -- 115,860
Other borrowings 17,259 332 21,009 -- 38,600
------ ------- -------- -------- --------
Total rate sensitive liabilities
(RSL) $65,387 $71,973 $131,530 $ 13,157 $282,047
======= ======= ======== ======== ========
Interest sensitivity gap ($14,299) $16,055) $2,540 $ 44,727
Cumulative gap ($14,299) ($30,354) ($32,894) $ 11,833
Cumulative gap to total assets (4.5%) (9.6%) (10.4%) 3.8%
</TABLE>
(1) Included in the period in which interest rates were next scheduled to
adjust or the period in which they were due. Annual prepayments were
assumed based on historical experience and management judgement.
(2) These are non-maturity deposits generally subject to immediate
withdrawal. However, management considers a certain amount to be core
deposits with longer effective maturities. This is based on retention
experience in changing interest rate environment.
Liquidity
Maintenance of liquidity is coordinated by ALCO. Liquidity can be
viewed as the ability to fund customers borrowing needs and their deposit
withdrawal requests while supporting asset growth. The Company's primary sources
of liquidity include deposit generation, asset maturities and cash flow from
loan repayments and securities.
At December 31, 1999, the Company had cash and cash equivalents of
$10.8 million in the form of cash,
18
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
due from banks, Federal Funds sold and short-term deposits with other
institutions. In addition, the Company had total securities available for sale
of $78.9 million which could be used for liquidity needs. This totals $89.7
million and represents 28.5% of total assets compared to $74.9 million and 26.8%
of total assets at December 31, 1998. The Company also monitors other liquidity
measures all of which were within policy guidelines at December 31, 1999. The
Company believes its liquidity position is adequate.
The Company maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The borrowing capacity from FHLB was in excess of $57 million.
At year-end 1999 the Company had $30 million in borrowings from the FHLB.
Results of Operations
Net Interest
Net interest income is the difference between income earned on loans
and securities and interest paid on deposits and other borrowings. For the year
ended December 31, 1999 net interest income (fte) was $12,475,000 an increase of
$454,000 or 3.8% over 1998. The resultant fte net interest spread and net
interest margin for the year 1999 were 3.85% and 4.48% respectively compared to
4.08% and 4.76% respectively in 1998.
Total fte interest income for 1999 was $21,590,000, an increase of
$1,092,000 or 5.3% from prior year. As the earning asset yield declined 36 basis
points to 7.75% from 8.11% in 1998, this increase in interest income was the
result of $25.9 million growth in average earning assets. Interest expense
totaled $9,115,000 for 1999, increasing $638,000 or 7.5% from 1998. The Company
was able to reduce its cost of interest-bearing liabilities to 3.90% compared to
4.03% in the prior year. As a result of a 36 basis point decline in earning
asset yields only partially offset by 13 basis point decline in cost of
interest-bearing liabilities, net interest spread decreased to 3.85% from 4.08%
in 1998. Net interest margin, which is the measurement of net return on earning
assets also decreased to 4.48% in 1999 from 4.76%. The decrease in net interest
margin was due in part to mix of earning asset growth, with 35% of the growth
due to loans and 65% in securities, which at a yield of 6.27% is lower than the
8.32% for loans. The funding mix also contributed to the decline in net interest
margin as borrowed funds increased $15.5 million at a cost of 5.52% and
deposits, which have a lower cost, increased $9.7 million on average.
- -------------------------------------------------Norwood Financial Corp-------19
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Interest income earned on loans totaled $16,303,000 with a yield of
8.32% in 1999 compared to $16,316,000 with a yield of 8.73% in 1998. The
decrease in yield was due in part to lower interest rate environment with an
average prime rate of 8.00% in 1999 compared to 8.36% in 1998. However, prime
rate at December 31, 1999 was 8.50%, increasing from 7.75% at the prior
year-end. Average loans increased $9.1 million to $196.0 million. Loans and
leases represented 70.3% of earning assets in 1999 compared to 74% in 1998.
Securities available for sale averaged $72.2 million in 1999 with an
fte interest income of $4,524,000 and yield of 6.27% compared to $55.0 million,
$3,375,000 and 6.14% respectively in 1998. The increase in yield was principally
due to the higher interest rate environment in the second half of 1999, and the
resulting extension in the average life of the portfolio.
Interest-bearing deposits averaged $207.9 million increasing $7.2
million from average in 1998. The cost of deposits for 1999 was 3.78% compared
to 3.99% in 1998. The Company decreased its costs of savings accounts by 25
basis points and time deposits by 23 basis points. Also, the percentage of time
deposits decreased to 51.5% of total interest bearing deposits compared to 52.3%
in 1998. Short-term borrowings, principally cash management accounts, averaged
$8.2 million at a cost of 3.66% compared to $7.6 million at 4.63% in 1998. Other
borrowings, which consist of advances from the FHLB increased on average to
$17.5 million in 1999, compared to $2.0 in 1998. The increase in borrowings were
used principally to fund purchases of mortgage-backed securities.
For the year ended December 31, 1998 net interest income (fte) was
$12,021,000 an increase of $602,000 or 5.3% over 1997. The resultant fte net
interest spread and net interest margin for the year 1998 were 4.08% and 4.76%
respectively compared to 4.10% and 4.70% respectively in 1997.
Total fte interest income for 1998 was $20,498,000, an increase of
$286,000 or 1.4% from prior year. As the earning asset yield declined 22 basis
points to 8.11% from 8.33% in 1997, this increase in interest income was the
result of $10.0 million growth in average earning assets. Interest expense
totaled $8,477,000 for 1998, a decrease of $316,000 or 3.6% from 1997. The
Company was able to reduce its cost of interest bearing liabilities to 4.03%
compared to 4.23% in the prior year. As a result of a 22 basis point decline in
earning asset yields only partially offset by 20 basis point decline in cost of
interest-bearing liabilities, net interest spread decreased to 4.08% from 4.10%
in 1997. However, net interest margin, which is the measurement of net return on
earning assets increased to 4.76% from 4.70%. This increase was caused by a
higher earning asset ratio of 94.2% compared to 93.3% in 1997, and an increase
in non-interest bearing
20
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
liabilities of $2.0 million and equity of $3.4 million. The ratio of earning
assets to interest-bearing liabilities improved to 120.% in 1998 from 116.7% in
1997.
Interest income earned on loans totaled $16,316,000 with a yield of
8.73% in 1998 compared to $16,205,000 with a yield of 8.83% in 1997. The
decrease in yield was principally due to lower interest rate environment with an
average prime rate of 8.36% in 1998 compared to 8.44% in 1997. Prime rate at
December 31, 1998 was 7.75%. During 1998 there continued a shift in loan mix
with increases in lower yielding retail loans and decreases in higher yielding
commercial loans. Average loans increased $3.3 million to $186.9 million. Loans
and leases represented 74.0% of earning assets in 1998 decreasing from 75.6% in
1997.
Total securities (HTM and AFS) averaged $63.0 million in 1998 with an
fte interest income of $4,051,000 and yield of 6.43% compared to $55.9 million,
$3,826,000 and 6.85% respectively in 1997. The decrease in yield was principally
due to shortening of the average repricing term in 1998, lower interest rate
environment, and purchases of lower coupon mortgage-backed securities.
Interest-bearing deposits averaged $200.7 million increasing $3 million
from average 1997. The average cost of deposits for 1998 was 3.99% compared to
4.14% in 1997. The Company decreased its costs of transaction and savings
accounts by 15 basis points and 26 basis points respectively. Also, the
percentage of time deposits decreased to 52.3% of total interest bearing
deposits compared to 53.6% in 1997. Short-term borrowings averaged $7.6 million
at a cost of 4.63% compared to $7.7 million at 4.84% in 1997.
Other Income
Other income, excluding gains on sales of securities, totaled
$1,875,000 in 1999, an increase of $248,000 or 15.2% over 1998. Other income
represented 13.1% of total revenues increasing from 11.9% in 1998. Service
charges and fees were $1,235,000 in 1999 compared to $1,087,000 in 1998, an
increase of $148,000. The increase is due in part to growth in fee-based retail
checking accounts; $38,000 and increase in automated teller machine income;
$14,000. The Wayne Bank Visa Check Card generated $64,000 in revenues,
increasing from $50,000 in 1998 and merchant card processing fees totaled
$79,000, an increase of $21,000 from 1998.
Commissions on sales of mutual funds, annuities and discount brokerage
through Norwood Investment Corp totaled $148,000 on sales of $6.4 million
compared to $134,000 in revenues on sales of $5.3 million in 1998. The Company
sold $1.7 million in residential mortgages for a gain of $19,000 declining from
a gain of $100,000 on $7.2 million in sales in 1998. The decrease in volume sold
is due to the increasing interest rate
- -------------------------------------------------Norwood Financial Corp-------21
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
environment during 1999. Trust income totaled $255,000 for 1999, an increase of
$82,000 or 47.4% over prior year. The increase is due in part to final
termination charges on closed accounts and higher estate income.
Other income for 1998, excluding gains on sales of securities and
non-recurring gain on termination of pension plan recorded in 1997, totaled
$1,627,000, an increase of $369,000 over 1997. Other income represented 11.9% of
total revenues increasing from 10.2% in 1997.
Service charges and fees were $1,087,000 in 1998 compared to $859,000
in 1997, an increase of $228,000. The increase was principally due to growth in
fee-bearing retail checking accounts of $44,000, and increase in overdraft fees
of $107,000. The Company increased fees on deposit products effective August 1,
1998. The Wayne Bank Visa Check Card, which was introduced in April 1997,
generated $50,000 in revenues, increasing $33,000 from 1997.
Commissions on mutual funds and annuities through Norwood Investment
Corp. totaled $134,000 on sales of $5.3 million compared to $75,000 on sales of
$2.2 million in 1997. During 1998, the Company sold $7.2 million in residential
mortgages for a gain of $100,000 compared to $57,000 in gains for 1997.
Other Income
(000)
1999 1998 1997
------- ------- -------
Service charges on
Deposit Accounts $ 213 $ 193 $ 145
ATM Fees 142 128 125
NSF Fees 478 440 333
Other Service Chgs. & Fees 402 326 256
Trust Income 255 173 165
Mutual Funds & Annuities 148 134 75
Gain on Sales of Loans 19 100 57
Other Income 218 133 102
------- ------- -------
$ 1,875 $ 1,627 $ 1,258
Net realized gains on
sales of securities 59 48 70
Gain on termination of
pension plan -- -- 597
------- ------- -------
Total $ 1,934 $ 1,675 $ 1,925
======= ======= =======
Other Expenses
Other expenses totaled $8,576,000 for 1999 compared to $8,067,000 in
1998, an increase of $509,000 or 6.3%. Salary and employee benefit costs which
represent 47.6% of other expense, were $4,081,000 for 1999,
22
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
an increase of $195,000 or 5.0%. The increase was principally due to staff
expenses related to a new branch location opened in June 1999. Total expenses
including staffing, rental and other expenses related to a new branch were
$230,000. Other real estate owned costs decreased to $5,000 from $115,000 in
1998 due to lesser number of properties in 1999. Legal expenses declined in 1999
to $49,000 from $74,000 in 1998 principally due to lower costs related to
non-performing loans.
In the fourth quarter of 1998 the Bank converted its data processing
core application systems from an in-house system to an outsourced environment.
As a result of monthly fees, data processing expense increased to $409,000 in
1999 compared to $290,000 in 1998. This was partially offset by decrease in
equipment costs. The Bank also incurred certain one-time costs associated with
conversion of lease processing system and its ATM network, both of which
occurred in the second quarter of 1999. Costs related to the disposition of
automobiles from the leasing portfolio were $409,000 compared to $157,000 in
1998. The increase was principally due to greater number of cars returned in
1999, the short terms of the maturing leases and the lower market values
compared to residual values. These losses were partially offset by lease
termination fee income of $78,000 in 1999 and $45,000 in 1998.
The efficiency ratio for 1999 improved to 56.9% from 58.0% in 1998.
Other expenses totaled $8,067,000 for 1998 compared to $7,861,000 in
1997, an increase of 2.6%. Salary and employee benefit costs which represents
48.2% of other expense was $3,886,000 for 1998, an increase of $247,000 or 6.8%.
The increase was principally in the benefits area with higher costs related to
Employee Stock Ownership Plan (ESOP) and 401(k) Plan. Other real estate owned
costs decreased to $115,000 from $254,000 in 1997 due to lower net losses of
$22,000 in 1998 compared to $111,000 in 1997. Legal expenses declined in 1998 to
$74,000 from $189,000 in 1997 principally due to lower costs related to
non-performing loans.
In the fourth quarter of 1998 the Bank converted its data processing
core application systems from an in-house system to an outsourced environment.
As a result of conversion related costs and processing, data processing expense
increased to $290,000 in 1998 compared to $150,000 in 1997.
Income Taxes
Income tax expense for the year 1999 was $1,514,000 for an effective
tax rate of 30.1% compared to an expense of $1,393,000 and an effective rate of
30.1% in 1998. The effective tax rate is lower than the
- -------------------------------------------------Norwood Financial Corp-------23
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
statutory rate of 34% due to holdings of municipal obligations and certain loans
which provide income partially exempt from Federal income taxes.
Income tax expense for 1998 was $1,393,000 for an effective tax rate of
30.1% compared to an expense of $1,067,000 and an effective rate of 28.2% in
1997. During 1998 the Company had a higher level of pre-tax income of $856,000
and lower levels of tax exempt income which increased the effective rate.
Capital and Dividends
Total stockholders' equity at December 31, 1999 was $26.7 million,
compared to $27.7 million at year-end 1998. The change was principally due to
retention of earnings of $2,523,000 after dividends declared of $985,000, a
$2,974,000 decrease in other comprehensive income due to fair value changes on
the Company's available for sale securities portfolio as a result of increasing
interest rates and the purchase of 41,219 shares of treasury stock, at a cost of
$941,000. At December 31, 1999 the Company had leverage capital ratio of 9.15%,
Tier 1 risk-based capital of 11.98% and total risk-based capital of 13.50%
compared to 9.09%, 12.30% and 14% respectively in 1998.
The following table sets forth the price range and cash dividends
declared per share regarding common stock for the period indicated:
Price Range
----------- Cash dividend
High Low paid per share
---- --- --------------
Year 1998
First Quarter $ 34.00 $ 20.75 $ .12
Second Quarter 34.00 27.75 .12
Third Quarter 27.00 22.00 .12
Fourth Quarter 24.00 20.50 .14
Year 1999
First Quarter $ 24.00 $ 21.25 $ .14
Second Quarter 24.00 21.00 .14
Third Quarter 24.125 23.00 .14
Fourth Quarter 23.25 20.50 .17
The book value of the common stock was $15.28 at December 31, 1999
compared to $15.56 at prior year end. At year-end the stock price was $20.75
compared to $22.25 at December 31, 1998.
[GRAPHICS OMITTED]
Graph discloses Cash Dividend Declared
95 $ .39
96 $ .42
97 $ .44
98 $ .50
99 $ .59
24
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Inflation
The impact of inflation upon banks differs from the impact upon
non-financial institutions. The majority of assets and liabilities of a bank are
monetary in nature and therefore change with movements in interest rates. The
exact impact of inflation on the Bank is difficult to measure. Inflation may
cause operating expenses to increase at a rate not matched by increased
earnings. Inflation may also affect the borrowing needs of consumers, thereby
affecting growth of the Bank's assets. Inflation may also affect the general
level of interest rates, which could have an effect on the Bank's profitability.
However, as discussed previously, the Bank strives to manage its
interest-sensitive assets and liabilities offsetting the effects of inflation.
Year 2000
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. The Company has operated and evaluated its computer
systems following January 1, 2000 and has not identified any errors. Systems
will continue to be monitored to assess whether they are at risk of
misinterpreting any future dates. The Company has not been informed of any such
problem experienced by its vendors or its customers, nor by any of the utilities
that provide services to the Company.
The Company will continue to monitor its significant vendors of goods
and services with respect to Year 2000 problems they may encounter as those
issues may effect the Company's ability to continue operations, or might
adversely affect the Company's financial position, results of operations and
cash flows. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
The expectations of the Company contained in this section on Year 2000
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements. All forward looking statements in this section are
based on information available to the Company on the date of this document, and
the Company assumes no obligation to update such forward looking statements.
- -------------------------------------------------Norwood Financial Corp-------25
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Summary of Quarterly Results (unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Net interest income $ 3,109 $ 3,186 $ 3,016 $ 2,823
Provision for loan losses 130 110 100 130
Net realized gains on sales of securities -- 1 34 24
Other income 520 524 398 433
Other expenses 2,206 2,255 2,131 1,984
------------ -------------- ---------- ----------
Income before income taxes 1,293 1,346 1,217 1,166
Income tax expense 367 426 368 353
------------ ----------- ---------- ----------
NET INCOME $ 926 $ 920 $ 849 $ 813
============ =========== ========== ==========
Basic earnings per share $ 0.56 $ 0.55 $ 0.50 $ 0.48
============ =========== ========== ==========
Diluted earnings per share $ 0.55 $ 0.55 $ 0.50 $ 0.48
============ =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Net interest income $ 3,042 $ 2,973 $ 2,917 $ 2,809
Provision for loan losses 180 180 180 180
Net realized gains on sales of securities 21 12 -- 15
Other income 430 446 408 343
Other expenses 2,122 1,977 2,011 1,957
------------ -------------- ---------- ----------
Income before income taxes 1,191 1,274 1,134 1,030
Income tax expense 356 384 343 310
------------ -------------- ---------- ----------
NET INCOME $ 835 $ 890 $ 791 $ 720
============ ============== ========== ==========
Basic earnings per share $ 0.50 $ 0.53 $ 0.47 $ 0.43
============ ============== ========== ==========
Diluted earnings per share $ 0.49 $ 0.52 $ 0.47 $ 0.43
============ ============== ========== ==========
</TABLE>
26
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Consolidated Balance Sheets
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- --------------------------------
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 $ 2,031 $ 94 4.63% $ 1,108 $ 56 5.05% $ 2,490 $ 141 5.66
Interest bearing
deposits with banks 755 14 1.99 1,678 75 4.47 713 40
Securities held to maturity 7,633 655 8.57 8,014 676 8.44 8,745 742 8.48
Securities available for sale
Taxable 69,401 4,335 6.25 53,116 3,248 6.11 43,525 2,803 6.44
Tax-exempt 2,800 189 6.75 1,883 127 6.74 3,624 281 7.75
------- ----- ------- ----- ------- -----
Total securities
available for sale 72,201 4,524 6.27 54,999 3,375 6.14 47,149 3,084 6.54
Loans receivable (3,4) 196,005 16,303 8.32 186,877 16,316 8.73 183,625 16,205 8.83
------- ----- ------- ----- ------- -----
Total interest
earning assets 278,625 21,590 7.75 252,676 20,498 8.11 242,722 20,212 8.33
Non-interest
earning assets:
Cash and due
from banks 7,409 6,451 6,440
Allowance for
loan losses (3,359) (3,277) (2,918)
Other assets 13,237 12,265 13,937
-------- --------- ---------
Total non-interest
earning assets 17,287 15,439 17,459
-------- --------- ---------
TOTAL ASSETS $295,912 $ 268,115 $ 260,181
======== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liablities:
Interest- bearing
demand and
money market $ 58,076 1,397 2.41 $ 52,691 1,306 2.48 $ 47,245 1,241 2.63
Savings 42,676 934 2.19 43,068 1,049 2.44 44,570 1,203 2.70
Time 107,152 5,520 5.15 104,980 5,647 5.38 105,920 5,745 5.42
------- ----- ------- ----- ------- -----
Total interest-
bearing deposits 207,904 7,851 3.78 200,739 8,002 3.99 197,735 8,189 4.14
Short-term borrowings 8,187 300 3.66 7,648 354 4.63 7,726 374 4.84
Other borrowings 17,464 964 5.52 2,000 121 6.05 2,486 230 9.25
------- ----- ------- ----- ------- -----
Total interest
bearing liabilities 233,555 9,115 3.90 210,387 8,477 4.03 207,947 8,793 4.23
Non-interest bearing
liabilities:
Non-interest bearing
demand deposits 28,059 25,490 25,584
Other liabilities 6,921 6,093 3,954
-------- --------- ---------
Total non-interest
bearing liabilities 34,980 31,583 29,538
Shareholders' equity 27,377 26,145 22,696
-------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $295,912 $ 268,115 $ 260,181
======== ========= =========
<PAGE>
Net interest income
(tax-equivalent basis) 12,475 3.85% 12,021 4.08% 11,419 4.10%
==== ==== ====
Tax-equivalent
basis adjustment (341) (280) (355)
------- -------- ----------
Net Interest Income $12,134 $ 11,741 $ 11,064
======= ======== ==========
Net Interest margin
(tax-equivalent basis) 4.48% 4.76% 4.70
==== ==== ====
</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.
RATE/VOLUME ANALYSIS
The following table shows fully taxable equivalent effect of changes in volumes
and rates on interest income and interest expense.
<TABLE>
<CAPTION>
Increase/(Decrease)
----------------------------------------------------------------
(dollars in thousands) 1999 compared to 1998 1998 compared to 1997
------------------------------ -------------------------------
Variance due to Variance due to
------------------------------ -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Federal funds sold $ 43 ($ 5) $ 38 ($ 71) ($ 14) ($ 85)
Interest bearing deposits with banks (30) (31) (61) 45 (10) 35
Securities held to maturity (33) 12 (21) (62) (4) (66)
Securities available for sale
Taxable 1,016 71 1,087 592 (147) 445
Tax-exempt 62 0 62 (121) (33) (154)
------- ------- ------- ------- ------- -------
Total securities available for sale 1,078 71 1,149 471 (180) 291
Loans receivable (3,4) 778 (791) (13) 285 (174) 111
------- ------- ------- ------- ------- -------
Total interest earning assets 1,836 (744) 1,092 668 (382) 286
Interest bearing liablities:
Interest- bearing demand and money market 130 (39) 91 138 (73) 65
Savings (9) (106) (115) (40) (114) (154)
Time 115 (242) (127) (51) (47) (98)
------- ------- ------- ------- ------- -------
Total interest- bearing deposits 236 (387) (151) 47 (234) (187)
Short-term borrowings 24 (78) (54) (4) (16) (20)
Other borrowings 855 (12) 843 (39) (70) (109)
------- ------- ------- ------- ------- -------
Total interest bearing liabilities 1,114 (476) 638 4 (320) (316)
------- ------- ------- ------- ------- -------
Net interest income(tax-equivalent basis) $ 722 ($ 268) $ 454 $ 664 ($ 62) $ 602
======= ======= ======= ======= ======= =======
</TABLE>
Changes in net interest income that could not be specifically identified as
either a rate or volume change were allocated proportionately to changes in
volume and changes in rate.
27
<PAGE>
An Independent Member of
Beard BDO
& Company Inc. Seidman
Certified Public Accountants Alliance
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Norwood Financial Corp.
Honesdale, Pennsylvania
We have audited the accompanying consolidated balance sheets of Norwood
Financial Corp. and its subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/Beard & Company, Inc.
Harrisburg, Pennsylvania
January 28, 2000
28
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
- ------------(Consolidated Balance Sheets)
<TABLE>
<CAPTION>
December 31, 1999 1998
---- ----
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,430 $ 7,954
Interest-bearing deposits with banks 398 1,284
Federal funds sold 1,970 3,360
--------- ---------
Cash and cash equivalents 10,798 12,598
Securities available for sale 78,875 62,270
Securities held to maturity, fair value 1999 $ 7,411; 1998 $ 8,151 7,477 7,645
Loans receivable, net of allowance for loan losses 1999 $ 3,344; 1998 $ 3,333 201,816 183,586
Bank premises and equipment, net 6,739 7,077
Other real estate 110 204
Accrued interest receivable 1,646 1,441
Other assets 7,366 4,196
--------- ---------
TOTAL ASSETS $ 314,827 $ 279,017
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 26,848 $ 27,264
Interest-bearing demand 26,660 23,926
Money market deposit accounts 31,987 30,324
Savings 42,152 42,579
Time 115,860 109,674
--------- ---------
TOTAL DEPOSITS 243,507 233,767
Short-term borrowings 8,600 7,776
Long-term debt 30,000 2,000
Accrued interest payable 2,385 2,283
Other liabilities 3,681 5,463
--------- ---------
TOTAL LIABILITIES 288,173 251,289
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $ .10 per share; authorized 10,000,000 shares;
issued 1,803,824 shares 180 180
Surplus 4,603 4,542
Retained earnings 25,763 23,240
Treasury stock, at cost 1999 59,889 shares; 1998 22,347 shares (1,214) (343)
Accumulated other comprehensive income (loss) (1,319) 1,655
Unearned Employee Stock Ownership Plan (ESOP) shares (1,359) (1,546)
--------- ---------
Total stockholders' equity 26,654 27,728
--------- ---------
Total liabilities and stockholders' equity $ 314,827 $ 279,017
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
--------- -------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $16,249 $16,311 $16,198
Securities:
Taxable 4,335 3,248 2,807
Tax-exempt 557 530 671
Interest-bearing deposits with other institutions 14 74 40
Federal funds sold 94 55 141
------- ------- -------
Total interest income 21,249 20,218 19,857
------- ------- -------
Interest expense:
Deposits 7,851 8,002 8,189
Short-term borrowings 300 354 374
Other 964 121 230
------- ------- -------
Total interest expense 9,115 8,477 8,793
------- ------- -------
Net interest income 12,134 11,741 11,064
Provision for loan losses 470 720 1,355
------- ------- -------
Net interest income after provision for loan losses 11,664 11,021 9,709
------- ------- -------
Other income:
Service charges and fees 1,235 1,087 859
Income from fiduciary activities 255 173 165
Net realized gains on sales of securities 59 48 70
Gain on termination of pension plan -- -- 597
Other 385 367 234
------- ------- -------
Total other income 1,934 1,675 1,925
------- ------- -------
Other expenses:
Salaries and employee benefits 4,081 3,886 3,639
Occupancy 712 708 693
Furniture and equipment 475 534 594
Data processing related operations 409 290 150
Other real estate owned 5 115 254
Advertising 94 120 163
Professional fees 186 254 323
Taxes, other than income 251 249 240
Amortization of intangible assets 185 214 291
Other 2,178 1,697 1,512
------- ------- -------
Total other expenses 8,576 8,067 7,861
------- ------- -------
Income before income taxes 5,022 4,629 3,773
Income tax expense 1,514 1,393 1,067
------- ------- -------
Net income $ 3,508 $ 3,236 $ 2,706
======= ======= =======
Earnings per share:
Basic $ 2.09 $ 1.93 $ 1.63
======= ======= =======
Diluted $ 2.08 $ 1.91 $ 1.63
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Consolidated Sttements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Unearned
Common Retained Treasury Income ESOP
Stock Surplus Earnings Stock (Loss) Shares Total
----- ------- -------- ----- ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 90 $ 4,444 $ 18,861 $ (345) $ 419 $(1,950) $21,519
------
Comprehensive income:
Net income -- -- 2,706 -- -- -- 2,706
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- 861 -- 861
------
Total comprehensive income 3,567
------
Cash dividends declared,
$ .435 per share -- -- (723) -- -- -- (723)
Two-for-one stock split in the form
of a 100% stock dividend 90 (90) -- -- -- -- --
Issuance of treasury stock -- -- -- 1 -- -- 1
Release of earned ESOP shares -- 30 -- -- -- 200 230
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1997 180 4,384 20,844 (344) 1,280 (1,750) 24,594
------
Comprehensive income:
Net income -- -- 3,236 -- -- -- 3,236
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- 375 -- 375
------
Total comprehensive income 3,611
-------
Cash dividends declared,
$ .50 per share -- -- (840) -- -- -- (840)
Stock options exercised -- 37 -- -- -- -- 37
Issuance of treasury stock -- -- -- 1 -- -- 1
Release of earned ESOP shares -- 121 -- -- -- 204 325
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1998 180 4,542 23,240 (343) 1,655 (1,546) 27,728
------
Comprehensive income:
Net income -- -- 3,508 -- -- -- 3,508
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- (2,974) -- (2,974)
------
Total comprehensive income 534
------
Cash dividends declared,
$ .59 per share -- -- (985) -- -- -- (985)
Stock options exercised -- (9) -- 70 -- -- 61
Acquisition of treasury stock -- -- -- (941) -- -- (941)
Release of earned ESOP shares -- 70 -- -- -- 187 257
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1999 $ 180 $ 4,603 $ 25,763 $(1,214) $ (1,319) $(1,359) $ 26,654
====== ======== ======== ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
- -------------------------------------------------Norwood Financial Corp-------31
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Consolidated Statements of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,508 $ 3,236 $ 2,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 470 720 1,355
Depreciation 670 670 709
Amortization of intangible assets 185 214 291
Deferred income taxes (63) 1,317 1,184
Net realized gain on sales of securities (59) (48) (70)
Losses on sale of other real estate, net (9) 22 111
Net gain on sale of mortgage loans (19) (100) (56)
Mortgage loans originated for sale (1,714) (7,126) (4,210)
Proceeds from sale of mortgage loans 1,733 7,226 4,266
(Increase) decrease in accrued interest receivable (205) (83) 200
Increase (decrease) in accrued interest payable 102 (82) 141
Earnings on life insurance policy (41) -- --
Other, net 750 980 (94)
-------- -------- --------
Net cash provided by operating activities 5,309 6,946 6,533
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 7,696 5,012 9,423
Proceeds from maturities and principal reductions on
mortgage-backed securities 14,421 16,031 11,703
Purchases (43,240) (33,417) (20,268)
Securities held to maturity, proceeds from maturities 175 515 650
Net increase in loans (19,909) (3,203) (12,079)
Purchase of life insurance policy (3,070) -- --
Purchase of bank premises and equipment (311) (446) (240)
Proceeds from sales of other real estate 197 1,000 1,975
-------- -------- --------
Net cash used in investing activities (44,041) (14,508) (8,836)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 9,740 7,013 (2,708)
Net increase in short-term borrowings 824 2,786 1,763
Repayments of long-term debt (2,000) -- (2,442)
Proceeds from long-term debt 30,000 -- 2,000
Stock options exercised 61 37 --
Acquisition of treasury stock (941) -- --
Proceeds from issuance of treasury stock -- 1 1
Release of ESOP shares 187 204 200
Cash dividends paid (939) (805) (696)
-------- -------- --------
Net cash provided by (used in) financing activities 36,932 9,236 (1,882)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,800) 1,674 (4,185)
Cash and cash equivalents:
Beginning of year 12,598 10,924 15,109
-------- -------- --------
End of year $ 10,798 $ 12,598 $ 10,924
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Notes to Consolidated Financial Statements
Summary of Accounting Policies
Nature of operations:
Norwood Financial Corp. (Company) was formed in March 1996 and is a one
bank holding company. Wayne Bank (Bank) is 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 the Pennsylvania Department of
Banking.
Principles of consolidation:
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., Norwood Investment Corp. and WTRO Properties.
All intercompany accounts and transactions have been eliminated in
consolidation.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities:
Securities classified as available for sale are those securities that
the Company intends to hold for an indefinite period of time but not necessarily
to maturity. Any decision to sell a security classified as available for sale
would be based on various factors, including significant movement in interest
rates, changes in maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
Securities available for sale are carried at fair value. Unrealized gains and
losses are reported in other comprehensive income, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of the cost of the
specific securities sold, are included in earnings. Premiums and discounts are
recognized in interest income using a method which approximates the interest
method over the period to maturity.
- -------------------------------------------------Norwood Financial Corp-------33
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Bonds, notes and debentures for which the Company has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Management determines the appropriate classification of debt securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date.
Loans receivable:
Loans generally are stated at their outstanding unpaid principal
balances, net of an allowance for loan losses and any deferred fees or costs.
Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the yield (interest income) of the related loans. The Company is
generally amortizing those amounts over the contractual life of the loan.
The Company provides automobile financing to its customers through
direct financing leases. These direct financing leases are carried at the
Company's net investment, which includes the sum of aggregate rentals receivable
and the estimated residual value of the leased automobiles less unearned income.
Unearned income is amortized over the leases terms by methods that approximate
the interest method.
A loan is generally considered impaired when it is probable the Company
will be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest and
amortization of fees is discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about
further collectibility of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is
placed on nonaccrual status, unpaid interest credited to income in the current
year is reversed and unpaid interest accrued in prior years is charged against
the allowance for loan losses. Interest received on nonaccrual loans generally
is either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally, loans
are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Allowance for loan losses:
The allowance for loan losses is established through provisions for
loan losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the loan's
initial effective interest rate or the fair value, less selling costs, of the
collateral for certain collateral dependent
34
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
loans. By the time a loan becomes probable of foreclosure, it has been charged
down to fair value, less estimated costs to sell.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, composition of the loan portfolio, current
economic conditions, and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change, including the amounts and timing of future cash flows
expected to be received on impaired loans.
Premises and equipment:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is calculated principally on the
straight-line method over the respective assets estimated useful lives.
Other real estate:
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in other real
estate owned expenses.
Intangible assets:
Intangible assets are comprised of goodwill and core deposit
acquisition premiums and are included in other assets. Goodwill is amortized
over a fifteen year period. Core deposit acquisition premiums, which were
developed by specific core deposit life studies, are being amortized over seven
to nine years. The amortization of intangible assets amounted to $ 185,000, $
214,000 and $ 291,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. 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.
Income taxes:
Deferred income tax assets and liabilities are determined based on the
differences between financial statement carrying amounts and the tax basis of
existing assets and liabilities. These differences are measured at the enacted
tax rates that will be in effect when these differences reverse. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion of the deferred tax assets will not
be realized. As changes in tax laws
- -------------------------------------------------Norwood Financial Corp-------35
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes. The Company and its subsidiary file a
consolidated federal income tax return.
Advertising costs:
The Company follows the policy of charging the costs of advertising to
expense as incurred.
Stock dividend and per share data:
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and are determined using the treasury stock
method.
Cash flow information:
For the purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest-bearing deposits with
banks and federal funds sold.
Cash payments for interest for the years ended December 31, 1999, 1998
and 1997, were $ 9,013,000, $ 8,560,000 and $ 8,652,000, respectively. Cash
payments for income taxes for the years ended December 31, 1999, 1998 and 1997
were $ 994,000, $ 29,000 and $ -0-, respectively. Non-cash investing activities
for 1999, 1998 and 1997 included foreclosed mortgage loans transferred to real
estate owned and repossession of other assets of $ 1,280,000, $ 1,579,000 and $
341,000, respectively.
Off-balance sheet financial instruments:
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit, letters of credit and commitments to sell loans. Such financial
instruments are recorded in the balance sheets when they become receivable or
payable.
Trust assets:
Assets held by the Company in a fiduciary capacity for customers are
not included in the financial statements since such items are not assets of the
Company. Trust income is reported on the accrual method.
36
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Comprehensive income:
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on available for
sale securities, are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects
are as follows:
Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses) on available for sale securities $(4,569) $ 618 $ 1,346
Less reclassification adjustment for gains realized in income 59 48 70
------- ------- -------
Net unrealized gains (losses) (4,510) 570 1,276
Income tax (benefit) (1,536) 195 415
------- ------- -------
Net of tax amount $(2,974) $ 375 $ 861
======= ======= =======
</TABLE>
Segment reporting:
The Company acts as an independent community financial service provider
and offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine network, the Company offers a full array of commercial and retail
financial services, including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of safe
deposit services. The Company also performs personal, corporate, pension and
fiduciary services through its Trust Department.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, mortgage banking and trust
operations of the Company. As such, discrete information is not available and
segment reporting would not be meaningful.
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities," which
was amended by Statement No. 137 and which becomes effective for the Company
January 1, 2001.
- -------------------------------------------------Norwood Financial Corp-------37
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The adoption of the Statement is not expected to have a significant impact on
the financial condition or results of operations of the Company.
SECURITIES
The amortized cost and fair value of securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain (Losses) Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
Available for sale:
U.S. Treasury securities $ 4,006 $ 2 $ (20) $ 3,988
U.S. Government agencies 18,781 -- (611) 18,170
States and political subdivisions 4,925 -- (251) 4,674
Corporate obligations 2,520 -- (213) 2,307
Mortgage-backed securities 47,766 -- (2,243) 45,523
-------- -------- -------- --------
77,998 2 (3,338) 74,662
Equity securities 2,878 1,335 -- 4,213
-------- -------- -------- --------
$ 80,876 $ 1,337 $ (3,338) $ 78,875
======== ======== ======== ========
Held to maturity:
States and political subdivisions $ 7,477 $ 30 $ (96) $ 7,411
======== ======== ======== ========
December 31, 1998:
Available for sale:
U.S. Treasury securities $ 5,511 $ 74 $ (4) $ 5,581
U.S. Government agencies 19,496 169 (37) 19,628
States and political subdivisions 3,703 125 (17) 3,811
Corporate obligations 1,704 85 -- 1,789
Mortgage-backed securities 28,211 180 (65) 28,326
-------- -------- -------- --------
58,625 633 (123) 59,135
Equity securities 1,136 1,999 -- 3,135
-------- -------- -------- --------
$ 59,761 $ 2,632 $ (123) $ 62,270
======== ======== ======== ========
Held to maturity:
States and political subdivisions $ 7,645 $ 506 $ -- $ 8,151
======== ======== ======== ========
</TABLE>
Equity securities consist of Pennsylvania community banks and Federal Home Loan
Bank stock.
The amortized cost and fair value of securities as of December 31,
1999, by contractual maturity or call date, are shown below. Expected maturities
may differ from contractual maturities or call dates because borrowers may have
the right to prepay obligations with or without call or prepayment penalties.
38
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Securities Available Securities Held
For Sale To Maturity
-------------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands)
Due in one year or less $ 5,700 $ 5,653 $ -- $ --
Due after one year through five years 13,205 12,919 -- --
Due after five years through ten years 4,717 4,540 100 101
Due after ten years 6,624 6,027 7,377 7,310
------- ------- ------- -------
30,246 29,139 7,477 7,411
Mortgage-backed securities 47,766 45,523 -- --
Equity securities 2,878 4,213 -- --
------- ------- ------- -------
$80,876 $78,875 $ 7,477 $ 7,411
======= ======= ======= =======
Gross realized gains and gross realized losses on sales of securities
available-for-sale were $ 65,000 and $ 6,000, respectively, in 1999; $ 54,000
and $ 6,000, respectively, in 1998, and $ 80,000 and $ 10,000, respectively, in
1997.
Securities with a carrying value of $ 41,285,000 and $ 29,632,000 at
December 31, 1999 and 1998 were pledged to secure public deposits, U.S. Treasury
demand notes, securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
Loans Receivable and Allowance for Loan Losses The components of loans
receivable at December 31 were as follows:
1999 1998
---- ----
(In Thousands)
Real estate:
Residential $ 56,984 $ 52,392
Commercial 49,796 30,734
Construction 3,339 3,046
Commercial, financial and agricultural 17,440 25,559
Consumer loans to individuals 54,026 42,061
Lease financing, net of unearned income 23,974 33,860
-------- -----------
205,559 187,652
Less:
Unearned income and deferred fees 399 733
Allowance for loan losses 3,344 3,333
-------- -----------
$201,816 $ 183,586
======== ===========
- -------------------------------------------------Norwood Financial Corp-------39
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The Bank's net investment in direct financing leases at December 31 consist of:
1999 1998
-------- --------
Minimum lease payments receivable $ 9,061 $ 14,579
Estimated unguaranteed residual values 17,759 24,122
Unearned income (2,846) (4,841)
-------- --------
$ 23,974 $ 33,860
======== ========
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Balance, beginning $ 3,333 $ 3,250 $ 2,616
Provision for loan losses 470 720 1,355
Recoveries 173 152 109
Loans charged off (632) (789) (830)
------- ------- -------
Balance, ending $ 3,344 $ 3,333 $ 3,250
======= ======= =======
The recorded investment in impaired loans, not requiring an allowance
for loan losses was $ 360,000 and $ 642,000 at December 31, 1999 and 1998,
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $ -0- at both December 31, 1999 and 1998. For the years
ended December 31, 1999, 1998 and 1997, the average recorded investment in these
impaired loans was $ 365,000, $ 669,000 and $ 2,716,000 and the interest income
recognized on these impaired loans was $ -0-, $ 77,000 and $ 68,000,
respectively.
Premesis and Equipment
Components of premises and equipment at December 31 are as follows:
1999 1999
-------- --------
(In Thousands)
Land and improvements $ 944 $ 944
Buildings and improvements 7,225 7,220
Furniture and equipment 2,469 2,163
-------- --------
10,638 10,327
Less accumulated depreciation (3,899) (3,250)
-------- --------
$ 6,739 $ 7,077
======== ========
40
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Deposits
Aggregate time deposits in denominations of $ 100,000 or more were $
32,487,000 and $ 27,535,000 at December 31, 1999 and 1998, respectively. At
December 31, 1999, the scheduled maturities of time deposits are as follows (in
thousands):
2000 $ 71,186
2001 31,144
2002 8,847
2003 2,741
2004 1,942
--------------
$ 115,860
==============
Borrowings
Short-term borrowings at December 31 consist of the following:
1999 1998
------ ------
(In Thousands)
Securities sold under agreements to repurchase $7,600 $7,612
U.S. Treasury demand notes 1,000 164
------ ------
$8,600 $7,776
====== ======
The outstanding balances and related information of short-term borrowings are
summarized as follows:
Years Ended December 31,
1999 1998
---- ----
(In Thousands)
Average balance during the year $ 8,187 $ 7,648
Average interest rate during the year 3.66% 4.63%
Maximum month-end balance during the year $26,462 $14,284
Securities sold under agreements to repurchase generally mature within
one day to one year from the transaction date. Securities with amortized costs
and fair values of $ 8,684,000 and $ 8,415,000 at December 31, 1999 and $
6,992,000 and $ 7,042,000 at December 31, 1998 were pledged as collateral for
these agreements. The securities underlying the agreements were under the
Company's control.
The Company has a line of credit commitment available from the Federal
Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $ 15,000,000 which
expires in March 2000. There were no borrowings under this line of credit at
December 31, 1999 and 1998.
- -------------------------------------------------Norwood Financial Corp-------41
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Other borrowings consisted of the following at December 31, 1999 and
1998 (in thousands):
1999 1998
---- ----
Notes with the Federal Home Loan Bank (FHLB):
Note due December 1999 at 6.04% $ -- $ 2,000
Fixed note due January 2000 at 5.28 3,000 --
Fixed note due January 2000 at 5.78 4,000 --
Fixed note due January 2000 at 6.04 2,000 --
Fixed note due February 2000 at 5.72 3,000 --
Fixed note due March 2000 at 5.78 3,000 --
Convertible note due December 2006 at 6.19% 5,000 --
Convertible note due April 2009 at 4.83% 5,000 --
Convertible note due April 2009 at 5.07% 5,000 --
------- -------
$30,000 $ 2,000
======= =======
Employee Benefit Plans
In 1997, the Company terminated its defined benefit pension plan which
covered substantially all employees and officers. At the time of the
termination, the Company determined the amount that the plan assets exceeded the
accumulated benefit obligation of eligible participants of which 25% $(102,000)
was transferred to the Company's 401(k) plan. The remaining plan assets were
transferred to the Company and it recognized a pre-tax gain of $ 597,000 in 1997
included in other income in the accompanying consolidated financial statements.
The Company has a defined contributory profit-sharing plan which
includes provisions of a 401(k) plan. The plan permits employees to make pre-tax
contributions up to 15% of the employee's compensation. The amount of
contributions to the plan, including matching contributions, is 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. The Company's contributions are expensed as the cost is
incurred, funded currently, and amounted to $ 115,000, $ 175,000 and $ 132,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
In 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
Bank 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
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
42
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
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
sheets. 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 and dividends on
unallocated ESOP shares are recorded as a reduction of debt. Compensation
expense for the ESOP was $ 285,000, $ 324,000 and $ 237,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The status of the ESOP shares are as follows:
1999 1998
---------- ----------
Allocated shares 37,665 27,365
Shares released from allocation 1,327 120
Unreleased shares 82,220 93,727
---------- ----------
Total ESOP shares 121,212 121,212
---------- ----------
Fair value of unreleased shares $1,706,000 $2,132,000
========== ==========
Income Taxes
The components of the provision for federal income taxes are as follows:
Years Ended December 31,
1999 1998 1997
------- ------- -------
(In Thousands)
Current $ 1,577 $ 76 $ (117)
Deferred (63) 1,317 1,184
------- ------- -------
$ 1,514 $ 1,393 $ 1,067
======= ======= =======
Income tax expense of the Company is less than the amounts computed by
applying statutory federal income tax rates to income before income taxes
because of the following:
<TABLE>
<CAPTION>
Percentage Of Income
Before Income Taxes
------------------------
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rates 34.0 % 34.0 % 34.0 %
Tax exempt interest income, net of interest expense disallowance (4.0) (3.6) (5.4)
Low-income housing tax credit (1.2) (1.3) (1.5)
Other 1.3 1.0 1.2
---- ---- ----
30.1 % 30.1 % 28.3 %
==== ==== ====
</TABLE>
The income tax provision includes $ 20,000, $ 16,000 and $ 24,000 of income
taxes relating to realized securities gains for the years ended December 31,
1999, 1998 and 1997, respectively.
- -------------------------------------------------Norwood Financial Corp-------43
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The net deferred tax liability included in other liabilities in the accompanying
balance sheets includes the following amounts of deferred tax assets and
liabilities:
1999 1998
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 786 $ 782
Deferred loan origination fees 90 29
Allowance for other real estate losses 38 66
Net unrealized loss on securities 680 --
Deferred compensation 31 41
Core deposit intangible 136 94
Partnership credit carryforward -- 116
Minimum tax credit carryforward 834 950
Net operating loss carryforward -- 550
Other 20 102
------- -------
Total Deferred tax assets 2,615 2,730
------- -------
Deferred tax liabilities:
Net unrealized gain on securities -- 853
Premises and equipment 107 241
Lease financing 4,211 4,939
Other 5 1
------- -------
Total deferred tax liabilities 4,323 6,034
------- -------
Net deferred tax liability $(1,708) $(3,304)
======= =======
Net operating loss carry forwards of approximately $ 1,570,000 were utilized in
1999.
Transactions with Executive Officers and Directors
Certain directors and executive officers of the Bank, their families
and their affiliates are customers of the Bank. Any transactions with such
parties, including loans and commitments, were in the ordinary course of
business at normal terms, including interest rates and collateralization,
prevailing at the time and did not represent more than normal risks. At December
31, 1999 and 1998, such loans amounted to $ 3,339,000 and $ 1,516,000,
respectively. During 1999, new loans to such related parties totaled $ 2,391,000
and repayments aggregated $ 568,000.
Regulatory Matters and Stockholders' Equity
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material affect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
44
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, the most recent notification from the
regulators has categorized the Company and the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
Company's or Bank's category.
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. The Bank's actual
capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk weighted assets) $29,691 13.47% $> 17,632 >8.00% $>20,040 >10.00%
- - - -
Tier 1 capital (to risk weighted assets) 26,384 11.97% > 8,816 >4.00% >13,224 > 6.00%
- - - -
Tier 1 capital (to average assets) 26,384 8.97% > 11,767 >4.00% >14,709 > 5.00%
- - - -
As of December 31, 1998:
Total capital (to risk weighted assets) $27,058 13.51% $>16,022 >8.00% $>20,028 >10.00%
- - - -
Tier 1 capital (to risk weighted assets) 23,731 11.85% > 8,010 >4.00% >12,015 > 6.00%
- - - -
Tier 1 capital (to average assets) 23,731 8.73% =10,873 >4.00% >13,591 > 5.00%
- - - -
</TABLE>
The Company's ratios do not differ significantly from the Bank's ratios
presented above.
The Bank is required to maintain average cash reserve balances in vault
cash or with the Federal Reserve Bank. The amount of these restricted cash
reserve balances at December 31, 1999 and 1998 was approximately $ 1,888,000 and
$ 1,260,000, respectively.
Under Pennsylvania banking law, the Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. At December 31, 1999, $ 22,910,000 of retained earnings
were available for dividends without prior regulatory approval, subject to the
regulatory capital requirements discussed above.
Stock Option Plan
The Company adopted a Stock Option Plan for the directors, officers and
employees of the Company in 1995. An aggregate of 500,000 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.
- -------------------------------------------------Norwood Financial Corp-------45
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 67,450 $ 18.40 55,570 $ 16.72 41,620 $ 16.54
Granted 16,500 22.24 15,500 24.00 18,000 17.13
Exercised (3,620) 16.52 (2,232) 16.46 -- --
Forfeited -- -- (1,388) 16.63 (4,050) 16.63
------ --------- ------ --------- ------ ---------
Outstanding, end of year 80,330 $ 19.28 67,450 $ 18.40 55,570 $ 16.72
====== ========= ====== ========= ====== =========
Exercisable at end of year 63,830 $ 18.51
====== =========
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged
from $ 16.44 to $ 24.00 per share. The weighted average remaining contractual
life is 8.0 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the Company's
net income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
Years Ended December 31,
1999 1998 1997
(In Thousands)
---------------------------------------------
Net income:
As reported $ 3,508 $ 3,236 $ 2,706
Pro forma 3,375 3,154 2,640
Earnings per share:
As reported 2.09 1.93 1.63
Pro forma 2.02 1.88 1.59
Earnings per share (assuming dilution):
As reported 2.08 1.91 1.63
Pro forma 2.00 1.86 1.59
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended December 31,
1999 1998 1997
----------------------------------
(In Thousands)
Dividend yield 2.46% 2.46% 2.40%
Expected life 8 years 8 years 8 years
Expected volatility 16.40% 39.80% 21.00%
Risk-free interest rate 4.65% 4.65% 5.75%
46
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Numerator, net income $3,508,000 $3,236,000 $2,706,000
========== ========== ==========
Denominator:
Denominator for basic earnings per share, weighted average shares 1,674,653 1,679,411 1,660,998
Effect of dilutive securities, employee stock options 11,690 16,674 3,474
---------- ---------- ----------
Denominator for diluted earnings per share, adjusted
weighted average shares and assumed conversions 1,686,343 1,696,085 1,664,472
========== ========== ==========
Basic earnings per common share $ 2.09 $ 1.93 $ 1.63
========== ========== ==========
Diluted earnings per common share $ 2.08 $ 1.91 $ 1.63
========== ========== ==========
</TABLE>
Off-Balance-Sheet Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. A summary of the Bank's
financial instrument commitments is as follows:
December 31,
1999 1998
---- ----
(In Thousands)
Commitments to extend credit $21,324 $13,788
Standby letters of credit 868 520
------- -------
$22,192 $14,308
======= =======
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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the customer and generally consists of real
estate.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Bank holds collateral, when deemed
necessary, supporting those commitments.
- -------------------------------------------------Norwood Financial Corp-------47
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike and Monroe Counties,
Pennsylvania and, accordingly, has extended credit primarily to commercial
entities and individuals in this area whose ability to honor their contracts is
influenced by the region's economy. These customers are also the primary
depositors of the Bank. The Bank is limited in extending credit by legal lending
limits to any single borrower or group of borrowers.
Disclosures About Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates indicated.
The estimated fair value amounts have been measured as of their respective year
ends and have not been re-evaluated or updated for purposes of these
consolidated financial statements subsequent to those respective dates. As such,
the estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year end.
The following information should not be interpreted as an estimate of
the fair value of the entire Company since a fair value calculation is only
provided for a limited portion of the Company's assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company's financial instruments at December
31, 1999 and 1998:
o For cash and due from banks, interest-bearing deposits with banks and
federal funds sold, the carrying amount is a reasonable estimate of fair value.
o For securities, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
o The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Disclosure of
the fair value of leases receivable is not required and has not been included in
the table below.
o The fair value of accrued interest receivable and accrued interest
payable is the carrying amount.
o The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits for similar remaining
maturities.
48
<PAGE>
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
o The fair value of short-term borrowings approximate their carrying
amount.
o The fair value of long-term debt is estimated using discounted cash
flow analyses based upon the Company's current borrowing rates for
similar types of borrowing arrangements.
o The fair value of commitments to extend credit and for outstanding
letters of credit is estimated using the fees currently charged to
enter into similar agreements.
The estimated fair value of the Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, interest-bearing
deposits with banks and federal funds sold $ 10,798 $ 10,798 $ 12,598 $ 12,598
Securities 86,352 86,286 69,915 70,421
Loans receivable, net 177,842 176,555 149,726 150,798
Accrued interest receivable 1,646 1,646 1,441 1,441
Financial liabilities:
Deposits 243,507 244,033 233,767 234,318
Short-term borrowings 8,600 8,600 7,776 7,776
Long-term debt 30,000 29,693 2,000 2,016
Accrued interest payable 2,385 2,385 2,283 2,283
Off-balance sheet financial instruments:
Commitments to extend credit and outstanding
letters of credit -- -- -- --
</TABLE>
Norwood Financial Corp. (Parent Company Only) Financial Inforation
Balance Sheets December 31,
1999 1998
---- ----
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary $ 510 $ 382
Interest bearing deposit with another institution -- 900
Securities available for sale 531 307
Investment in bank subsidiary 25,978 26,438
Other assets 37 51
------- -------
$27,056 $28,078
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 402 $ 350
Stockholders equity 26,654 27,728
------- -------
$27,056 $28,078
======= =======
- -------------------------------------------------Norwood Financial Corp-------49
<PAGE>
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $ 983 $ 839 $ 723
Interest income from bank subsidiary 119 139 162
Other interest income 32 37 14
------ ------ ------
1,134 1,015 899
Expenses 65 75 54
------ ------ ------
Income before income taxes 1,069 940 845
Income tax expense 29 40 41
------ ------ ------
1,040 900 804
Equity in undistributed earnings of subsidiary 2,468 2,336 1,902
------ ------ ------
Net income $3,508 $3,236 $2,706
====== ====== ======
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,508 $ 3,236 $ 2,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of bank subsidiary (2,468) (2,336) (1,902)
Other, net 112 155 86
------- ------- -------
Net cash provided by operating activities 1,152 1,055 890
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of securities available for sale (292) -- --
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised 61 37 --
Acquisition of treasury stock (941) -- --
Proceeds from issuance of treasury stock -- 1 1
Release of ESOP shares 187 204 200
Cash dividends paid (939) (805) (696)
------- ------- -------
Net cash used in financing activities (1,632) (563) (495)
------- ------- -------
Increase in cash and cash equivalents (772) 492 395
Cash and cash equivalents:
Beginning 1,282 790 395
------- ------- -------
Ending $ 510 $ 1,282 $ 790
======= ======= =======
</TABLE>
50
EXHIBIT 23
<PAGE>
CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (on Form S-8) of Norwood Financial Corp. of our report dated January
28, 2000, with respect to the consolidated financial statements of Norwood
Financial Corp. and subsidiary incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/BEARD & COMPANY, INC.
Harrisburg, Pennsylvania
March 21, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,430
<INT-BEARING-DEPOSITS> 398
<FED-FUNDS-SOLD> 1,970
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,875
<INVESTMENTS-CARRYING> 7,477
<INVESTMENTS-MARKET> 7,411
<LOANS> 205,160
<ALLOWANCE> 3,344
<TOTAL-ASSETS> 314,827
<DEPOSITS> 243,507
<SHORT-TERM> 8,600
<LIABILITIES-OTHER> 6,066
<LONG-TERM> 30,000
0
0
<COMMON> 180
<OTHER-SE> 26,474
<TOTAL-LIABILITIES-AND-EQUITY> 314,827
<INTEREST-LOAN> 16,249
<INTEREST-INVEST> 4,892
<INTEREST-OTHER> 108
<INTEREST-TOTAL> 21,249
<INTEREST-DEPOSIT> 7,851
<INTEREST-EXPENSE> 9,115
<INTEREST-INCOME-NET> 12,134
<LOAN-LOSSES> 470
<SECURITIES-GAINS> 59
<EXPENSE-OTHER> 8,576
<INCOME-PRETAX> 5,022
<INCOME-PRE-EXTRAORDINARY> 5,022
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,508
<EPS-BASIC> 2.09
<EPS-DILUTED> 2.08
<YIELD-ACTUAL> 4.48
<LOANS-NON> 596
<LOANS-PAST> 61
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,333
<CHARGE-OFFS> 632
<RECOVERIES> 173
<ALLOWANCE-CLOSE> 3,344
<ALLOWANCE-DOMESTIC> 3,344
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,035
</TABLE>
