-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FSCH+dGw7gygKeViusmSIKsrMNTzTnDARg+2ESv57ej7U6bVXF2gnFHh92UUrvr2 8qt5S9pDyP/Rz8AZlsrMkw== 0000946275-00-000151.txt : 20000324 0000946275-00-000151.hdr.sgml : 20000324 ACCESSION NUMBER: 0000946275-00-000151 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28364 FILM NUMBER: 576512 BUSINESS ADDRESS: STREET 1: 717 MAIN ST STREET 2: PO BOX 269 CITY: HONESDALE STATE: PA ZIP: 18431 BUSINESS PHONE: 7172531455 10-K 1 FORM 10-K 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 . --------------- --------------- Commission File No. 0-28366 Norwood Financial Corp. - -------------------------------------------------------------------------------- ( 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 - ---------------------------------------- ----------- (Address of Principal Executive Offices (Zip Code) Issuer's Telephone Number, Including Area Code: (717) 253-1455 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share - -------------------------------------------------------------------------------- (Title of Class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, --- and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 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) 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 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 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 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 Types of Loans. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the dates indicated.
At December 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------- ------------- --------------- ------------- -------------- $ % $ % $ % $ % $ % (Dollars in Thousands) Type of Loans: - ------------- 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 ======== ======= ======= ======= =======
5 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 ====== ====== ====== ====== 6 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."
At December 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In Thousands) 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%
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 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:
Year ended December 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- -------- -------- -------- 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%
8 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.
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 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.
9 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 ====== ====== ====== 10 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."
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 % ------- ------- ------- ------- ------- ------- ------- ------- ----- ------- (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% ======= ===== ======= ==== ======= ===== ======= ===== ======= =====
(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 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 12 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 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 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 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 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 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 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 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 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.
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
EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 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), 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- 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- 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- 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- (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- 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. -7- (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 -8- (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. -9- (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 -10- 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. -11- 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. -12- EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 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 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) -2- 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 -3- 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 -4- 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 -5- 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 -6- 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: -7- (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 -8- 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. -9- (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. -10- 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 -11- 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. -12- EX-10.6 4 EXHIBIT 10.6 EXHIBIT 10.6 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, 1 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 2 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. 3 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. 4 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 5 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 6 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 7 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 8 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 9 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. 10 EX-10.7 5 EXHIBIT 10.7 EXHIBIT 10.7 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, 1 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 2 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. 3 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. 4 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 5 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 6 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 7 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 8 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 9 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. 10 EX-10.8 6 EXHIBIT 10.8 EXHIBIT 10.8 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, 1 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 2 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. 3 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. 4 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 5 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 6 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 7 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 8 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 9 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. 10 EX-10.9 7 EXHIBIT 10.9 EXHIBIT 10.9 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. 1 (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. 2 (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 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 (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 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 (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 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 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. EX-13 8 EXHIBIT 13 EXHIBIT 13 (Five Year Financial Summary)--------------------------------------------------- Summary of Selected Financial Data (dollars in thousands, except per share data)
For the years ended December 31, ------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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%
[GRAPHICS OMITTED] 99 ANNUAL REPORT - --------------------------------------------------(Norwood Financial Corp)-----3 [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 --------------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 [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 --------------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 [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:
At December 31 ------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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%
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 --------------1999 Annual Report ....ANNUAL REPORT 99 Box Graphics
At December 31, ------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In Thousands) 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%
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 [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 --------------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 [GRAPHICS OMITTED] 99 ANNUAL REPORT The following table displays interest-sensitivity as of December 31, 1999: (in thousands)
3 Months 3 Through 1 Through Over Or Less 12 Months 3 Years 3 Years Total ------- --------- ------- ------- ----- 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%
(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 --------------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 [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 --------------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 [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 --------------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 [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 --------------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 [GRAPHICS OMITTED] 99 ANNUAL REPORT Summary of Quarterly Results (unaudited) (dollars in thousands, except per share amounts)
1999 ------------------------------------------------------ December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- 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 ============ =========== ========== ==========
1998 ------------------------------------------------------ December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- 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 ============ ============== ========== ==========
26 --------------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)
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 ---------- ----------- ---- ---------- ----------- ---- ---------- ----------- ---- 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 ======== ========= ========= 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 ==== ==== ====
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.
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 ------ ---- --- ------ ---- --- 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 ======= ======= ======= ======= ======= =======
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 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 --------------1999 Annual Report ....ANNUAL REPORT 99 Box Graphics - ------------(Consolidated Balance Sheets)
December 31, 1999 1998 ---- ---- (In Thousands) ASSETS 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 ========= =========
See Notes to Consolidated Financial Statements. 29 [GRAPHICS OMITTED] 99 ANNUAL REPORT Consolidated Statements of Income
Years Ended December 31, 1999 1998 1997 --------- -------- --------- (In Thousands, Except Per Share Data) 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 ======= ======= =======
See Notes to Consolidated Financial Statements 30 --------------1999 Annual Report ....ANNUAL REPORT 99 Box Graphics Consolidated Sttements of Stockholders' Equity Years Ended December 31, 1999, 1998 and 1997
Accumulated Other Comprehensive Unearned Common Retained Treasury Income ESOP Stock Surplus Earnings Stock (Loss) Shares Total ----- ------- -------- ----- ------ ------ ----- (In Thousands) 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 ====== ======== ======== ======= ======== ======= ========
See Notes to Consolidated Financial Statements - -------------------------------------------------Norwood Financial Corp-------31 [GRAPHICS OMITTED] 99 ANNUAL REPORT Consolidated Statements of Cash Flows Years Ended December 31,
1999 1998 1997 -------- -------- -------- (In Thousands) 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 ======== ======== ========
See Notes to Consolidated Financial Statements. 32 --------------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 [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 --------------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 [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 --------------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,
1999 1998 1997 ------- ------- ------- (In Thousands) 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 ======= ======= =======
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 [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:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gain (Losses) Value -------- -------- -------- -------- (In Thousands) 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 ======== ======== ======== ========
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 --------------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 [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 --------------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 [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 --------------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:
Percentage Of Income Before Income Taxes ------------------------ Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- 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 % ==== ==== ====
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 [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 --------------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:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ----------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (In Thousands) 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% - - - -
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 [GRAPHICS OMITTED] 99 ANNUAL REPORT A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1999 1998 1997 ---------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- 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 ====== =========
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 --------------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:
Years Ended December 31, 1999 1998 1997 ------------------------------------ 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 ========== ========== ==========
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 [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 --------------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:
December 31, 1999 December 31, 1998 --------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In Thousands) 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 -- -- -- --
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 [GRAPHICS OMITTED] 99 ANNUAL REPORT Statements of Income
Year Ended December 31, 1999 1998 1997 ---- ---- ---- (In Thousands) 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 ====== ====== ======
Statements of Cash Flows
Year Ended December 31, 1999 1998 1997 ---- ---- ---- (In Thousands) 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 ======= ======= =======
50 EX-23 9 EXHIBIT 23 EXHIBIT 23 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 EX-27 10 FDS
9 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. 1000 12-MOS DEC-31-1999 DEC-31-1999 8,430 398 1,970 0 78,875 7,477 7,411 205,160 3,344 314,827 243,507 8,600 6,066 30,000 0 0 180 26,474 314,827 16,249 4,892 108 21,249 7,851 9,115 12,134 470 59 8,576 5,022 5,022 0 0 3,508 2.09 2.08 4.48 596 61 0 0 3,333 632 173 3,344 3,344 0 1,035
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