UNITED STATES
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
For the fiscal year ended December 31, 2006
-----------------
or
[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File No. 0-28364
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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (570) 253-1455
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
--------------------------- ------------------------------------------
Common Stock $.10 par value The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of March 14, 2007, there were 2,792,151 shares outstanding of the
registrant's Common Stock. ---------
The Registrant's voting stock trades on the NASDAQ Global 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 June 30, 2006, $31.46 per share, was $70,727,743 based
on 2,248,180 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 2006. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the 2007 Annual Meeting of
Stockholders. (Part III)
NORWOOD FINANCIAL CORP.
FORM 10-K
Table of Contents
Part I Page
Item 1. Business 1
Item 1A Risk Factors 18
Item 1B. Unresolved Staff Comments 24
Item 2 Properties 24
Item 3 Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 26
Part III
Item 10. Directors, Executive Officers and Corporate Governance 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions and Director Independence 27
Item 14. Principal Accounting Fees and Services 28
Part IV
Item 15. Exhibits, Financial Statement Schedules 29
Signatures 31
1
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 as
detailed in Item 1A include:
o our ability to effectively manage future growth
o loan losses in excess of our allowance
o risks inherent in commercial lending
o real estate collateral which is subject to declines in value
o regional economic factors
o loss of senior officers
o comparatively low legal lending limits
o limited market for the Company's stock
o restrictions on ability to pay dividends
o common stock may lose value
o competitive environment
o issuing additional shares may dilute ownership
o extensive and complex governmental regulation and associated cost
o interest rate risks
Norwood Financial Corp. 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"), a Pennsylvania corporation, is the
holding company for Wayne Bank. On March 29, 1996, the Bank completed a holding
company reorganization and became a wholly owned subsidiary of the Company. As
of December 31, 2006, the Company had total assets of $454.4 million, deposits
of $358.1 million, and stockholders' equity of $52.2 million. The Company's
ratio of average equity to average assets was 11.23%, 11.19% and 11.15% for
fiscal years, 2006, 2005 and 2004, respectively
Wayne Bank is a Pennsylvania chartered commercial bank headquartered 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 to
applicable limits by the Deposit Insurance Fund ("DIF") as administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the
Pennsylvania Department of Banking ("PDB") and the FDIC.
2
The Bank is an independent community bank with six offices in Wayne County,
three offices in Pike County and three offices in Monroe County. The Bank offers
a wide variety of personal and business credit services and trust and investment
products and real estate settlement services to the consumers, businesses,
nonprofit organizations, and municipalities in each of the communities that the
Bank serves. The Bank primarily serves the Pennsylvania counties of Wayne, Pike
and Monroe, and to a much lesser extent, the counties of Lackawanna and
Susquehanna. In addition, the Bank operates twelve automated teller machines,
one in each of its branch locations. The Company's main office is located at 717
Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455.
The Bank maintains a website at www.waynebank.com.
COMPETITION
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market area of Wayne, Pike and
Monroe Counties, Pennsylvania. Based on data compiled by the FDIC as of June 30,
2006 (the latest date for which data is available), the Bank had the third
largest share of FDIC-insured deposits in Wayne County with approximately 20.5%,
second in Pike County with 18.5%, and 12th in Monroe County with 1.3%. This data
does not reflect deposits held by credit unions with which the Bank also
competes. Deposit competition also includes a number of insurance products sold
by local agents and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition varies depending
upon market conditions and comes from other insured financial institutions such
as commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage bankers.
PERSONNEL
As of December 31, 2006, the Bank had 117 full-time and 5 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 residences as well as second home
dwellings. The products include adjustable rate mortgages with terms up to 30
years which are retained and serviced through the Bank, 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 the extent consistent with our asset/liability management
strategies. 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 to a lesser extent also offers indirect dealer financing of automobiles
(new and used), boats, and recreational vehicles through a limited network of
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 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 payment default. At the same time, the
3
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate may also be
limited by the maximum periodic interest rate adjustment permitted in certain
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. Such loans may
entail additional credit risks compared to owner-occupied residential mortgage
lending. As a result, the Bank has de-emphasized the indirect lending product
line.
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. The Bank offsets such
factors with requiring more owner equity, a lower loan to value ratio and by
obtaining the personal guaranties of the principals. In addition, a majority of
the Bank's commercial real estate portfolio is owner occupied property.
Due to the type and nature of the collateral, consumer lending generally
involves more credit risk when compared with residential real estate lending.
Consumer 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.
There are additional risks associated with indirect automobile lending
since we must rely on the automobile dealer to provide accurate information to
us and accurate disclosures to the borrowers. These loans are principally done
on a non-recourse basis. We seek to mitigate these risks by only dealing with
dealers with whom we have a long-standing relationship.
LOAN SOLICITATION AND PROCESSING
The Bank has established various lending limits for its officers and also
maintains an Officer Loan Committee to approve higher loan amounts. The loan
committee is comprised of the President and Chief Executive Officer, Senior
Lending Officer and other Bank officers. The Loan Committee has the authority to
approve all loans up to set limits based on the type of loan and the collateral.
Requests in excess of these limits must be submitted to the Directors' Loan
Committee or Board of Directors for approval. Additionally, the President and
Chief Executive Officer, and the Senior Lending Officer and other officers have
the authority to approve secured and unsecured loans up to amounts approved by
the Board of Directors and maintained in the Bank's Loan Policy. Notwithstanding
individual lending authority, certain loan policy exceptions must be submitted
to the loan committee for approval.
4
Hazard insurance coverage is required on all properties securing loans made
by the Bank. Flood insurance is also required, when applicable.
Loan applicants are notified of the credit decision by letter. If the loan
is approved, the loan commitment specifies the terms and conditions of the
proposed loan including the amount, interest rate, amortization term, a brief
description of the required collateral, and the required insurance coverage. The
borrower must provide proof of fire, flood (if applicable) and casualty
insurance on the property serving as collateral and title insurance, and these
applicable insurances must be maintained during the full term of the loan.
5
TYPES OF LOANS. Set forth below is selected data relating to the
composition of the Bank's loan portfolio at the dates indicated.
As of December 31,
--------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------- --------------- --------------- -------------- ---------------
$ % $ % $ % $ % $ %
------- --- ------- --- ------- --- ------- --- ------- ---
(dollars in thousands)
Type of Loans:
Commercial, Financial and Agricultural..$ 34,019 10.8 $ 26,755 9.2 $ 20,263 7.9 $ 17,022 7.3 $ 15,074 6.9
Real Estate-Construction................ 7,714 2.4 5,944 2.0 4,890 1.9 5,904 2.5 4,109 1.9
Real Estate-Mortgage
Residential............ 113,783 36.0 100,705 34.6 90,606 35.5 77,459 33.1 69,040 31.6
Commercial............. 138,881 44.0 133,495 45.8 111,164 43.6 96,276 41.1 79,623 36.5
Lease financing, net of unearned income. - - - - - - 316 .1 1,592 .7
Consumer Loans to Individuals........... 21,520 6.8 24,353 8.4 28,193 11.1 37,219 15.9 48,951 22.4
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
315,917 100.0 291,252 100.0 255,116 100.0 234,196 100.0 218,389 100.0
===== ===== ===== ===== =====
Unearned income and deferred fees....... (350) (362) (359) (463) (419)
Allowance for loan losses............... (3,828) (3,669) (3,448) (3,267) (3,146)
-------- -------- -------- -------- --------
$311,739 $287,221 $251,309 $230,466 $214,824
======== ======== ======== ======== ========
6
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, 2006. 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
-------- ---------- ---------- -----
(in thousands)
Commercial, Financial
and Agricultural $12,329 $10,551 $11,139 $34,019
Real Estate - Construction 7,714 -- -- 7,714
------- -------- ------- -------
Total $20,043 $10,551 $11,139 $41,733
======= ======= ======= =======
Loans with fixed-rates $ 4,260 $ 6,177 $ 5,869 $16,306
Loans with floating rates 15,783 4,374 5,270 25,427
------- ------- ------- -------
Total $20,043 $10,551 $11,139 $41,733
======= ======= ======= =======
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual loans, foreclosed real estate owned and loans that are 90 days or
more delinquent but on which the Bank was accruing interest at the dates
indicated. The Bank did not have any loans accounted for as troubled debt
restructurings at the dates indicated. For the year ended December 31, 2006,
interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $37,000 of which
$8,000 was collected.
7
As of December 31,
-------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars in thousands)
Non-accrual loans:
Commercial and all other........................ $ -- $ -- $ -- $ -- $ --
Real estate..................................... 392 330 32 125 213
Consumer........................................ 17 11 8 -- 3
---- ---- ---- ---- ----
Total....................................... 409 341 40 125 216
Accruing loans which are contractually past-
due 90 days or more:
Commercial and all other....................... -- -- -- -- --
Real estate.................................... -- -- 5 -- --
Consumer....................................... -- 12 22 18 5
---- ---- ---- ---- ----
Total............................................. -- 12 27 18 5
---- ---- ---- ---- ----
Total non-performing loans........................ 409 353 67 143 221
Foreclosed real estate............................ -- -- -- -- 21
---- ---- ---- ---- ----
Total non-performing assets....................... $409 $353 $ 67 $143 $242
==== ==== ==== ==== ====
Total non-performing loans to total loans.... .13% .12% .03% .06% .10%
Total non-performing loans to total assets........ .09% .08% .02% .04% .06%
Total non-performing assets to total assets....... .09% .08% .02% .04% .07%
The recorded investment in impaired loans, not requiring an allowance for
loan losses was $290,000 and $310,000 at December 31, 2006 and 2005,
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $-0- at December 31, 2006 and 2005. The related allowance
for loan losses associated with these loans was $-0- at December 31, 2006 and
2005. For the years ended December 31, 2006, 2005 and 2004, the average recorded
investment in these impaired loans was $286,000, $316,000 and $-0- and the
interest income recognized on these impaired loans was $1,000, $11,000 and $-0-,
respectively.
POTENTIAL PROBLEM LOANS. As of December 31, 2006, 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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
information with respect to the Bank's allowance for loan losses for the years
indicated:
8
Year Ended December 31,
--------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars in thousands)
Total loans receivable net of unearned income ................ $ 315,567 $ 290,890 $ 254,757 $ 233,733 $ 217,970
Average loans receivable ..................................... 301,533 274,053 245,783 225,680 213,814
--------- --------- --------- --------- ---------
Allowance balance at beginning of period .................... $ 3,669 $ 3,448 $ 3,267 $ 3,146 $ 3,216
Charge-offs:
Commercial and all other ................................... -- (4) (19) (121) (34)
Real Estate ................................................ -- (6) (10) -- (122)
Consumer ................................................... (150) (200) (342) (478) (608)
Leases ..................................................... -- -- (11) (36) (30)
--------- --------- --------- --------- ---------
Total ........................................................ (150) (210) (382) (635) (794)
--------- --------- --------- --------- ---------
Recoveries:
Commercial and all other ................................... 18 12 13 5 --
Real Estate ................................................ 2 18 8 24 13
Consumer ................................................... 65 46 78 64 72
Leases ..................................................... 4 5 9 3 9
--------- --------- --------- --------- ---------
Total ........................................................ 89 81 108 96 94
--------- --------- --------- --------- ---------
Net Charge-offs .............................................. (61) (129) (274) (539) (700)
Provision Expense ............................................ 220 350 455 660 630
--------- --------- --------- --------- ---------
Allowance balance at end of period ........................... $ 3,828 $ 3,669 $ 3,448 $ 3,267 $ 3,146
========= ========= ========= ========= =========
Allowance for loan losses as a percent of total loans
outstanding .................................................. 1.21% 1.26% 1.35% 1.40% 1.44%
Net loans charged off loans percent of average
outstanding .................................................. .02% .05% .11% .24% .33%
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. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which credit losses may occur. The total allowance is
available to absorb losses from any type of loan.
9
As of December 31,
-----------------------------------------------------------------------
2006 2005 2004
-------------------- ------------------- --------------------
(Dollars in thousands)
% of % of % of
Loans Loans Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Commercial, financial and agricultural $ 505 10.8% $ 427 9.2% $ 337 7.9%
Real estate - construction 44 2.4 36 2.0 20 1.9
Real estate - mortgage 2,667 80.0 2,713 80.4 2,480 79.1
Consumer loans to individuals 388 6.8 442 8.4 483 11.1
Lease Financing -- -- -- -- -- --
General Risk Allocation 224 -- 51 -- 128 --
------ ----- ------ ----- ------ -----
Total $3,828 100.0% $3,669 100.0% $3,448 100.0%
====== ===== ====== ===== ====== =====
As of December 31,
-----------------------------------------
2003 2002
------------------- ------------------
(Dollars in thousands)
% of % of
Loans Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
Commercial, financial and agricultural $ 291 7.3% $ 265 6.9%
Real estate - construction 27 2.5 21 1.9
Real estate - mortgage 2,222 74.2 1,926 68.1
Consumer loans to individuals 634 15.9 788 22.4
Lease Financing 9 .1 24 .7
General Risk Allocation 84 -- 122 --
------ ----- ------ -----
Total $3,267 100.0% $3,146 100.0%
====== ===== ====== =====
10
INVESTMENT ACTIVITIES
---------------------
GENERAL. The Company maintains a portfolio of investment securities
consisting principally of obligations of the U.S. Government and its agencies
including mortgage-backed securities and obligations of states, counties and
municipalities including school districts. To a lesser extent, the Company also
has corporate debt obligations in the portfolio as well as a portfolio of equity
instruments of other financial services companies. 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:
As of December 31,
---------------------------------
(dollars in thousands) 2006 2005 2004
-------- -------- --------
Securities:
(carrying value)
U.S. Treasury Securities..................... $ -- $ 1,989 $ 2,014
U.S. Government Agencies................. 47,581 51,996 47,151
State and political Subdivisions............. 17,419 21,175 24,256
Corporate Obligations........................ 8,439 10,450 15,308
Mortgage-backed securities................. 38,652 29,954 32,060
Equity Securities.............................. 1,775 1,702 1,868
-------- -------- --------
Total Securities .......................... $113,866 $117,266 $122,657
======== ======== ========
Fair value of Securities.................... $113,883 $117,294 $122,811
======== ======== ========
11
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 as of December 31, 2006. 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 the mortgage-backed securities is based upon
contractual terms, the average life may differ as a result of changes in cash
flow. Equity securities with no stated maturity are classified as "one year or
less."
Investment Portfolio Maturities After one through After five through Total Investment
One year or less five years ten years After ten years Securities
----------------- ------------------ ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
U.S. Government Agencies $25,361 2.95% $20,224 4.56% $ 1,996 5.65% $ -- -- $47,581 3.75%
State and political subdivisions 991 3.23% 6,452 3.84% 7,341 6.27% 2,635 6.22% 27,419 5.47%
Corporate Obligations 5,483 2.84% 2,956 4.21% -- -- -- -- 8,439 3.32%
Mortgage-backed securities -- -- 9,380 3.93% 6,192 5.32% 23,080 4,87% 38,652 4.71%
Equity Securities 1,775 3.14% -- -- -- -- -- -- 1,775 3.14%
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total Investment Securities $33,610 2.95% $39,012 4.26% $15,529 5.81% $25,715 5.01% $113,866 4.30%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
12
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 instruments. The Bank
participates in Jumbo CD ($100,000 and over) markets with local municipalities
and school districts which are typically priced on a competitive bid basis.
Other services the Bank offers its customers on a limited basis include cash
management, direct deposit and Automated Clearing House (ACH) activity. The Bank
operates twelve automated teller machines and is affiliated with the STAR ATM
network. Internet banking including bill-pay is offered through the website at
www.waynebank.com.
The following table sets forth information regarding deposit categories of the
Company.
2006 2005 2004
---- ---- ----
(dollars in thousands) Average Average Average
--------------------- ------------------------ -----------------------
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
Non-interest bearing
demand $ 54,798 --% $ 52,109 --% $ 47,399 --%
Interest-bearing demand 39,472 .10% 44,026 .10% 42,385 .10%
Money Market 57,410 2.87% 49,721 1.86% 47,466 1.07%
Savings 49,937 .46% 57,128 .47% 58,243 .47%
Time 146,344 3.96% 128,704 2.82% 118,512 2.31%
-------- -------- --------
Total $347,961 $331,688 $314,005
======== ======== ========
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,
2006.
(dollars in thousands)
Maturity Period
---------------
Within three months........................... $28,040
Over three through six months................. 15,770
Over six through twelve months................ 7,520
Over twelve months............................ 5,406
-------
$56,736
=======
13
SHORT-TERM BORROWINGS
The following table sets forth information concerning short-term borrowings
(those maturing within one year) which consist principally of securities sold
under agreements to repurchase, federal funds purchased and U.S. Treasury demand
notes, that the Company had during the periods indicated.
(dollars in thousands) Years ended December 31,
-----------------------------
2006 2005 2004
------ ------ ------
Short term borrowings:
Average balance during the year ..................... $22,209 $15,059 $12,965
Maximum month-end balance during the year ........... 29,677 24,956 22,982
Average interest rate during the year ............... 4.39% 2.76% 1.17%
Total short-term borrowings at end of the year ...... $22,736 $18,564 $22,982
Weighted average interest rate at the end of the year 4.20% 3.76% 1.83%
TRUST ACTIVITIES
The Bank operates a Wealth Management/Trust Department which provides estate
planning, investment management and financial planning to customers for which it
is generally compensated based on a percentage of assets under management. As of
December 31, 2006, the Bank had $96.9 million of assets under management
compared to $87.0 million as of December 31, 2005.
SUBSIDIARY ACTIVITIES
The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of
the Company. Norwood Investment Corp. (NIC), a Pennsylvania Corporation
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 Invest Financial a
registered broker/dealer. NIC had sales volume of $10.1 million in 2006,
generating gross revenues for the Company of $131,000, compared to $150,000 in
2005 included in Other Income.
WCB Realty Corp., a Pennsylvania Corporation, is a wholly-owned real estate
subsidiary of the Bank whose principal asset is the administrative offices of
the Company, which also includes the Main Office of the Bank.
WTRO Properties Inc., a Pennsylvania Corporation, is a wholly-owned real estate
subsidiary of the Bank established to hold title to certain real estate upon
which the Bank has foreclosed. WTRO did not hold title to any property as of
December 31, 2006 and 2005.
Norwood Settlement Services, LLC, a Pennsylvania Limited Liability Company, was
established in 2004 to provide title and settlement service to bank customers
and non-customers. The subsidiary is 70% owned by Wayne Bank and 30% owned by
Title Strategies, LLC. Gross revenues, included in other income, for 2006
totaled $37,000 and $26,000 in 2005.
14
REGULATION
Set forth below is a brief description of certain laws which relate to the
regulation of the Registrant and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF THE COMPANY
GENERAL. The Company, as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve") and by the Pennsylvania Department of Banking (the "Department"). The
Company is required to file annually a report of its operations with, and is
subject to examination by, the Federal Reserve and the Department. This
regulation and oversight is generally intended to ensure that the Company limits
its activities to those allowed by law and that it operates in a safe and sound
manner without endangering the financial health of its subsidiary banks.
Under the BHCA, the Company must obtain the prior approval of the Federal
Reserve before it may acquire control of another bank or bank holding company,
merge or consolidate with another bank holding company, acquire all or
substantially all of the assets of another bank or 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 Federal
Reserve 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 Federal Reserve to be an unsafe and unsound banking practice
or a violation of the Federal Reserve regulations, or both.
NON-BANKING ACTIVITIES. The business activities of the Company, as a bank
holding company, are restricted by the BHCA. Under the BHCA and the Federal
Reserve's bank holding company regulations, the Company may only engage in, or
acquire or control voting securities or assets of a company engaged in, (1)
banking or managing or controlling banks and other subsidiaries authorized under
the BHCA and (2) any BHCA activity the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks to be a proper
incident thereto. These include any incidental activities necessary to carry on
those activities, as
15
well as a lengthy list of activities that the Federal Reserve has determined to
be so closely related to the business of banking as to be a proper incident
thereto.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act, permits greater
affiliation among banks, securities firms, insurance companies, and other
companies under a new type of financial services company known as a "financial
holding company." A financial holding company essentially is a bank holding
company with significantly expanded powers. Financial holding companies are
authorized by statute to engage in a number of financial activities previously
impermissible for bank holding companies, including securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; and merchant banking activities. The Act also
permits the Federal Reserve and the Treasury Department to authorize additional
activities for financial holding companies if they are "financial in nature" or
"incidental" to financial activities. A bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized,
well managed, and has at least a "satisfactory" CRA rating. A financial holding
company must provide notice to the Federal Reserve within 30 days after
commencing activities previously determined by statute or by the Federal Reserve
and Department of the Treasury to be permissible. The Company has not submitted
notice to the Federal Reserve of its intent to be deemed a financial holding
company.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve 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 Bank Holding Company Act. The Federal Reserve's capital adequacy
guidelines are similar to those imposed on the Bank by the Federal Deposit
Insurance Corporation. See "Regulation of the Bank-Regulatory Capital
Requirements."
REGULATION OF THE BANK
GENERAL. As a Pennsylvania chartered, insured commercial bank, the Bank is
subject to extensive regulation and examination by the Department and by the
FDIC, which insures its deposits to the maximum extent permitted by law. 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 generally have been promulgated to protect
depositors and not for the purpose of protecting stockholders. This regulatory
structure also gives the federal and state banking agencies extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the United
States Congress, could have a material impact on the Company, the Bank and their
operations.
PENNSYLVANIA BANKING LAW. The Pennsylvania Banking Code ("Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, and employees, as well as
corporate powers, savings and investment operations and other aspects of the
Bank and its affairs. The Banking Code delegates extensive rule-making power and
administrative discretion to the Department so that the supervision and
regulation of state chartered banks may be flexible and readily responsive to
changes in economic conditions and in savings and lending practices.
The Federal Deposit Insurance Corporation Act ("FDIA"), however, prohibits
state chartered banks from making new investments, loans, or becoming involved
in activities as principal and equity investments which are not permitted for
national banks unless (1) the FDIC determines the activity or investment does
not pose a
16
significant risk of loss to the BIF and (2) the bank meets all applicable
capital requirements. Accordingly, the additional operating authority provided
to the Bank by the Banking Code is significantly restricted by the FDIA.
FEDERAL DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and savings institutions and safeguards the safety and soundness of the
banking and savings industries. The FDIC previously administered two separate
insurance funds, the Bank Insurance Fund (BIF), which generally insured
commercial bank and state savings bank deposits, and the Savings Insurance Fund
("SAIF"), which generally insured savings association deposits.
Under the Federal Deposit Insurance Reform Act of 2005 (The "Reform Act"),
which was signed into law on February 15, 2006 (i) the Bank Insurance Fund and
the Savings Association Insurance Fund were merged into a new combined fund,
called the Deposit Insurance Fund effective March 31, 2006, (ii) the current
$100,000 deposit insurance coverage will be indexed for inflation (with
adjustments every five years, commencing January 1, 2011); and (iii) deposit
insurance coverage for retirement accounts were increased to $250,000 per
participant subject to adjustment for inflation. The FDIC has been given greater
latitude in setting the assessment rates for insured depository institutions
which could be used to impose minimum assessments.
The FDIC is authorized to set the reserve ratios for the Deposit Insurance
Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the
Deposit Insurance Fund's reserves exceed the designated reserve ratio, the FDIC
is required to pay out all or, if the reserve ratio is less than 1.5%, a portion
of the excess as a dividend to insured depository institutions based on the
percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on their past contributions to the BIF or SAIF.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at its current 1.25%. The FDIC has also adopted a new
risk-based premium system that provides for quarterly assessments based on an
insured institution's ranking in one of four risk categories based on their
examination ratings and capital ratios. Beginning in 2007, well-capitalized
institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed for deposit insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be determined according to a formula based on a weighted average of the
institution's individual CAMEL component ratings plus either five financial
ratios or the average ratings of its long-term debt. Institutions in Risk
Categories II, III and IV will be assessed at annual rates of 10, 28 and 43
basis points, respectively. The Bank anticipates that it will be able to offset
its deposit insurance premium for 2007 with the special assessment credit.
In addition, all insured institutions of the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to finance
resolutions of insolvent thrifts. These assessments, the current quarterly rate
of which is approximately .0154 of insured deposits, will continue until the
Financing Corporation bonds mature in 2017.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has promulgated capital adequacy
requirements for state-chartered banks that, like the Bank, are not members of
the Federal Reserve System. At December 31, 2006, the Bank exceeded all
regulatory capital requirements and was classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively increases the minimum Tier
I leverage ratio for
17
such other banks to 4% to 5%. Under the FDIC's regulation, the highest-rated
banks are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization, rated composite
1 under the Uniform Financial Institutions Rating System. Tier I or core capital
is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain servicing and purchased credit card relationships, and minus
certain other listed assets.
The FDIC's regulations also require that state-chartered, non-member banks
meet a risk-based capital standard. The risk-based capital standard requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
I capital for the risk-based standards are the same as those for the leverage
capital requirement. The components of supplementary (Tier 2) capital include
cumulative perpetual preferred stock, mandatory subordinated debt, perpetual
subordinated debt, intermediate-term preferred stock, up to 45% of unrealized
gains on equity securities and a bank's allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital that may be included in total capital is limited to 100%
of Tier I capital.
A bank that has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulations also provide that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
The Bank is also subject to minimum capital requirements imposed by the
Department on Pennsylvania-chartered depository institutions. Under the
Department's capital regulations, a Pennsylvania bank or savings bank must
maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC's
capital regulations) to total assets of 4%. In addition, the Department has the
supervisory discretion to require a higher leverage ratio for any institutions
based on the institution's substandard performance in any of a number of areas.
The Bank was in compliance in both the FDIC and Pennsylvania capital
requirements as of December 31, 2006.
AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability
of banks to engage in transactions with their affiliates, including their bank
holding companies. In particular loans by a subsidiary bank and its parent
company or the nonbank subsidiaries of the bank 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 other 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.
LOANS TO ONE BORROWER. Under Pennsylvania law, commercial banks have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to 15% of the institution's capital accounts. An institution's capital account
includes the aggregate of all capital, surplus, undivided profits, capital
securities and general reserves for loan losses. Pursuant to the national bank
parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to
the maximum amounts permissible for national banks, which are allowed to
18
make loans to one borrower of up to 25% of capital and surplus in certain
circumstances. As of December 31, 2006, loans-to-one-borrower limitation was
$8.2 million and the Bank was in compliance with such limitation.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by member institutions and proceeds from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Trustees of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the Bank's outstanding
advances from the FHLB. At December 31, 2006, the Bank was in compliance with
this requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department. At December 31, 2006, the Bank
met its reserve requirements.
RESTRICTIONS ON DIVIDENDS. 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 which
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 Federal Reserve has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve'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 Federal Reserve also indicated 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 Federal
Reserve may prohibit a bank holding company from paying any dividends if the
holding company's bank subsidiary is classified as "undercapitalized."
ITEM 1A. RISK FACTORS
----------------------
In determining whether to invest in our securities, investors should
consider, among other factors, the following:
19
RISKS RELATED TO OUR BUSINESS
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO EFFECTIVELY MANAGE OUR FUTURE
GROWTH.
We believe that we have in place the management and systems, including data
processing systems, internal controls and a strong credit culture, to support
continued growth. However, our continued growth and profitability depend on the
ability of our officers and key employees to manage such growth effectively, to
attract and retain skilled employees and to maintain adequate internal controls
and a strong credit culture. Accordingly, there can be no assurance that we will
be successful in managing our expansion, and the failure to do so would
adversely affect our financial condition and results of operations.
IF WE EXPERIENCE LOAN LOSSES IN EXCESS OF OUR ALLOWANCE, OUR EARNINGS WILL BE
ADVERSELY AFFECTED.
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management maintains
an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectibility is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require us to
increase the allowance for loan losses as a part of their examination process,
our earnings and capital could be significantly and adversely affected.
As of December 31, 2006, our allowance for loan losses was $3,828,000 which
represented 1.21% of outstanding loans. At such date, we had 10 nonperforming
loans totaling $409,000. We actively manage our nonperforming loans in an effort
to minimize credit losses. Although management believes that its allowance for
loan losses is adequate, there can be no assurance that the allowance will prove
sufficient to cover future loan losses. Further, although management uses the
best information available to make determinations with respect to the allowance
for loan losses, future adjustments may be necessary if economic conditions
differ substantially from the assumptions used or adverse developments arise
with respect to our non-performing or performing loans. Material additions to
our allowance for loan losses would result in a decrease in our net income and
capital, and could have a material adverse effect on our financial condition and
results of operations.
MOST OF OUR LOANS ARE TO COMMERCIAL BORROWERS, WHICH HAVE A HIGHER DEGREE OF
RISK THAN OTHER TYPES OF LOANS.
Commercial loans are often larger and may involve greater risks than other types
of lending. Because payments on such loans are often dependent on the successful
operation of the property or business involved, repayment of such loans may be
more sensitive than other types of loans to adverse conditions in the real
estate market or the economy. Unlike residential mortgage loans, which generally
are made on the basis of the borrower's ability to make repayment from his or
her employment and other income and which are secured by real property whose
value tends to be more easily ascertainable, commercial loans typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself and
20
the general economic environment. If the cash flow from business operations is
reduced, the borrower's ability to repay the loan may be impaired.
MOST OF OUR LOANS ARE SECURED, IN WHOLE OR IN PART, WITH REAL ESTATE COLLATERAL
WHICH IS SUBJECT TO DECLINES IN VALUE.
In addition to the financial strength and cash flow characteristics of the
borrower in each case, we often secure our loans with real estate collateral. As
of December 31, 2006, approximately 82% of our loans, had real estate as a
primary, secondary or tertiary component of collateral. Real estate values and
real estate markets are generally affected by, among other things, changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loans to potential purchasers, changes in tax laws and
other governmental statutes, regulations and policies, and acts of nature. The
real estate collateral in each case provides an alternate source of repayment in
the event of default by the borrower. If real estate prices in our markets
decline, the value of the real estate collateral securing our loans could be
reduced. If we are required to liquidate the collateral securing a loan during a
period of reduced real estate values to satisfy the debt, our earnings and
capital could be adversely affected.
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS SUBJECT TO REGIONAL ECONOMIC
FACTORS THAT COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Substantially all of our business is with customers in our market area of
Northeastern Pennsylvania. Most of our customers are consumers and small and
medium-sized businesses which are dependent upon the regional economy. Adverse
changes in economic and business conditions in our markets could adversely
affect our borrowers, their ability to repay their loans and to borrow
additional funds, and consequently our financial condition and performance.
Additionally, we often secure our loans with real estate collateral, most of
which is located in Northeastern Pennsylvania. A decline in local economic
conditions could adversely affect the values of such real estate. Consequently,
a decline in local economic conditions may have a greater effect on our earnings
and capital than on the earnings and capital of larger financial institutions
whose real estate loan portfolios are geographically diverse.
THE LOSS OF SENIOR EXECUTIVE OFFICERS AND CERTAIN OTHER KEY PERSONNEL COULD HURT
OUR BUSINESS.
Our success depends, to a great extent, upon the services of William W. Davis,
Jr., our President and Chief Executive Officer, and Lewis J. Critelli, our
Executive Vice President and Chief Financial Officer. Although we have
employments agreements with non-compete provisions with Messrs. Davis and
Critelli, the existence of such agreements does not assure that we will retain
their services. The unexpected loss of these individuals could have a material
adverse effect on our operations. From time to time, we also need to recruit
personnel to fill vacant positions for experienced lending officers and branch
managers. Competition for qualified personnel in the banking industry is
intense, and there can be no assurance that we will continue to be successful in
attracting, recruiting and retaining the necessary skilled managerial, marketing
and technical personnel for the successful operation of our existing lending,
operations, accounting and administrative functions or to support the expansion
of the functions necessary for our future growth. Our inability to hire or
retain key personnel could have a material adverse effect on our results of
operations.
21
OUR LEGAL LENDING LIMITS ARE RELATIVELY LOW AND RESTRICT OUR ABILITY TO COMPETE
FOR LARGER CUSTOMERS.
At December 31, 2006, our lending limit per borrower was approximately $8.2
million, or approximately 15% of our capital plus allowance for loan losses.
Accordingly, the size of loans that we can offer to potential borrowers is less
than the size of loans that many of our competitors with larger capitalization
are able to offer. We may engage in loan participations with other banks for
loans in excess of our legal lending limits. However, there can be no assurance
that such participations will be available at all or on terms which are
favorable to us and our customers.
RISKS RELATED TO OUR COMMON STOCK
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK, WHICH MAY ADVERSELY
IMPACT YOUR ABILITY TO SELL YOUR SHARES AND THE PRICE YOU RECEIVE FOR YOUR
SHARES.
Although our common stock is quoted on the Nasdaq Global Market, there has been
limited trading activity in our stock and an active trading market is not
expected to develop. This means that there may be limited liquidity for our
common stock, which may make it difficult to buy or sell our common stock, may
negatively affect the price of our common stock and may cause volatility in the
price of our common stock.
THERE ARE RESTRICTIONS ON OUR ABILITY TO PAY CASH DIVIDENDS.
Although we have paid cash dividends on a quarterly basis since 1996, and the
Bank has paid dividends for many previous years, there is no assurance that we
will continue to pay cash dividends. Future payment of cash dividends, if any,
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board may deem relevant and will be subject to applicable
federal and state laws that impose restrictions on our ability to pay dividends.
OUR COMMON STOCK IS NOT INSURED AND YOU COULD LOSE THE VALUE OF YOUR ENTIRE
INVESTMENT.
An investment in shares of our common stock is not a deposit and is not insured
against loss by the government.
OUR MANAGEMENT AND SIGNIFICANT SHAREHOLDERS CONTROL A SUBSTANTIAL PERCENTAGE OF
OUR STOCK AND THEREFORE HAVE THE ABILITY TO EXERCISE SUBSTANTIAL CONTROL OVER
OUR AFFAIRS.
As of December 31, 2006, our directors and executive officers beneficially owned
approximately 374,733 shares, or approximately 12.8 % of our common stock,
including options to purchase 125,187 shares, in the aggregate, of our common
stock at exercise prices ranging from $10.36 to $31.50 per share. Because of the
large percentage of stock held by our directors and executive officers and other
significant shareholders, these persons could influence the outcome of any
matter submitted to a vote of our shareholders.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON OR PREFERRED STOCK, WHICH MAY DILUTE
THE OWNERSHIP AND VOTING POWER OF OUR SHAREHOLDERS AND THE BOOK VALUE OF OUR
COMMON STOCK.
We are currently authorized to issue up to 10,000,000 shares of common stock of
which 2,797,151 shares are currently outstanding and up to 5,000,000 shares of
preferred stock of which no shares are outstanding. Our Board of Directors has
authority, without action or vote of the shareholders, to issue all or part of
the authorized but unissued shares and to establish the terms of any series of
preferred stock. These authorized but unissued
22
shares could be issued on terms or in circumstances that could dilute the
interests of other stockholders. In addition, a total of 250,000 shares of
common stock have been reserved for issuance under the Norwood Financial Corp
2006 Stock Option Plan, of which 47,700 were issued as of December 31, 2006. As
of December 31, 2006, options to purchase a total of 135,945 shares were
exercisable and had exercise prices ranging from $10.36 to $31.50. Any such
issuance will dilute the percentage ownership interest of shareholders and may
further dilute the book value of our common stock.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND THE PENNSYLVANIA BUSINESS
CORPORATION LAW COULD DETER TAKEOVERS WHICH ARE OPPOSED BY THE BOARD OF
DIRECTORS.
Our articles of incorporation require the approval of 80% of our outstanding
shares for any merger or consolidation unless the transaction meets certain fair
price criteria or the business combination has been approved or authorized by
the Board of Directors. In addition, our articles of incorporation may require
the disgorgement of profits realized by any person who attempts to acquire
control of the Company. As a Pennsylvania corporation with a class of securities
registered with the Securities and Exchange Commission, the Company is governed
by certain provisions of the Pennsylvania Business Corporation Law that, inter
alia, permit the disparate treatment of certain shareholders; prohibit calls of
special meetings of shareholders; require unanimous written consent for
shareholder action in lieu of a meeting; require shareholder approval for
certain transactions in which a shareholder has an interest; and impose
additional requirements on business combinations with persons who are the
beneficial owners of more than 20% of the Company's stock.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN A COMPETITIVE MARKET WHICH COULD CONSTRAIN OUR FUTURE GROWTH AND
PROFITABILITY.
We operate in a competitive environment, competing for deposits and loans with
commercial banks, savings associations and other financial entities. Competition
for deposits comes primarily from other commercial banks, savings associations,
credit unions, money market and mutual funds and other investment alternatives.
Competition for loans comes primarily from other commercial banks, savings
associations, mortgage banking firms, credit unions and other financial
intermediaries. Many of the financial intermediaries operating in our market
area offer certain services, such as international banking services, which we do
not offer. Moreover, banks with a larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the needs of larger customers.
WE ARE REQUIRED TO COMPLY WITH EXTENSIVE AND COMPLEX GOVERNMENTAL REGULATION
WHICH CAN ADVERSELY AFFECT OUR BUSINESS.
Our operations are and will be affected by current and future legislation and by
the policies established from time to time by various federal and state
regulatory authorities. We are subject to supervision and periodic examination
by the Federal Reserve Board (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC") and the Pennsylvania Department of Banking. Banking
regulations, designed primarily for the safety of depositors, may limit a
financial institution's growth and the return to its investors by restricting
such activities as the payment of dividends, mergers with or acquisitions by
other institutions, investments, loans and interest rates, interest rates paid
on deposits, expansion of branch offices, and the offering of securities or
trust services. We are also subject to capitalization guidelines established by
federal law and could be subject to enforcement actions to the extent that we
are found by regulatory examiners to be undercapitalized. It is not possible to
predict what changes, if any, will be made to existing federal and state
legislation and regulations or the effect that any such
23
changes may have on our future business and earnings prospects. Further, the
cost of compliance with regulatory requirements may adversely affect our ability
to operate profitability.
In addition, the monetary policies of the FRB have had a significant effect on
the operating results of banks in the past and are expected to continue to do so
in the future. Among the instruments of monetary policy used by the FRB to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the FRB or to existing federal and state legislation or the effect that such
change may have on our future business and earnings prospects.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
WE REALIZE INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS
AND INVESTMENTS AND INTEREST PAID ON DEPOSITS AND BORROWINGS, AND CHANGES IN
INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY AND ASSETS.
Changes in prevailing interest rates may hurt our business. We derive our income
mainly from the difference or "spread" between the interest earned on loans,
securities and other interest-earning assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. In general, the larger the
spread, the more we earn. When market rates of interest change, the interest we
receive on our assets and the interest we pay on our liabilities will fluctuate.
This can cause decreases in our spread and can adversely affect our income.
Interest rates affect how much money we can lend. For example, when interest
rates rise, the cost of borrowing increases and loan originations tend to
decrease. In addition, changes in interest rates can affect the average life of
loans and investment securities. A reduction in interest rates generally results
in increased prepayments of loans and mortgage-backed securities, as borrowers
refinance their debt in order to reduce their borrowing cost. This causes
reinvestment risk, because we generally are not able to reinvest prepayments at
rates that are comparable to the rates we earned on the prepaid loans or
securities. Changes in market interest rates could also reduce the value of our
financial assets. If we are unsuccessful in managing the effects of changes in
interest rates, our financial condition and results of operations could suffer.
AS A PUBLIC COMPANY, WE ARE SUBJECT TO NUMEROUS REPORTING REQUIREMENTS THAT ARE
CURRENTLY EVOLVING AND COULD SUBSTANTIALLY INCREASE OUR OPERATING EXPENSES AND
DIVERT MANAGEMENT'S ATTENTION FROM THE OPERATION OF OUR BUSINESS.
The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required
changes in some of our corporate governance, securities disclosure and
compliance practices. In response to the requirements of that Act, the SEC has
promulgated new rules covering a variety of subjects. Compliance with these new
rules has significantly increased our legal and financial and accounting costs,
and we expect these increased costs to continue. In addition, compliance with
the requirements has taken a significant amount of management's and the Board of
Directors' time and resources. Likewise, these developments may make it more
difficult for us to attract and retain qualified members of our board of
directors, particularly independent directors, or qualified executive officers.
24
As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules
requiring public companies to include a report of management on the company's
internal control over financial reporting in their annual reports on Form 10-K
that contains an assessment by management of the effectiveness of the company's
internal control over financial reporting beginning with the annual report on
Form 10-K for our fiscal year ending December 31, 2007. In addition, in the
future, the public accounting firm auditing the company's financial statements
must attest to and report on management's assessment of the effectiveness of the
company's internal control over financial reporting. This requirement is first
applicable to our annual report on Form 10-K for fiscal 2008 and for all future
annual reports. The costs associated with the implementation of this
requirement, including documentation and testing, have not been estimated by us.
If we are ever unable to conclude that we have effective internal control over
financial reporting or, if our independent auditors are unable to provide us
with an unqualified report as to the effectiveness of our internal control over
financial reporting for any future year-ends as required by Section 404,
investors could lose confidence in the reliability of our financial statements,
which could result in a decrease in the value of our securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
-----------------------------------
None
ITEM 2. PROPERTIES
--------------------
The Bank operates from its main office located at 717 Main Street,
Honesdale, Pennsylvania and eleven additional branch offices. The Bank's total
investment in office property and equipment is $13.3 million with a net book
value of $6.0 million as of December 31, 2006. The Bank currently operates
automated teller machines at all twelve of its facilities. The Bank leases four
of its locations with minimum lease commitments of $4,011,000 through 2029. The
four 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.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
--------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
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, 2006 ("Annual Report") and is incorporated herein by reference.
Issuer Purchases of Equity Securities
--------------------------------------
Maximum number
of shares (or
approximate
Total number of dollar value) that
shares purchased may yet
Total number Average price as part of publicly be purchased
of shares paid per announced plans under the plans
purchased share or programs* or programs
---------- ----- -------------------- -----------
October 1-October 31, 2006 5,000 $31.10 5,000 94,863
November 1-November 30, 2006 -- -- -- --
December 1-December 31, 2006 2,000 31.25 2,000 92,863
----- ----- ----- ------
Total 7,000 $31.14 7,000 92,863
===== ===== ===== ======
* On June 15, 2005, the Registrant announced its intention to repurchase up to
5% of its outstanding common stock (approximately 134,000 shares) in the open
market.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The above-captioned information appears under "Summary of Selected
Financial Data" in the Annual Report, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
The above-captioned information appears under "Management's Discussion and
Analysis" in the Annual Report and is incorporated herein by reference from the
Annual Report.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------
The above-captioned information appears under "Management's Discussion and
Analysis -- Market Risk" in the Annual Report and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The Company's consolidated financial statements listed in Item 15 are
incorporated herein by reference from the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
---------------------------------
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
--------------------------
None.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
----------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I-- Election of
Directors" and "Corporate Governance" in the Proxy Statement for the 2007 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated herein by
reference.
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer and principal accounting officer
or controller. The Company undertakes to provide a copy of the Code of Ethics to
any person without charge, upon request to Lewis J. Critelli Executive Vice
President and Chief Financial Officer, Norwood Financial Corp., 717 Main Street,
Honesdale, PA 18431.
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 AND
--------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the Section captioned "Principal Holders of Our Common Stock" of
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" of the
Proxy Statement.
(c) Changes in Control
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.
(d) Equity Compensation Plan Information
28
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted average remaining available for
To be issued upon exercise price of future issuance under
Exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a)
------------------- ---------- -----------------------
Equity compensation plans
approved by shareholders:
Stock Option Plan............. 128,027 $18.71 --
2006 Stock Option Plan........ 47,700 30.91 202,300
Equity compensation plan
not approved by shareholders:
1999 Directors Stock
Compensation Plan........... 7,918 17.10 --
------- ------ -------
TOTAL..................... 183,645 $21.81 202,300
======= ====== =======
The 1999 Directors Stock Compensation Plan provides for annual grants of
options to non-employee directors as of the close of business on the day of the
first regularly scheduled board meeting in December of each year. The amounts of
such awards are determined by the board or a committee thereof. The exercise
price for each option is equal to the fair market value of the stock as of the
date of grant. Options generally have terms of ten years and one day from the
date of grant and vest over periods ranging from six months to one year from the
date of grant. Except in the event of death or disability, optionees may not
sell shares acquired on exercise of options within six months of the date of
grant. Options are not transferable except in the event of the death of the
optionee.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
--------------------------------------------------------------------------------
INDEPENDENCE
------------
The information required by this item is incorporated herein by reference
to the section in the Proxy Statement captioned "Related Party Transactions" and
"Corporate Governance".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
------------------------------------------------
The information required by this item is incorporated herein by reference
to the section on the Proxy Statement captioned "Proposal 2-Ratification of
Appointment of Independent Auditors."
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT, AND SCHEDULES
-----------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated balance sheets of Norwood Financial Corp. and
subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three year period ended December 31,
2006, together with the related notes and the report of independent
registered public accounting firm of Beard Miller Company LLP,
independent registered public accounting firm.
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 seven key employees of the Bank***
10.4+ Consulting Agreement with Russell L. Ridd****
10.5+ Norwood Financial Corp. Stock Option 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***
10.10+ Salary Continuation Agreement between the Bank and Joseph A. Kneller******
10.11+ Salary Continuation Agreement between the Bank and John H. Sanders******
10.12+ 2006 Stock Option Plan*******
10.13+ First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.********
10.14+ First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli ********
10.15+ First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper********
10.16+ First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller********
10.17+ First and Second Amendments to Salary Continuation Agreement with John H. Sanders********
13 Annual Report to Stockholders for the fiscal year ended December 31, 2006
21 Subsidiaries of Norwood Financial Corp. (see Item 1. Business, General and Subsidiary Activity)
23 Consent of Independent Registered Public Accounting Firm
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32 Certification pursuant to 18 U.S. C. SS.1350, as adopted pursuant to SS.906 of Sarbanes Oxley Act of 2002
30
------------------------
+ Management contract or compensatory plan arrangement.
* 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.0-28364.
** Incorporated by reference into this document from the identically
numbered exhibits to the registrant's Form 8-K filed with the
Commission March 6, 2006.
*** Incorporated herein by reference into this document from the Exhibits
to the Registrant's Form 10-K filed with the Commission on March 23,
2000, File No. 0-28364.
**** Incorporated by reference into this document from the Exhibit to the
Registrant's Form 10-K filed with the Commission on March 31, 1997,
File No. 0-28364.
***** Incorporated by reference into this document from the Exhibits to Form
S-8 filed with the Commission on August 14, 1998, File No. 333-61487.
****** Incorporated by reference into this document from the identically
numbered exhibits to the Registrant's Form 10-K filed with the
Commission on March 22, 2004, File No. 0-28364.
******* Incorporated by reference to this document from Exhibit 4.1 to
Registrant's Registration Statement on Form S-8 (File No.
333-134831) filed with the Commission on June 8, 2006.
******** Incorporated herein by reference from the Exhibits to the
Registrant's Current Report on Form 8-K filed April 4, 2006.
31
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 22, 2007 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 on March 22, 2007 by the following persons on
behalf of the Registrant and in the capacities 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
(Principal Executive Officer) Officer)
By:
--------------------------------------------
John E. Marshall
Director
By: /s/ Daniel J. O'Neill By: /s/ Dr. Kenneth A. Phillips
-------------------------------------- --------------------------------------------
Daniel J. O'Neill Dr. Kenneth A. Phillips
Director Director
By: /s/ Gary P. Rickard By: /s/ Russell L. Ridd
-------------------------------------- --------------------------------------------
Gary P. Rickard Russell L. Ridd
Director Director
By: /s/ Ralph A. Matergia By:
-------------------------------------- --------------------------------------------
Ralph A. Matergia Richard L. Snyder
Director Director
By: /s/ Susan Gumble-Cottell
-------------------------------------
Susan Gumble-Cottell
Director
32