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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,
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the
transition period from to .
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Commission File No. 0-28366
Norwood Financial Corp.
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( Exact Name of Registrant as specified in Its Charter)
Pennsylvania 23-2828306
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(State or Other Jurisdiction of Incorporation I.R.S. Employer or Organization)
Identification No.
717 Main Street, Honesdale, Pennsylvania 18431
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (717) 253-1455
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, --- and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 16, 1999, there were 1,781,477 shares outstanding of the
registrant's Common Stock.
The Registrant's voting stock trades on the NASDAQ National Market under
the symbol "NWFL." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the last price the registrant's
Common Stock was sold on March 14, 2000, was $27,083,000 ($19.75 per share based
on 1,371,285 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
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