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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998,
-----------------
[ ] 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.
- --------------------------------------------------------------------------------
( Exact Name of Registrant as specified in Its Charter)
Pennsylvania 23-2828306
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
717 Main Street, Honesdale, Pennsylvania 18431
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (570) 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 1,803,824 issued and 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 15, 1999, was $30,942,362 ($22 per share based on
1,406,471 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1998. (Parts I, II, and IV) 2. Portions of the Proxy Statement for
the Annual Meeting of Stockholders. (Part III)
PART I
Item 1. Business.
General
Norwood Financial Corp. (the "Company") is a Pennsylvania corporation
organized in November 1995 at the direction of Wayne Bank ("Wayne Bank" or the
"Bank") to facilitate the reorganization of the Bank into the holding company
form of organization ("Reorganization"). On March 29, 1996, the Bank completed
the Reorganization and became a wholly owned subsidiary of the Company. Prior to
such date, the description of all financial information herein is that of the
Bank.
Wayne Bank is a Pennsylvania chartered commercial bank located in
Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870
as Wayne County Savings Bank. Wayne County Savings Bank changed its name to
Wayne County Bank and Trust in December 1943. In September 1993, the Bank
adopted the name Wayne Bank. The Bank's deposits are currently insured by the
Bank Insurance Fund ("BIF") as administered by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is regulated by the Pennsylvania Department of
Banking ("PDB") and the FDIC.
The Bank is an independent community-oriented bank with six offices in
Wayne County and two offices in Pike County. The Bank primarily serves the
Pennsylvania counties of Wayne and Pike and to a much lesser extent, the
counties of Lackawanna, Monroe and Susquehanna. These offices include 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 seven in branch locations and three 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, 1998, the Bank had total assets, deposits, and
stockholders equity of $277.8 million, $234.1 million, and $26.4 million,
respectively.
Competition
The Company's primary market area of Wayne and Pike Counties, Pennsylvania,
is rural and derives a significant portion of its economic base from businesses
which serve the leisure time and youth camp markets. The market place has a
large amount of seasonal dwellings, marina and lake activity, hunting, fishing,
skiing and camping - tourism related activity. Wayne County has become more
accessible to the western areas of Scranton and Wilkes-Barre with the completion
of the Lackawanna Industrial Highway. The County was recently selected as a site
for a new Federal Prison, which should have an economic benefit. 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.
The Bank is one of a number of financial institutions serving its immediate
market area. The competition for deposit products comes from commercial banks in
the market area, savings association and 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. Also, certain loans were
refinanced elsewhere based on interest rate changes. The Bank prices its loans
to be competitive with local and regional competition, while remaining aware of
risk elements.
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 the 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. In
addition to automobile lending, the Bank operates an auto leasing program
through its dealer network.
Commercial loans and commercial mortgages are provided to local small and
mid-sized businesses at a variety of terms and rate structures. Commercial
lending activities include lines of credit, revolving credit, term loans,
mortgages, various forms of secured lending and 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.
During 1998, the majority of the Bank's mortgage origination was in fixed
rate product, due to the lower interest rate environment.
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 and leasing provide 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
2
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 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.
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.
3
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,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- --------------- --------------
$ % $ % $ % $ % $ %
------ ------ ------- ----- ------- ------ ------- ------ ------- -----
(Dollars in Thousands)
Type of Loans:
Commercial, Financial and Agricultural $25,539 13.6 $26,589 14.2 $29,680 16.7 $33,891 22.0 $31,378 22.2
Real Estate-construction 3,046 1.6 2,046 1.1 1,602 0.9 1,380 0.9 3,480 2.5
residential.................. 52,038 27.8 54,227 29.0 54,547 30.8 55,718 36.2 53,810 38.1
commercial................... 30,555 16.3 32,986 17.7 36,852 20.8 39,103 25.4 37,098 26.2
Leases to Individuals................. 33,860 18.1 33,877 18.1 17,048 9.6 --- -- -- --
Installment Loans to Individuals...... 42,266 22.6 37,082 19.9 37,503 21.2 23,800 15.5 15,543 11.0
------ ---- ------ ---- ------ ---- ------ ---- --------
Total Loans 187,304 100.0 186,807 100.0 177,232 100.0 153,892 100.0 141,309 100.0
Less unearned income.................. 385 1,167 2,611 1,798 608
Allowance for loan losses..... 3,333 3,250 2,616 2,125 1,893
------ -------- ------ ------- -------
Total loans,net....................... $183,586 $182,390 $172,005 $149,969 $138,808
======== ======== ======= ======= ========
4
Maturities and Sensitivities of Loans to Changes in Interest Rates. The
following table sets forth maturities and interest rate sensitivity for all
categories of loans as of December 31, 1998. 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 $ 8,715 $ 9,449 $ 7,375 $25,539
Real Estate-
3,046 -- -- 3,046
Construction
Residential 5,948 12,128 33,962 52,038
Commercial 2,642 9,623 18,290 30,555
Leases (net) 9,077 24,783 -- 33,860
Installment loans to
individuals 10,931 31,335 -- 42,266
------ ------- ------ -------
Total $40,359 $87,318 $59,627 $187,304
====== ====== ====== =======
Loans with fixed-rate $31,391 $68,569 $19,365 $119,325
Loans with floating
rates 8,968 18,749 40,262 67,979
----- ------ ------ ------
Total $40,359 $87,318 $59,627 $187,304
====== ====== ====== =======
5
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,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In Thousands)
Loans accounted for on a non-accrual basis:
Commercial and all other $ 65 $ 963 $1,633 $1,572 $2,754
Real estate 503 1,112 1,790 2,205 2,175
Consumer 20 33 28 48 --
------ ------ ------ ------ ------
Total $ 588 $2,108 $3,451 $3,825 $4,929
====== ====== ====== ====== ======
Accruing loans which are contractually past-
due 90 days or more:
Commercial and all other $ -- $ 44 $ 38 $ 55 $ 553
Real estate -- -- -- -- 2,716
Consumer 34 23 4 -- 7
------ ------ ------ ------ ------
Total $ 34 $ 67 $ 42 $ 55 $3,276
====== ====== ====== ====== ======
Total non-performing loans $ 622 $2,175 3,493 $3,880 $8,205
Other real estate owned 204 537 2,283 $1,944 $1,377
------ ------ ------ ------ ------
Total non-performing assets $ 826 $2,712 $5,776 $5,824 $9,582
====== ====== ====== ====== ======
Total non-performing loans to total loans .33% 1.17% 2.00% 2.55% 5.83%
Total non-performing loans to total assets .22% .83% 1.34% 1.79% 4.18%
Total non-performing assets to total assets .30% 1.03% 2.22% 2.68% 4.89%
Potential Problem Loans. As of December 31, 1998, 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, 1998 and 1997 the recorded investment in
loans considered impaired in accordance with Statement No. 114 and 118 were
$642,000 and $2,334,000 respectively.
6
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:
At December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- ---------- --------- ----------
(Dollars in Thousands)
Total loans receivable........................... $ 186,919 $ 185,640 $ 174,621 $ 152,094 $ 140,701
Average loans receivable......................... 186,877 183,625 160,517 145,990 136,314
Allowance balance at beginning of period......... $ 3,250 $ 2,616 $ 2,125 $ 1,893 $ 1,864
Charge-offs:
Commercial and all other...................... (294) (380) (820) (448) (709)
Real estate................................... (14) (119) (226) (353) (306)
Consumer...................................... (366) (264) (320) (123) (82)
Leases........................................ (115) (67) -- -- --
--------- --------- --------- --------- ---------
Total (789) (830) (1,366) (924) (1,097)
Recoveries:
Commercial and all other....................... 89 72 71 513 31
Real estate.................................... 7 3 16 3 3
Consumer....................................... 50 34 60 21 22
Leasing........................................ 6 -- -- -- --
--------- --------- --------- --------- ---------
Total......................................... 152 109 147 537 56
--------- --------- --------- --------- ---------
Provision expense................................ 720 1,355 1,710 619 1,070
--------- --------- --------- --------- ---------
Allowance balance at end of period............... $ 3,333 $ 3,250 $ 2,616 $ 2,125 $ 1,893
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding..................... 1.78% 1.75% 1.50% 1.40% 1.35%
Net loans charged off as a percent of
average loans outstanding...................... .34% .39% .76% .27% .76%
7
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,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- -----------------
(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 $ 427 13.6% $ 610 14.2% $ 871 16.7% $ 927 22.0% $ 793 22.2%
agricultural
Real estate - construction 53 1.6 15 1.1 38 0.9 14 0.9 29 2.5
Real estate - mortgage 765 44.1 641 46.7 727 51.6 909 61.6 759 64.3
Installment loans to individuals 589 22.6 276 19.9 260 21.2 155 15.5 87 11.0
Leases 339 18.1 169 18.1 85 9.6 -- -- -- --
Unallocated 1,160 -- 1.539 -- 635 -- 120 -- 225 --
Total $3,333 100.0% $3,250 100.0% $2,616 100.0% $2,125 100.0% $1,893 100.0%
- --------------------------------
(1) Includes specific reserves for assets classified as loss.
8
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) 1998 1997 1996
Securities: ------ ------ -------
(carrying value)
U.S. Treasury Securities.......... $5,581 $ 8,034 $3,994
U.S. Government
Agencies.......................... 19,628 18,024 25,857
State and political
subdivisions..................... 11,456 9,621 13,979
Corporate Notes and bonds......... 1,789 --- 503
Mortgage-backed Securities........ 28,326 18,961 11,359
Equity Securities................. 3,135 2,891 2,019
------ ------ ------
Total Securities $69,915 $57,531 $57,711
====== ====== ======
Fair value of
Securities........................ $70,421 $57,888 $57,946
====== ====== ======
9
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, 1998. All yields are
stated on a fully taxable equivalent basis using a Federal tax rate of 34%.
Actual maturities may differ from contractual maturities as certain instruments
have call features which allow prepayment of obligations.
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 $1,513 6.04 $ 4,068 5.50 $ -- -- $ -- -- $ 5,581 5.65
U.S. Government Agencies -- -- 11,075 5.80 6,561 6.62 1,992 6.35 19,628 6.13
State and political -- -- 1,085 6.17 525 7.40 9,846 8.68 11,456 8.38
subdivisions(3)
Mortgage-backed Securities(1) 2,805 6.39 11,220 6.39 9,854 6.44 4,447 6.53 28,326 6.43
Corporate Securities -- -- -- -- -- -- 1,789 6.38 1,789 6.38
Equity Securities(2) 3,135 4.72 -- -- -- -- -- -- 3,135 4.72
------ ----- ------- ---- ------- ----- ------ ---- ------- -----
Total Investment Securities $7,453 5.62% $27,448 6.01% $16,940 6.54% $18,074 7.67% $69,915 6.53%
(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 $7,645 in securities classified as held-to-maturity with a market
value of $8,151
10
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,
1998.
(Dollars in thousands) Certificates
of Deposit
----------
Maturity Period
- ---------------
Within three months..................... $11,810
Over three through six months........... 10,851
Over six through twelve months.......... 2,633
Over twelve months...................... 2,241
------
$27,535
======
Short-Term Borrowings
The following table sets forth information concerning 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,
-----------------------
1998 1997 1996
------ ------ ------
Short-term borrowings:
Average balance outstanding................ $7,648 $7,892 $4,907
Maximum amount outstanding at any
month-end during the period.............. 14,284 13,456 11,967
Weighted average interest rate during
the period................................. 4.63% 4.84% 5.03%
Total short-term borrowings at end of period. $7,776 $4,990 $3,227
11
Trust Activities
The Bank operates a Trust Department which provides estate planning, investment
management and financial planning to customers. At December 31, 1998, the Bank
acted as trustee for $52.5 million of assets of which $29.5 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 $5.2 million in 1998, generating revenues of $134,000.
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.
Personnel
As of December 31, 1998, the Company and the Bank had 106 full-time and 17
part-time employees. None of the Company employees are represented by a
collective bargaining group. The Company believes that its relationship with its
employees is good.
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a bank holding company within the meaning of
Pennsylvania Banking Code of 1965 and the Bank Holding Company Act of 1956 (the
"Act"). As such, the Company is subject to regulation by the PDB and the Board
of Governors of the Federal Reserve System ("FRB"). In addition, the FRB has
enforcement authority over the Company and its non-bank subsidiaries which also
permits the FRB to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary bank. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for
stockholders of the Company.
A bank holding company is prohibited under the Act from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in non-banking activities unless the FRB, by order or regulation, has
found such activities to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the FRB considers whether the performance of these activities by
a bank holding company would offer benefits to the public
12
that outweigh the possible adverse effects.
As a bank holding company, the Company is required to file with the FRB an
annual report and any additional information as the FRB may require pursuant to
the Act. The FRB also examines the Company and its subsidiaries.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Act on extensions of credit to the bank holding company or any of
its subsidiaries, on investments in the stock or other securities of the bank
holding company or its subsidiaries, and on the taking of such stock or
securities as collateral for loans to any borrower. Furthermore, under
amendments to the Act and regulations of the FRB, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or providing any
property or services. Generally, this provision provides that a bank may not
extend credit, lease or sell property, or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to the bank holding company, or to any other subsidiary of the bank
holding company or on the condition that the customer not obtain other credit or
service from a competitor of the bank, the bank holding company, or any
subsidiary of the bank.
Permitted Non-Banking Activities. The FRB permits bank holding companies to
engage in non-banking activities or businesses so closely related to banking or
to managing or controlling banks so as to be a proper incident thereto. FRB
approval notice is required before the Company or a non-bank subsidiary of the
Company may engage in any such activities or before such a business may be
acquired. The FRB is authorized to differentiate between activities that are
initiated by a bank holding company or a subsidiary and activities commenced by
acquisition of a going concern.
Regulatory Capital Requirements. The FRB has adopted capital adequacy guidelines
pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the
BHCA. The FRB capital adequacy guidelines are similar to those imposed on the
Bank by the FDIC. See "Regulation of the Bank - Regulatory Capital
Requirements."
Commitments to Affiliated Depository Institutions. Under FRB policy, the Company
will be expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances when it might not do so
absent such policy. The enforceability and precise scope of this policy is
unclear, however, in light of recent judicial precedent; however, should the
Bank require the support of additional capital resources, it should be
anticipated that Company will be required to respond with any such resources
available to it.
Pennsylvania Regulation of Acquisition of the Company. The Company is organized
under Pennsylvania law. Because the Company will not be a "registered company"
under Pennsylvania law, the Company included in its Articles of Incorporation
certain provisions governing mergers, takeovers, business combinations, and
other similar transactions applicable to registered companies in Pennsylvania.
Federal Securities Law. The Company Common Stock is registered under the 1934
Act and therefore, the Company is subject to the information, reporting, proxy
solicitation, and insider trading restrictions and requirements under the 1934
Act.
Regulation of the Bank
General. As a Pennsylvania chartered, BIF-insured bank, the bank is subject to
extensive regulation and examination by the PDB, the FDIC, which insures its
deposits to the maximum extent permitted by law,
13
and to a much lesser extent, by the FRB. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, the reserves required to be kept
against deposits, the timing of the availability of deposited funds and the
nature and amount of and collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the PDB, the FDIC or the United States Congress could
have a material adverse impact on the Company, the Bank and their operations.
Pennsylvania Banking Law. The Pennsylvania Banking Code ("Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, and employees, as well as
corporate powers, savings and investment operations and other aspects of the
Bank and its affairs. The Banking Code delegates extensive rule-making power and
administrative discretion to the PDB so that the supervision and regulation of
state chartered bank may be flexible and readily responsive to changes in
economic conditions and in savings and lending practices.
The PDB generally examines each bank not less frequently than once every two
years. The Banking Code permits the PDB to accept the examinations and reports
of the FDIC in lieu of the PDB's examination. The present practice is for the
PDB to conduct individual examinations. The PDB may order any bank to
discontinue any violation of law or unsafe or unsound business practice and may
direct any director, trustee, officer, attorney or employee of a bank engaged in
an objectionable activity, after the PDB has ordered the activity to be
terminated, to show cause at a hearing before the PDB why such person should not
be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with commercial banks authorizes (I) a bank or holding company thereof
located in another state (a "foreign institution") to acquire the voting stock
of, merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered bank and (ii) the establishment of branches in
Pennsylvania by foreign institutions, in each case subject to certain conditions
including (A) reciprocal legislation in the state in which the foreign
institution seeking entry into Pennsylvania is located permitting comparable
entry by Pennsylvania savings institutions and (B) approval by the PDB.
Pennsylvania law also provides for nationwide branching by
Pennsylvania-chartered banks, subject to the PDB's approval and certain other
conditions.
On September 29, 1994, the United States Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Law"), which amended various federal banking laws to provide for nationwide
interstate banking, interstate bank mergers and interstate branching. The
Interstate Banking Law will allow, effective September 29, 1995, the acquisition
by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions were
allowed effective June 1, 1997; however, states may "opt-out" of the merger and
purchase and assumption provisions by enacting laws that specifically prohibit
such interstate transactions. States may, in the alternative, enact legislation
to allow interstate merger and purchase and assumption transactions prior to
June 1, 1997. Pursuant to the Interstate Banking Law, states may also enact
legislation to allow for de novo interstate branching by out of state banks.
14
Pennsylvania has enacted "opt-in" legislation authorizing full interstate
branching for state- chartered financial institutions prior to June 1, 1997.
This legislation allows out-of-state banks to branch into Pennsylvania either by
buying an existing bank or converting it into a branch or by setting up a de
novo branch. The law requires reciprocity from the other state until June 1,
1997. The legislation also allows state-chartered banks the same rights as
federally chartered banks to branch into other states that allow interstate
branching.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the
BIF to a maximum of $100,000 for each insured account (as defined by law and
regulation). Regardless of an institution's capital level, insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all insured institutions. Under
applicable regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital (i.e., "well capitalized,"
"adequately capitalized" and "undercapitalized"). These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. Because the BIF exceeded
its statutory required ratio of reserves to insured deposits, the Bank paid
approximately $2,000 in federal deposit insurance premiums for year ended
December 31, 1998.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the Bank will pay, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. The Bank paid $25,133 in Fico Bond assessments
in 1998.
Regulatory Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy prescribing the capital adequacy requirements for
state-chartered banks, some of which, like the Bank, are not members of the
Federal Reserve System. At December 31, 1998, the Bank exceeded all regulatory
capital requirements and is classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Leverage or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill, and certain purchased mortgage servicing rights
and purchased credit and relationships.
The FDIC also requires that state-chartered banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier I capital and supplementary
15
(Tier 2) capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above under
the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
A bank which has less than the minimum leverage capital requirement is subject
to various capital plan and activities restriction requirements. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could
be subject to potential termination of deposit insurance.
The following table sets forth the Company's regulatory capital position as of
December 31, 1998 as compared to the minimum capital requirements imposed by the
FDIC. The Bank's ratios do not differ significantly from the Company's ratios
presented below.
Percent of
Amount Adjusted Assets
(Dollars in Thousands)
Leverage Capital.................. $ 24,893 9.09%
Required........................ 10,724 4.00%
------ -----
Excess.......................... $ 14,169 5.09%
======== =====
Tier 1 Capital.................... $ 24,893 12.30%
Required........................ 8,096 4.00%
------- -----
Excess.......................... $ 16,797 8.30%
======= =====
Total Capital..................... $ 28,333 14.00%
Required........................ 16,192 8.00%
------- -----
Excess.......................... $ 12,141 6.00%
======= =====
The Bank is also subject to more stringent PDB guidelines. Although not adopted
in regulation form, the PDB utilizes capital standards requiring a minimum of
6.5% leverage capital and 10% 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 both the FDIC and Pennsylvania capital
requirements at December 31, 1998.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a commercial bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
16
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. The Bank
received a "satisfactory" rating in its last CRA examination in May, 1998.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a bank or its subsidiaries and its
affiliates be on terms as favorable to the Bank as transactions with
non-affiliates. In addition, certain of these transactions are restricted to a
percentage of the Bank's capital. Affiliates of the Bank include the Company and
any company which would be under common control with the Bank.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders, as well as entities such persons control are currently governed by
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated
by the Federal Reserve Board. Among other things, these regulations require such
loans to be made on terms substantially similar to those offered to unaffiliated
individuals, place limits on the amount of loans the Bank may make to such
persons based, in part, on the Bank's capital position, and require certain
approval procedures to be followed.
Federal Reserve System. The FRB requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily 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, 1998, the Bank met its
reserve requirements.
Item 2. Description of Properties
- -----------------------------------
The Bank operates from its main office located at 717 Main Street, Honesdale,
Pennsylvania and seven additional branch offices. The Bank's total investment in
office property and equipment is $10.3 million with a net book value of $7.1
million at December 31, 1998. The Bank currently operates automated teller
machines at seven of its branch offices and three automated teller machine only
facilities. The Bank leases one branch office inside a Weis supermarket. The
lease expires in 1999 and it has two five year 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.
17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and related
stockholder matters appears under "Market and Dividend Information" in the
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1998("Annual Report") on page 20 and page 40 is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial
and Other Data" in the Annual Report on page 2, 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 of Financial Condition and Results of Operations in the Annual Report
on pages 9 through 22 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 14 through 15 and is incorporated herein by reference.
18
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 23 through 46 and are incorporated herein by
reference.
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 section captioned "Information with Respect
to Nominees for Director, Directors Continuing in Office and Executive Officers"
at pages 3 to 6 of the Registrant's definitive proxy statement for the
Registrant's Annual Meeting of Stockholders to be held on April 27, 1999 (the
"Proxy Statement"), which was filed with the Commission on March 31, 1999 is
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement at pages 7 through 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement at pages 2 through 4.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement at page 12
and 13.
19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report to shareholders.
PAGE
----
Independent Auditor's Report.......................................... 23
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 24
Consolidated Statements of Income For the Years Ended
December 31, 1998, 1997 and 1996.................................... 25
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996................ 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................... 27
Notes to Consolidated Financial Statements............................ 28-46
The remaining information appearing in the Annual Report is not deemed to be
filed as part of this report, except as expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of Norwood Financial Corp.*
3.2 Bylaws of Norwood Financial Corp.*
4.0 Specimen Stock Certificate of Norwood Financial Corp.*
10.1 Employment Agreement with William W. Davis, Jr., President and
Chief Executive Officer **
10.2 Employment Agreement with Lewis J. Critelli, Chief Financial
Officer **
10.3 Form of Change-in-Control Severance Agreement with ten key
employees of the Bank*
10.4 Consulting Agreement with Russell L. Ridd **
10.5 Wayne Bank Stock Option Plan*
11.0 Statement regarding computation of earnings per share (see Note 1
to the Notes to Consolidated Financial Statements in the Annual
Report) 13.0 Annual Report to Stockholders for the fiscal year
ended December 31, 1998
13.0 Annual Report to Stockholders
21.0 Subsidiary of the Registrant (see "Item 1. Business - General"
and "-Subsidiary Activity" herein)
23.1 Consent of Beard & Company, Inc., Independent Auditors
23.2 Consent of S.R. Snodgrass, Independent Auditors
20
27.0 Financial Data Schedule***
(b) Reports on Form 8-K.
None.
* Incorporated herein by reference into this document from the Exhibits to
Form 10, Registration Statement initially filed with the Commission on
April 29, 1996, Registration No. 28366.
** Incorporated herein by reference into this document from the Exhibits to
the Registrant's Form 10-K for the year ended December 31,1996 filed with
the Commission on March 31, 1997, File No. 0-28366.
*** Only in electronic filing.
21
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 16, 1999 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
and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 16, 1999 Date: March 16, 1999
By: By: /s/ John E. Marshall
-------------------------------- ------------------------------
Charles E. Case John E. Marshall
Director Director
Date: March ____, 1999 Date: March 16, 1999
By: By: /s/ Dr. Kenneth A. Phillips
-------------------------------- ------------------------------
Daniel J. O'Neill Dr. Kenneth A. Phillips
Director Director
Date: March ____, 1999 Date: March 16, 1999
By: By: /s/ Russell L. Ridd
-------------------------------- ------------------------------
Gary P. Rickard Russell L. Ridd
Director Director
Date: March ____, 1999 Date: March 16, 1999
By: /s/ Harold A. Shook By:
-------------------------------- ------------------------------
Harold A. Shook John J. Weidner
Director Director
Date: March 16, 1999 Date: March ____, 1999