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 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to .
Commission File No. 0-28366
Norwood Financial Corp.
- -------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2828306
- ---------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
717 Main Street, Honesdale, Pennsylvania 18431
- ---------------------------------------------- -------------------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (717) 253-1455
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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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 11, 1997, there were 900,346 issued and outstanding 889,116
shares of the registrant's Common Stock.
The Registrant's voting stock trades 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 11, 1997, was $29,785,386 ($33.50 per share based on 889,116 shares of
Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended December 31, 1996. (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 and one office in Susquehanna
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 three offices acquired from Meridian Bank as of March 25,
1996, one each in the counties of Wayne, Pike and Susquehanna. In addition, the
Bank operates three automated teller machine only remote service facilities with
one in Wayne County and two in Pike County.
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, 1996, the Bank had total assets, deposits, and
stockholders equity of $260.1 million, $229.3 million, and $21.5 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
will be more accessible to the western areas of Scranton and Wilkes-Barre with
the completion prior to 1999 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 commuting
distance of the New York/Northern New Jersey metropolitan area.
The Bank is one of 16 financial institutions serving its immediate market
area. The competition for deposit products comes from 10 commercial banks in the
market area, one savings association 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.
1
The Bank is in a competitive environment for loan products. The Bank
prices its loans to be competitive with local and regional competition, while
remaining aware of risk elements.
Personnel
As of December 31, 1996, the Bank had 104 full-time and 39 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. The Bank offers
longer term fixed rate mortgage products, a portion of which may be sold,
servicing retained, in the secondary market through the Federal National
Mortgage Corporation (Fannie Mae) or Federal Home Loan Mortgage Corporation
(Freddie Mac). Fixed rate home equity loans are made on terms up to 180 months,
as well as offering a home equity line of credit. The Bank does a significant
level of indirect dealer financing of automobiles, boats, and recreational
vehicles through a network of over 30 dealers in Northeast Pennsylvania. In
addition to automobile lending, the Bank recently began 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 letter of credit facilities.
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.
Commercial and commercial real estate lending entail significant
additional risks when compared with residential mortgages 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 supply
and demand conditions in the market. A number of the Bank's commercial lending
customers operate businesses related to leisure time and vacation related
industries. As such they maybe subject to seasonal fluctuation in cash flow and
are in part dependent on consumer vacation patterns.
2
Types of Loans and Leases. Set forth below is selected data relating to
the composition of the Bank's loan portfolio at the dates indicated.
At December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------------------ ---------------- --------------- ---------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in Thousands)
Type of Loans and Leases:
Commercial, Financial and Agricultural.... $ 29,679 16.8% $ 33,891 22.0% $ 31,378 22.2% $ 31,421 23.0 $ 33,426 24.4
Real Estate-construction ................. 1,602 .9% 1,380 0.9 3,480 2.5 1,748 1.3 -- --
Real Estate-mortgage ..................... 91,401 51.6% 94,822 61.6 90,908 64.3 89,677 65.6 88,752 64.8
Installment Loans to Individuals ......... 37,502 21.1% 23,800 15.5 15,543 11.0 13,948 10.2 14,770 10.8
Leases to Individuals (Net of unearned).... 16,981 9.6% -- -- -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total Loans ........................... 177,165 100% 153,892 100% 141,309 100% 136,794 100% 136,948 100%
==== ==== ==== ==== ====
Less: Unearned income ................... 2,611 1,798 608 799 1,037
Allowance for loan losses ............. 2,616 2,125 1,893 1,864 2,342
-------- -------- -------- -------- --------
Total loans, net ......................... $171,938 $149,969 $138,808 $134,131 $133,569
======== ======== ======== ======== ========
3
Maturities and Sensitivities of Loans and Leases to Changes in Interest
Rates. The following table sets forth maturities and interest rate sensitivity
for all categories of loans as of December 31, 1996. 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 $ 5,881 $ 18,067 $ 5,731 $ 29,679
Real Estate - 1,602 --- --- 1,602
Construction
Real Estate Mortgage 7,662 32,111 51,628 91,401
Leases (net) 4,175 12,806 --- 16,981
Installment loans to
individuals 9,184 26,978 1,340 37,502
-------- -------- -------- --------
Total $ 28,504 $ 89,962 $ 58,699 $177,165
======== ======== ======== ========
Loans with fixed-rate $17,359 $52,494 $ 15,590 $ 85,443
Loans with floating
rates 11,145 37,468 43,661 91,722
-------- -------- -------- --------
Total $ 28,504 $ 89,962 $59,251 $177,165
======== ======== ======= ========
4
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,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Commercial and all other ................................. $ 1,633 $ 1,572 $ 2,754 $ 3,276 $ 611
Real estate .............................................. 1,790 2,205 2,175 2,631 2,078
Consumer ................................................. 28 48 -- -- 1
------- ------- ------- ------- -------
Total ...................................................... $ 3,451 $ 3,825 $ 4,929 $ 5,907 $ 2,690
======= ======= ======= ======= =======
Accruing loans which are contractually past 90 days or more:
Commercial and all other ................................ $ 38 $ 55 $ 553 $ 609 $ 2,444
Real estate ............................................. -- -- 2,716 2,061 1,450
Consumer ................................................ 4 -- 7 5 141
------- ------- ------- ------- -------
Total ...................................................... $ 42 $ 55 $ 3,276 $ 2,675 $ 4,035
======= ======= ======= ======= =======
Total non-performing loans ................................. $ 3,493 $ 3,880 $ 8,205 $ 8,582 $ 6,725
Other real estate owned .................................... 2,283 1,944 1,377 $ 1,715 $ 1,520
------- ------- ------- ------- -------
Total non-performing assets ................................ $ 5,776 $ 5,824 $ 9,582 $10,297 $ 8,245
======= ======= ======= ======= =======
Total non-performing loans to total loans................... 1.98% 2.55% 5.83% 6.31% 4.95%
Total non-performing loans to total assets.................. 1.34% 1.79% 4.18% 4.43% 3.61%
Total non-performing assets to total assets................. 2.22% 2.68% 4.89% 5.32% 4.42%
Potential Problem Loans. As of December 31, 1996, 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, 1996 and 1995 the recorded investment in
loans considered impaired in accordance with Statement No. 114 and 118 were
$2,877,248 and $3,713,104 respectively.
5
Analysis of the Allowance for Loan and Lease Losses. The following table
sets forth information with respect to the Bank's allowance for loan losses at
the dates indicated:
At December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Total loans and leases net of unearned outstanding......... $ 174,621 $ 152,094 $ 140,701 $ 135,995 $ 135,911
Average loans and leases outstanding ...................... 160,517 145,990 136,314 135,659 134,928
Allowance balances at beginning of period ................. 2,125 $ 1,893 $ 1,864 $ 2,342 $ 2,000
Charge-offs:
Commercial and all other ............................... (820) (448) (709) (767) (1,112)
Real estate ............................................ (226) (353) (306) (587) (130)
Consumer ............................................... (320) (123) (82) (79) (89)
--------- --------- --------- --------- ---------
Total ..................................................... (1,366) (924) (1,097) (1,433) (1,331)
Recoveries:
Commercial and all other ................................ 70 513 31 24 12
Real estate ............................................. 16 3 3 0 0
Consumer ................................................ 60 21 22 16 11
--------- --------- --------- --------- ---------
Total ..................................................... 146 537 56 40 23
Provisions charged to expense ............................. 1,710 619 1,070 915 1,650
--------- --------- --------- --------- ---------
Allowance balance at end of period ........................ $ 2,615 $ 2,125 $ 1,893 $ 1,864 $ 2,342
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding .............................. 1.50% 1.40% 1.35% 1.37% 1.72%
Net loans charged off as a percent of
average loans outstanding ............................... .76% 0.27% 0.76% 1.03% 0.97%
6
Allocation of the Allowance For Loan and Lease Losses. The following table sets
forth the allocation of the Bank's allowance for loan and lease losses by
category and the percent in each category to total at the date indicated.
At December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ---------------- ----------------- ---------------
% 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 $ 871 16.8% $ 927 22.0% $ 793 22.2% $ 963 23.0% $ 609 24.4%
Real Estate - Construction 38 .9% 14 0.9 29 2.5 19 1.3 -- --
Real Estate - Mortgage 727 51.6% 909 61.6 759 64.3 810 65.6 1,205 64.8
Installment loans to individual260 21.1% 155 15.5 87 11.0 72 10.2 160 10.8
Leases 85 9.6% -- -- -- -- -- -- -- --
Unallocated 635 -- 120 -- 225 -- -- -- 367 --
-------- ---- ------- -- ------ ---- ------ ---- ------ ----
Total $ 2,615 100% $ 2,125 100.0% $1,893 100.0% $1,864 100.0% $2,342 100.0%
======== === ======= ===== ====== ===== ====== ===== ====== =====
- -------------------------
(1) Includes specific reserves for assets classified as loss.
7
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
----------------------------
1996 1995 1994
-------- ------- --------
Investment Securities:
(carrying value)
U.S. Government Securities ... $ 3,993 $ 5,521 $15,288
Obligations of U.S. ..........
Government Agencies .......... 25,858 18,717 2,954
Obligations of state and
political subdivisions ....... 13,979 12,003 9,390
Corporate Notes and bonds .... 503 972 8,458
Mortgage-backed Securities ... 11,359 9,028 --
Equity Securities ............ 2,018 2,640 2,569
------- ------- -------
Total Investment Securities $57,710 $48,881 $38,659
======= ======= =======
Market value of Investment
Securities ..................... $57,945 $49,034 $38,485
======= ======= =======
8
Maturity Distribution of Securities. The following table sets forth
certain information regarding carrying values, weighted average yields, and
maturities of the Company's investment securities portfolio at December 31,
1996. 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.
Maturity as shown below 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 Total
One Year or Less Five Years Ten Years After Ten Years Investment Securities
----------------- ------------------- ------------------ ------------------ --------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
U.S. Government Securities $ 501 5.51 % $ 3,492 5.85% $ -- --% $ -- -- $ 3,993 5.81%
Obligations of U.S. -- -- 14,516 6.50% 10,062 7.37% 1,280 7.02% 25,858 6.86%
Government Agencies
Obligations of state and 500 7.47% 500 7.43% 982 7.62% 11,997 8.27% 13,979 8.17%
political subdivisions(3)
Corporate Notes and bonds 503 5.51% -- -- -- 503 5.51%
Mortgage-backed Securities(1) 441 7.24% 6,747 6.92% 1,291 7.34% 2,880 7.45% 11,359 7.11%
Equity Securities(2) 2,018 4.95% -- --% -- --% -- --% 2,018 4.95%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total Investment Securities $ 3,963 5.66% $25,255 6.54% $12,335 7.39% $16,157 8.02% $57,710 7.07%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Actual maturities may differ from contractual maturities as certain instruments
have call features which allow prepayment of obligations.
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 $8,804,889 in securities classified as held-to-maturity with a
market value of $9,040,338.
9
Deposit Activities.
General. The Bank provides a full range of deposit products to its retail
and business customers. These include interest-bearing and non-interest 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. Other services the Bank offers its customers on a limited
basis include cash management, direct deposit, ACH activity and payroll
processing. The Bank operates eleven 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,
1996.
Certificates
of Deposits
-------------
Maturity Period (In Thousands)
Within three months............................ $ 14,735
Over three through six months.................. 7,226
Over six through twelve months................. 4,080
Over twelve months............................. 2,849
-----------
$ 28,890
===========
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 and U.S.
Treasury demand notes, that the Company had during the periods indicated.
Year ended December 31,
-----------------------------
1996 1995 1994
------ ------- ------
Short-term borrowings:
Average balance outstanding ......... $ 4,902 $ 2,631 $ 2,110
Maximum amount outstanding at any
month-end during the period ....... 11,967 9,277 2,819
Weighted average interest rate during
the period .......................... 5.04% 5.53% 3.57%
Total short-term borrowings at end of
period ................................ $ 3,227 $ 2,031 $ 1,589
10
Trust Activities
The Bank operates a Trust Department which provides estate planning,
employee benefit plan administration, investment management and financial
planning to Bank customers. At December 31, 1996, the Bank acted as trustee for
$44.3 million of assets.
Subsidiary Activities
The Bank, a Pennsylvania chartered bank, is the only wholly owned
subsidiary of the Company. Norwood Investment Corp. ("NIC"), incorporated in
1996, is a Pennsylvania licensed insurance agency, a wholly-owned subsidiary of
the Bank. NIC business is annuity and mutual fund sales 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
CoreLink Financial Inc., a registered broker/dealer.
WCB Realty Corp. is a wholly-owned real estate subsidiary of the Bank whose
principal asset is the administrative offices of the Company.
Personnel
As of December 31, 1996, the Company and the Bank had 104 full-time and 39
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"). As an FDIC insured
subsidiary of a bank holding company, the Bank is subject to certain
restrictions in dealing with the Company and with other persons from time to
time affiliated with the Bank, and is subject to examination and supervision by
the PDB and the FDIC. 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 that outweigh the
possible adverse effects. See "- Permitted Non-Banking Activities."
11
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, 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,
12
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
will be 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.
13
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, 1996.
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. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 6.4 basis points. Based on total deposits as of
December 31, 1996, had the Act been in effect, the Bank's annual deposit
insurance premium would have been approximately $15,000. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance funds
be merged before January 1, 2000, the rate paid by all members of this new fund
to retire the Fico Bonds would be equal.
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, 1996, 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
14
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 (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, 1996 as compared to the minimum capital requirements imposed
by the FDIC. (The Bank's ratios do not significantly differ from the Company's).
Percent of
Amount Adjusted Assets
------ ---------------
(Dollars in Thousands)
Leverage Capital................... $19,415 7.64%
Required......................... 10,098 4.00%
------- -----
Excess........................... $ 9,317 3.64%
======= =====
Tier 1 Capital..................... $19,415 10.26%
Required......................... 7,572 4.00%
------- -----
Excess........................... $11,843 6.26%
======= =====
Total Capital...................... $21,784 11.51%
Required......................... 15,144 8.00%
------- -----
Excess........................... $ 6,640 3.51%
====== =====
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% total risk-
15
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 in both the FDIC and Pennsylvania capital
requirements at December 31, 1996.
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
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 an "outstanding" rating in its last CRA examination in May, 1995.
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 checking, 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, 1996, 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 eight additional branch offices. The Bank's total
investment in office property and equipment is $12.5 million with a net book
value of $7.8 million at December 31, 1996. The Bank currently operates
automated teller machines at seven of its branch offices and three automated
teller machine only facilities.
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.
16
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 "Market and Dividend Information" in
the Registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1996 ("Annual Report") on page 11, and 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 1, and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The table that follows sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which are
expected to reprice or mature in each of the future time periods shown.
The table also indicates the time periods in which interest-earning assets
and interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The assumptions used in the table are included in the notes
thereto. Management believes that the assumptions used to evaluate the
vulnerability of the Bank's operations to changes in interest rates are
reasonable. The interest rate sensitivity of the Bank's assets and liabilities
as shown in the table below could vary substantially if differing assumptions
were used or if actual experience differs from the assumptions used in the
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in differing degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Further, in the event of a significant change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the table. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase.
17
Less than 90 Days One to Over
90 Days to 1 Year Five Years Five Years Total
------------ ------------ ------------ ----------- ---------
($ 000)
Interest Earning Assets
Money Market Instruments ................ $ 8,037 $ 0 $ $ $ 8,037
Loans and Leases ........................ 47,334 46,297 62,984 17,939 174,554
Investment Securities ................... 3,511 9,963 26,116 18,120 57,710
--------- --------- --------- --------- ---------
Total Rate Sensitive Assets .......... 58,882 56,260 89,100 36,059 240,301
Interest bearing Liabilities
Time Deposits ........................... 34,668 52,964 25,742 113,374
Interest-bearing checking ............... 1,011 3,030 16,161 20,202
Money market and statement
savings ............................... 6,192 18,585 45,721 70,498
Other Borrowed Funds .................... 3,227 150 2,292 5,669
--------- --------- --------- --------- ---------
Total rate sensitive liabilities...... $ 45,098 $ 74,579 $ 87,774 $ 2,292 $ 209,743
========= ========= ========= ========= =========
Incremental Gap ............................ $ 13,784 $ (18,319) $ 1,326 $ 33,767
========= ========= ========= =========
Cumulative Gap ............................. $ 13,784 $ (4,535) $ (3,209) $ 30,558
========= ========= ========= =========
Rate sensitive assets/rate sensitive
liabilities on a cumulative basis .......... 130.56% 96.21% 98.45% 114.57%
Except as set forth above, the above-captioned information appears under
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on pages 6 through 12 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 S.R. Snodgrass, A.C. appears
in the Annual Report on pages 13 through 26 and are incorporated herein by
reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
18
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 22, 1997 (the
"Proxy Statement"), which was filed with the Commission on March 31, 1997 and
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 6 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 3 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
11.
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.
PAGE
Independent Auditors' Report......................................... 13
Consolidated Balance Sheets as of December 31, 1996 and 1995......... 14
Consolidated Statements of Income For the Years Ended
December 31, 1996, 1995 and 1994................................... 15
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994............... 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................... 17
Notes to Consolidated Financial Statements........................... 18-26
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, Senior Vice Presiden
and Chief Financial Officer
10.3 Form of Change-in-Control Severance Agreement with 9 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 Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1996
21.0 Subsidiary of the Registrant (see "Item 1. Business - General" and
"-Subsidiary Activity" herein)
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.
** 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 11, 1997 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 Senior Vice President and Chief Financial Officer
and Director (Principal Financial and Accounting Officer)
(Principal Executive Officer)
Date: March 11, 1997 Date: March 11, 1997
By: /s/ By: /s/ John E. Marshall
----------------------------------- -------------------------------
Charles E. Case John E. Marshall
Director Director
Date: March ____, 1997 Date: March 11, 1997
By: /s/ Daniel J. O'Neill By: /s/ Dr. Kenneth A. Phillips
----------------------------------- --------------------------------
Daniel J. O'Neill Dr. Kenneth A. Phillips
Director Director
Date: March 14, 1997 Date: March 11, 1997
By: /s/ Gary R. Rickard By: /s/ Russell L. Ridd
----------------------------------- -------------------------------
Gary R. Rickard Russell L. Ridd
Director Chairman of the Board
Date: March 11, 1997 Date: March 11, 1997
By: /s/ Harold A. Shook By: /s/ John J. Weidner
---------------------------------- -------------------------------
Harold A. Shook John J. Weidner
Director Director
Date: March 11, 1997 Date: March 11, 1997