10-K 1 f10k_123104-0160.txt FORM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File No. 0-28366 Norwood Financial Corp. -------------------------------------------------------------------------------- (Exact Name of Registrant as specified in Its Charter) Pennsylvania 23-2828306 ----------------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 717 Main Street, Honesdale, Pennsylvania 18431 ---------------------------------------- ------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (570) 253-1455 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES NO X --- --- As of March 14, 2005, there were 2,664,983 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 June 30, 2004, was $64,064,960 ($29.49 per share based on 2,172,430 shares of Common Stock outstanding). Solely for purposes of this calculation, directors, executive officers and greater than 5% stockholders are treated as affiliates. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2004. (Parts I, II, and IV) 2. Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders. (Part III) PART I Forward Looking Statements The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. Norwood Financial Corp. undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Item 1. Business ----------------- General Norwood Financial Corp. (the "Company"), a Pennsylvania corporation, is the holding company for Wayne Bank. On March 29, 1996, the Bank completed a holding company reorganization and became a wholly owned subsidiary of the Company. As of December 31, 2004, the Company had total assets of $411.6 million, deposits of $318.6 million, and stockholders' equity of $45.7 million. 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, three offices in Pike County and two offices in Monroe County. The Bank offers a wide variety of personal and business credit services, trust and investment products and real estate settlement services to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves. The Bank primarily serves the Pennsylvania counties of Wayne, Pike and Monroe, and to a much lesser extent, the counties of Lackawanna and Susquehanna. In addition, the Bank operates twelve automated teller machines with eleven in branch locations and one remote service facility. The Company's main office is located at 717 Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455. The Company maintains a website at www.waynebank.com. Competition The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company's market area of Wayne, Pike and Monroe Counties, Pennsylvania. Based on data compiled by the FDIC as of June 30, 2004 (the latest date for which data is available), the Bank had the second largest share of FDIC-insured deposits in both Wayne County and Pike County with approximately 21% and 20%, respectively, and the 14th largest share in Monroe County with 1%. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers. Personnel As of December 31, 2004, the Bank had 114 full-time and 5 part-time employees. None of the Bank's employees are represented by a collective bargaining group. Lending Activities The Bank's loan products include loans for personal and business use. This includes mortgage lending to finance principal residences as well as second home dwellings. The products include adjustable-rate mortgages with terms up to 30 years which are retained and serviced through the Bank, fixed-rate mortgage products which may be sold, servicing retained, in the secondary market through the Federal National Mortgage Association (Fannie Mae) or held in the Bank's portfolio subject to certain internal guidelines. Fixed-rate home equity loans are originated on terms up to 180 months, as well as offering a home equity line of credit tied to prime rate. The Bank also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a network of over 30 dealers in Northeast Pennsylvania. Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structures. Commercial lending activities include lines of credit, revolving credit, term loans, mortgages, various forms of secured lending and a limited amount of letter of credit facilities. The structure may be fixed, immediately repricing tied to the prime rate or adjustable at set intervals. Adjustable-rate loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for 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 may also be limited by the maximum periodic interest rate adjustment permitted in certain adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank. Consumer lending, including indirect financing provides benefits to the Bank's asset/liability management program by reducing the Bank's exposure to interest rate changes, due to their generally shorter terms. Such loans may entail additional credit risks compared to owner-occupied residential mortgage lending. As a result, the Bank has de-emphasized the indirect lending product line. Commercial lending including real-estate related loans entail significant additional risks when compared with residential real estate and consumer lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and market conditions for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. The liquidation of commercial property is often more costly and may involve more time to sell than residential real estate. The Bank offsets such factors with loan to value positions 2 and personal guaranties. In addition, a majority of the Bank's commercial real estate portfolio is owner-occupied property. Due to the type and nature of the collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent on the borrower's continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency. There are additional risks associated with indirect automobile lending since the Bank must rely on the automobile dealer to provide accurate information to us and accurate disclosures to the borrowers. These loans are principally done on a non-recourse basis. The Bank seeks to mitigate these risks by only dealing with dealers with whom it has a long-standing relationship Loan Solicitation and Processing. The Bank has established various lending limits for its officers and also maintains an Officer Loan Committee. The Loan Committee is comprised of the President and Chief Executive Officer, Senior Lending Officer and other Bank officers. The Loan Committee has the authority to approve all loans up to set limits based on the type of loan and the collateral. Requests in excess of these limits must be submitted to the Directors Loan Committee or Board of Directors for approval. Additionally, the President and Chief Executive Officer, and the Senior Lending Officer and other officers have the authority to approve secured and unsecured loans up to amounts approved by the Board of Directors and maintained in the Bank's Loan Policy. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to the loan committee for approval. Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable. Loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral, and these applicable insurances must be maintained during the full term of the loan. 3 Types of Loans. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the date indicated.
At December 31, --------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 --------------- --------------- --------------- ---------------- --------------- $ % $ % $ % $ % $ % -------- ---- -------- ---- -------- ----- -------- ----- -------- ----- (dollars in thousands) Type of Loans: -------------- Commercial, Financial and Agricultural.... $ 20,263 7.9% $ 17,022 7.3% $ 15,074 6.9% $ 17,442 8.1% $ 17,102 7.9% Real Estate-Construction.................. 4,890 1.9 5,904 2.5 4,109 1.9 4,642 2.2 2,425 1.1 Real Estate-Mortgage Residential.............. 90,606 35.5 77,459 33.1 69,040 31.6 64,635 30.1 59,517 27.5 Commercial............... 111,164 43.6 96,276 41.1 79,623 36.5 63,609 29.6 56,815 26.2 Lease financing, net of unearned income.. - - 316 .1 1,592 .7 6,126 2.9 13,664 6.3 Consumer Loans to Individuals............. 28,193 11.1 37,219 15.9 48,951 22.4 58,143 27.1 67,286 31.0 -------- ---- -------- ---- -------- ----- -------- ----- -------- ----- 255,116 100.0% 234,196 100.0% 218,389 100.0% 214,597 100.0% 216,789 100.0% ===== ===== ===== ===== ===== Unearned income and deferred fees......... (359) (463) (419) (403) (312) Allowance for loan losses................. (3,448) (3,267) (3,146) (3,216) (3,300) -------- -------- ------- ------ ------ $251,309 $230,466 $214,824 $210,978 $213,177 ======== ======== ======== ======== ========
4 Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for selected categories of loans as of December 31, 2004. Scheduled repayments are reported in the maturity category in which payment is due. Less than One to Over One Year Five Years Five Years Total -------- ---------- ---------- ----- (in thousands) Commercial, Financial and Agricultural $8,205 $7,617 $4,441 $20,263 Real Estate-Construction 4,890 -- -- 4,890 ------ ------ ------ ------- Total $13,095 $7,617 $4,441 $25,153 ====== ====== ====== ======= Loans with fixed-rates $3,041 $5,381 $3,455 $11,877 Loans with floating rates 10,054 2,236 986 13,276 ------ ----- ----- ------ Total $13,095 $7,617 $4,441 $25,153 ======= ====== ====== ======= Non-performing Assets. The following table sets forth information regarding non-accrual loans, foreclosed real estate owned and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated. The Bank did not have any loans accounted for as troubled debt restructurings at the dates indicated. For the year ended December 31, 2004, interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $1,500 of which $1,000 was collected. 5
At December 31, --------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (dollars in thousands) Non-accrual loans: Commercial and all other ...................................... $ -- $ -- $ -- $ 64 $ 64 Real estate ................................................... 32 125 213 597 518 Consumer ...................................................... 8 -- 3 11 -- ---- ---- ---- ---- ---- Total ...................................................... 40 125 216 672 582 Accruing loans which are contractually past- due 90 days or more: Commercial and all other ..................................... -- -- -- -- -- Real estate .................................................. 5 -- -- -- 34 Consumer ..................................................... 22 18 5 11 64 ---- ---- ---- ---- ---- Total ...................................................... 27 18 5 11 98 ---- ---- ---- ---- ---- Total non-performing loans ...................................... 67 143 221 683 680 Foreclosed real estate .......................................... -- -- 21 54 27 ---- ---- ---- ---- ---- Total non-performing assets ..................................... $ 67 $143 $242 $737 $707 ==== ==== ==== ==== ==== Total non-performing loans to total loans ....................... .03% .06% .10% .32% .31% Total non-performing loans to total assets ...................... .02% .04% .06% 20% .21% Total non-performing assets to total assets ..................... .02% .04% .07% .21% .22%
The recorded investment in impaired loans, not requiring an allowance for loan losses was $-0- and $263,000 at December 31, 2004 and 2003, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2004 and 2003. The related allowance for loan losses associated with these loans was $-0- at December 31, 2004 and 2003. For the years, ended December 31, 2004, 2003 and 2002, the average recorded investment in these impaired loans was $-0-, $337,000 and $262,000 and the interest income recognized on these impaired loans was $-0-, $30,000 and $23,000, respectively. Potential Problem Loans. As of December 31, 2004, 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. 6 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank's allowance for loan losses for the years indicated:
Years Ended December 31, --------------------------------------------------------------- 2004 2003 2002 2001 2000 ------- ------- ------- ------- ------- (dollars in thousands) Total loans receivable net of unearned income ........... $ 254,757 $ 233,733 $ 217,970 $ 214,194 $ 216,477 Average loans receivable ................................ 245,783 225,680 213,814 214,905 211,174 ======= ======= ======= ======= ======= Allowance balance at beginning of period ................ $ 3,267 $ 3,146 $ 3,216 $ 3,300 $ 3,344 Charge-offs: Commercial and all other .............................. (19) (121) (34) (12) -- Real Estate ........................................... (10) -- (122) (11) (9) Consumer .............................................. (342) (478) (608) (711) (589) Leases ................................................ (11) (36) (30) (152) (170) ------- ------- ------- ------- ------- Total .............................................. (382) (635) (794) (886) (768) Recoveries: Commercial and all other .............................. 13 5 -- 8 54 Real Estate ........................................... 8 24 13 1 73 Consumer .............................................. 78 64 72 85 88 Leasing ............................................... 9 3 9 29 ------- ------- ------- ------- ------- Total .............................................. 108 96 94 107 244 Net Charge-offs ......................................... (274) (539) (700) (779) (524) Provision Expense ....................................... 455 660 630 695 480 ------- ------- ------- ------- ------- Allowance balance at end of period ...................... $ 3,448 $ 3,267 $ 3,146 $ 3,216 $ 3,300 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding ............................................. 1.35% 1.40% 1.44% 1.50% 1.52% Net loans charged off as a percent of average loans outstanding ............................................. .11% .24% .33% .36% .25%
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. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which credit losses may occur. The total allowance is available to absorb losses from any type of loan.
At December 31, -------------------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------- --------------- ---------------- ----------------- ----------------- % 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 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (dollars in thousands) Commercial, financial and $ 337 7.9% $ 291 7.3% $ 265 6.9% $ 426 $ 345 7.9% agricultural 8.1% Real estate - construction 20 1.9 27 2.5 21 1.9 70 2.2 40 1.1 Real estate - mortgage 2,480 79.1 2,222 74.2 1,926 68.1 1,421 59.7 1,314 53.7 Consumer loans to individuals 483 11.1 634 15.9 788 22.4 715 27.1 719 31.0 Lease Financing -- -- 9 .1 24 .7 92 2.9 118 6.3 General Risk Allocation 128 -- 84 -- 122 -- 492 -- 764 -- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $3,448 100.0% $3,267 100.0% $3,146 100.0% $3,216 100.0% $3,300 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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 states, 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, ---------------------------------- (in thousands) 2004 2003 2002 -------- -------- -------- Securities (carrying value) U.S. Treasury Securities ......... $ 2,014 $ 2,065 $ -- U.S. Government Agencies ......... 47,151 47,632 33,197 State and political subdivision... 24,256 24,678 21,364 Corporate obligations ............ 15,308 13,665 11,403 Mortgage-backed securities ....... 32,060 40,508 53,358 Equity securities ................ 1,868 2,023 1,725 -------- -------- -------- Total securities ............. $122,657 $130,571 $121,047 ======== ======== ======== Fair value of securities ............. $122,811 $130,798 $121,347 ======== ======== ======== 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 as of December 31, 2004. Yields on tax-exempt securities are stated on a fully taxable equivalent basis using a Federal tax rate of 34%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations. Maturity on the mortgage-backed securities is based upon contractual terms, the average life may differ as a result of changes in cash flow. Equity securities with no stated maturity are classified as "one year or less."
After One After Five Total Investment One Year Or Less Through Five Years Through Ten Years After Five Years Securities ------------------- ------------------ ----------------- ----------------- ----------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average (dollars in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- U.S. Treasuries $ -- -- $ 2,014 2.39% $ -- -- $ -- -- $ 2,014 2.39% U.S. Government Agencies 1,994 2.09% 44,184 2.80% 973 3.55% -- -- 47,151 2.79% State and political subdivision 411 3.48% 7,892 3.71% 4,372 6.80% 11,581 8.03% 24,256 6.33% Mortgage-backed Securities (1) -- --% 4,281 3.73% 9,303 3.66% 18,476 3.75% 32,060 3.72% Corporate Obligations 506 1.40% 13,813 3.29% 989 2.72% -- -- 15,308 3.19% Equity Securities (2) 1,868 2.24% -- -- -- -- -- 1,868 2.24% ------ ---- ------- ---- ------- ---- ------- ---- -------- ---- Total Investment Securities $4,779 2.20% $72,184 3.04% $15,637 4.47% $30,057 5.40% $122,657 3.77% ====== ==== ======= ==== ======= ==== ======= ==== ======== ====
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 instruments. The Bank participates in Jumbo CD ($100,000 and over) markets with local municipalities and school districts which are typically priced on a competitive bid basis. Other services the Bank offers its customers on a limited basis include cash management, direct deposit and Automated Clearing House (ACH) activity. The Bank operates twelve automated teller machines and is affiliated with the STAR ATM network. Internet banking is offered through the website at www.waynebank.com. The following table sets forth information regarding deposit categories of the Company.
Years Ended December 31, --------------------------------------------------------------- 2004 2003 2002 -------------------- ------------------ ------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------- -------- (dollars in thousands) Non-interest bearing demand $ 47,399 -- $ 39,119 -- $33,966 -- Interest-bearing demand 42,385 .10% 41,139 .17% 38,178 .26% Money Market 47,466 1.07% 41,457 1.12% 36,518 1.72% Savings 58,243 .47% 55,055 .78% 48,361 1.34% Time 118,512 2.31% 127,995 2.87% 127,571 3.73% -------- -------- -------- Total $314,005 $304,765 $284,594 ========= ========= ========
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, 2004. (dollars in thousands) Certificates of Maturity Period Deposit --------------- ------- Within three months.................................... $13,416 Over three through six months.......................... 6,272 Over six through twelve months......................... 4,779 Over twelve months..................................... 8,816 ------- $33,283 ======= 11 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) Years ended December 31, ------------------------------ 2004 2003 2002 ---- ---- ---- Short term borrowings: Average balance during the year......................... $12,965 $ 9,081 $ 9,552 Maximum month-end during the year....................... 22,982 12,859 15,168 Average interest rate during the year................... 1.17% 1.09% 1.84% Total short-term borrowings at end of the year.......... $22,982 $12,859 $ 9,016 Weighted average interest rate at the end of the year... 1.83% .99% 1.32%
Trust Activities The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers. As of December 31, 2004, the Bank acted as trustee for $83.4 million of assets compared to $74.0 million as of December 31, 2003. 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 Invest Financial a registered broker/dealer. NIC had sales volume of $12.1 million in 2004, generating gross revenues for the Company of $154,000, included in Other Income. WCB Realty Corp. is a wholly-owned real estate subsidiary of the Bank whose principal asset is the administrative offices of the Company, which also includes the Main Office of the Bank. WTRO Properties Inc. is a wholly-owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank has foreclosed. WTRO did not hold title to any property as of December 31, 2004 and 2003. Norwood Settlement Services, LLC was established in 2004 to provide title and settlement service to bank customers and non-customers. The subsidiary is a Pennsylvania Limited Liability Company, 70% owned by Wayne Bank and 30% owned by Title Strategies, LLC. Gross revenues for 2004 totaled $17,000. 12 Regulation Set forth below is a brief description of certain laws which relate to the regulation of the Registrant and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Regulation of the Company General. The Company, as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), is subject to regulation and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve") and by the Pennsylvania Department of Banking (the "Department"). The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve and the Department. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of its subsidiary banks. Under the BHCA, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding ompany, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares. Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank's investments in the stock or securities of the holding company, and on the subsidiary bank's taking of the holding company's stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both. Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHCA. Under the BHCA and the Federal Reserve's bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHCA and (2) any BHCA activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the 13 Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto. Financial Modernization. The Gramm-Leach-Bliley Act, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a "satisfactory" CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. The Company has not submitted notice to the Federal Reserve of its intent to be deemed a financial holding company. Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation. See "Regulation of the Bank-Regulatory Capital Requirements." Regulation of the Bank General. As a Pennsylvania chartered, insured commercial bank, the Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations. Pennsylvania Banking Law. The Pennsylvania Banking Code ("Banking Code") contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. 14 The Federal Deposit Insurance Corporation Act ("FDIA"), however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the BIF and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA. Federal Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC administers two separate insurance funds, the BIF, which generally insures commercial bank and state savings bank deposits, and the Savings Insurance Fund ("SAIF"), which generally insures savings association deposits. The Bank is a member of the BIF and its deposit accounts are insured by the FDIC, up to prescribed limits. The FDIC is authorized to establish separate annual deposit insurance assessment rates for members of the BIF and the SAIF, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of either insurance fund. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. The FDIC has set the deposit insurance assessment rates for BIF-member institutions for the first six months of 2005 at 0% to .027% of insured deposits on an annualized basis, with the assessment rate for most institutions set at 0%. In addition, all insured institutions of the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to finance resolutions of insolvent thrifts. These assessments, the current quarterly rate of which is approximately .0154% of insured deposits, will continue until the Financing Corporation bonds mature in 2017. Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. At December 31, 2004, the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." The FDIC's capital regulations establish a minimum 3% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks to 4% to 5%. Under the FDIC's regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier I or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain servicing and purchased credit card relationships, and minus certain other listed assets. 15 The FDIC's regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank's allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier I capital. A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC's regulations also provide that any insured depository institution with a ratio of Tier I capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could be subject to potential termination of deposit insurance. The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department's capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC's capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution's substandard performance in any of a number of areas. The Bank was in compliance in both the FDIC and Pennsylvania capital requirements as of December 31, 2004. Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular loans by a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and other extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Loans to One Borrower. Under Pennsylvania and federal law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution's capital accounts. An institution's capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. As of December 31, 2004, the Bank's loans-to-one-borrower limitation was $7 million and the Bank was in compliance with such limitation. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., 16 advances) in accordance with policies and procedures established by the Board of Trustees of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank's outstanding advances from the FHLB. At December 31, 2004, the Bank was in compliance with this requirement. Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2004, the Bank met its reserve requirements. Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends which cause the Bank's retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Item 2. Properties ------------------- The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and ten additional branch offices. The Bank's total investment in office property and equipment is $11.8 million with a net book value of $5.5 million as of December 31, 2004. The Bank currently operates automated teller machines at all eleven of its facilities and one automated teller machine only location. The Bank leases three of its locations with minimum lease commitments of $2,215,000 through 2029. The three locations have various renewal options. Item 3. Legal Proceedings -------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. 17 Item 4. Submission of Matters to a Vote of Security-Holders ------------------------------------------------------------ None. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities ------------------------------------- Information relating to the market for Registrant's common equity and related stockholder matters appears under "Market and Dividend Information" in the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2004 ("Annual Report") and is incorporated herein by reference.
Issuer Purchases of Equity Securities ------------------------------------- Maximum number -------------- of shares (or ------------- approximate ----------- Total number of dollar value) that --------------- ------------------ shares purchased may yet ---------------- ------- Total number Average price as part of publicly be purchased ------------ ------------- -------------------- ------------- of shares paid per announced plans under the plans --------- -------- --------------- --------------- purchased share or programs or programs --------- ----- ----------- ----------- October 1-October 31, 2004 - - - - November 1-November 30, 2004 - - - - December 1-December 31, 2004 1,017(1) $ 22.83 - - --------- ------------ -------- -------- Total 1,017 $ 22.83 - - ======= ============ ======== ========
(1) Purchases relate to the Company's Employee Stock Ownership Plan related to forfeitures of shares by participants and purchase of shares from participants. Item 6. Selected Financial Data -------------------------------- The above-captioned information appears under "Summary of Operations" in the Annual Report, and is incorporated herein by reference. 18 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 and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk ------------------------------------------------------------------- The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk" in the Annual Report and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data ---------------------------------------------------- The Company's consolidated financial statements listed in Item 15 are incorporated herein by reference from the Annual Report. Item 9. Changes In and Disagreements with Accountants on Accounting and -------------------------------------------------------------------------------- Financial Disclosure -------------------- None Item 9A. Controls and Procedures --------------------------------- The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information --------------------------- None 19 PART III Item 10. Directors and Executive Officers of the Registrant ------------------------------------------------------------ The information contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I -- Election of Directors" in the Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated herein by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller. The Company undertakes to provide a copy of the Code of Ethics to any person without charge, upon request to Lewis J. Critelli Executive Vice President and Chief Financial Officer, Norwood Financial Corp., 717 Main Street, Honesdale, PA 18431. Item 11. Executive Compensation -------------------------------- The information contained under the section captioned "Director and Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the Section captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" of the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" and "Proposal I -- Election of Directors" of the Proxy Statement. (c) Changes in Control Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. 20 (d) Equity Compensation Plan Information
(a) (b) (c) Number of securities remaining available for future issuance Number of Securities Weighted average under equity To be issued upon exercise price of compensation plans Exercise of outstanding (excluding securities Outstanding options, options, warrants reflected in Warrants and rights and rights column(a)) ------------------- ---------- ---------- Equity Compensation plans approved by shareholders Stock Option Plan. . . . . . . 128,853 $19.19 515,920 Equity compensation plans not approved by shareholders -- -- -- 1999 Directors Stock Compensation Plan. . . . . 14,001 $18.90 -- ------- ------ ------- 142,854 $19.16 515,920 ======= ====== =======
The 1999 Directors Stock Compensation Plan provides for annual grants of options to non-employee directors as of the close of business on the day of the first regularly scheduled board meeting in December of each year. The amounts of such awards are determined by the board or a committee thereof. The exercise price for each option is equal to the fair market value of the stock as of the date of grant. Options generally have terms of ten years and one day from the date of grant and vest over periods ranging from six months to one year from the date of grant. Except in the event of death or disability, optionees may not sell shares acquired on exercise of options within six months of the date of grant. Options are not transferable except in the event of the death of the optionee. Item 13. Certain Relationships and Related Transactions -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned "Certain Relationships and Related Transactions". Item 14. Principal Accounting Fees and Services ------------------------------------------------ The information required by this item is incorporated herein by reference to the section on the Proxy Statement captioned "Proposal 2-Ratification of Appointment of Independent Accountants." 21 PART IV Item 15. Exhibits, Financial Statements Schedules -------------------------------------------------- (a) Listed below are all financial statements and exhibits filed as part of this report, and are incorporated by reference. 1. The consolidated balance sheets of Norwood Financial Corp. and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2004, together with the related notes and the report of independent registered public accounting firm of Beard Miller Company LLP, independent accountants. 2. Schedules omitted as they are not applicable. 3. Exhibits
3(i) Articles of Incorporation of Norwood Financial Corp.* 3(ii) Bylaws of Norwood Financial Corp.* 4.0 Specimen Stock Certificate of Norwood Financial Corp.* 10.1+ Amended Employment Agreement with William W.Davis, Jr. ** 10.2+ Amended Employment Agreement with Lewis J. Critelli ** 10.3+ Form of Change-in-Control Severance Agreement with seven key employees of the Bank** 10.4+ Consulting Agreement with Russell L. Ridd*** 10.5+ Norwood Financial Corp Stock Option Plan**** 10.6+ Salary Continuation Agreement between the Bank and William W. Davis, Jr.** 10.7+ Salary Continuation Agreement between the Bank and Lewis J. Critelli** 10.8+ Salary Continuation Agreement between the Bank and Edward C. Kasper** 10.9+ 1999 Directors Stock Compensation Plan** 10.10+ Salary Continuation Agreement between the Bank and Joseph A. Kneller***** 10.11+ Salary Continuation Agreement between the Bank and John H. Sanders***** 13 Annual Report to Stockholders for the fiscal year ended December 31, 2004 21 Subsidiaries of Norwood Financial Corp. (see "Item 1. Business -- General" and "Subsidiary Activity") 23 Consent of Independent Registered Public Accounting Firm 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of Sarbanes Oxley Act of 2002.
------------------------- + Management contract or compensatory plan or arrangement. 22 * Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No. 0-28366. ** Incorporated herein by reference into this document from the Exhibits to the Registrant's Form 10-K filed with the Commission on March 23, 2000, File No. 0-28366. *** Incorporated by reference into this document from the Exhibit to the Registrant's Form 10-K filed with the Commission on March 31, 1997, File No. 0-28366 **** Incorporated by reference into this document from the Exhibits to Form S-8 filed with the Commission on August 14, 1998, File No. 333-61487 ***** Incorporated by reference into this document from the identically numbered exhibits to the Registrant's Form 10-K filed with the Commission on March 22, 2004, File No. 0-28366. 23 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 21, 2005 By: /s/William W. Davis, Jr. -------------------------------- William W. Davis, Jr. President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 21, 2005 by the following persons on behalf of the Registrant and in the capacities indicated.
By: /s/William W. Davis, Jr. By: Lewis J. Critelli -------------------------------------- -------------------------------------------- William W. Davis, Jr. Lewis J. Critelli President, Chief Executive Officer Executive Vice President and Chief Financial Officer and Director (Principal Financial and Accounting (Principal Executive Officer) Officer) By: By: -------------------------------------- -------------------------------------------- Charles E. Case John E. Marshall Director Director By: /s/Daniel J. O'Neill By: /s/Dr. Kenneth A. Phillips -------------------------------------- -------------------------------------------- Daniel J. O'Neill Dr. Kenneth A. Phillips Director Director By: /s/Gary P. Rickard By: /s/Russell L. Ridd -------------------------------------- -------------------------------------------- Gary P. Rickard Russell L. Ridd Director Director By: By: /s/Richard L. Snyder -------------------------------------- -------------------------------------------- Ralph A. Matergia Richard L. Snyder Director Director
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