-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OY+CJRtsUw9iNvOYCmOi0cf+Su5dy397x/hYzuzq42ere5FcxBYuV0upZIqYfkWG JIpLIyC5ESm2ReFOa2WSOQ== 0000946275-98-000219.txt : 19980401 0000946275-98-000219.hdr.sgml : 19980401 ACCESSION NUMBER: 0000946275-98-000219 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28364 FILM NUMBER: 98583008 BUSINESS ADDRESS: STREET 1: 717 MAIN ST STREET 2: PO BOX 269 CITY: HONESDALE STATE: PA ZIP: 18431 BUSINESS PHONE: 7172531455 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December -------- 31, 1997, -------- [ ] 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. - -------------------------------------------------------------------------------- ( Exact Name of Registrant as specified in Its Charter) Pennsylvania 23-2828306 - --------------------------------------------- ------------------ (State or Other Jurisdiction of Incorporation I.R.S. Employer or Organization) Identification No. 717 Main Street, Honesdale, Pennsylvania 18431 - --------------------------------------------- ------------------ (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 -------------------------------------- (Title of Class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 16, 1998, there were 1,802,824 issued and 1,780,430 shares outstanding of the registrant's Common Stock. The Registrant's voting stock trades on the NASDAQ National Market under the symbol "NWFL." The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant's Common Stock was sold on March 19, 1998, was $44,192,000 ($32 per share based on 1,381,010 shares of Common Stock outstanding). DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year ended December 31, 1997. (Parts I, II, and IV) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders. (Part III) PART I Item 1. Business. General Norwood Financial Corp. (the "Company") is a Pennsylvania corporation organized in November 1995 at the direction of Wayne Bank ("Wayne Bank" or the "Bank") to facilitate the reorganization of the Bank into the holding company form of organization ("Reorganization"). On March 29, 1996, the Bank completed the Reorganization and became a wholly owned subsidiary of the Company. Prior to such date, the description of all financial information herein is that of the Bank. Wayne Bank is a Pennsylvania chartered commercial bank located in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne County Savings Bank. Wayne County Savings Bank changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank's deposits are currently insured by the Bank Insurance Fund ("BIF") as administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the Pennsylvania Department of Banking ("PDB") and the FDIC. The Bank is an independent community-oriented bank with six offices in Wayne County and two offices in Pike County. The Bank primarily serves the Pennsylvania counties of Wayne and Pike and to a much lesser extent, the counties of Lackawanna, Monroe and Susquehanna. These offices include two offices acquired from Meridian Bank as of March 23, 1996, one each in the counties of Wayne and Pike In addition, the Bank operates 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, 1997, the Bank had total assets, deposits, and stockholders equity of $262.4 million, $227.0 million, and $23.7 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 driving distance of the New York/Northern New Jersey Metropolitan area. The Bank is one of 17 financial institutions serving its immediate market area. The competition for deposit products comes from 11 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, 1997, the Bank had 104 full-time and 24 part-time employees. None of the Bank's employees are represented by a collective bargaining group. Lending Activities The Bank's loan products include loans for personal and business use. This includes mortgage lending to finance principal residence as well as "seasonal" or second home dwellings. The products include adjustable rate mortgages up to 30 years which are retained and serviced through the Bank, longer term fixed rate mortgage products are sold, servicing retained, in the secondary market through the Federal National Mortgage Association (Fannie Mae) or are held in the Bank's portfolio subject to certain internal guidelines. Fixed rate home equity loans are made on terms up to 180 months, as well as offering a home equity line of credit tied to prime rate. The Bank does a significant level of indirect dealer financing of automobiles, boats, and recreational vehicles through a network of over 60 dealers in Northeast Pennsylvania. In addition to automobile lending, the Bank operates an auto leasing program through its dealer network. Leasing activity was strong in 1997 with net growth in the portfolio of $16.8 million to total $33.9 million at December 31, 1997. The Company has slowed the growth for 1998 in limiting transactions with certain high volume dealers Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structure. 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. 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. While consumer lending, including indirect and leasing provide benefits to the Bank's asset/liability management program by reducing the Bank's exposure to interest rate changes, due to their generally shorter terms, and producing higher yields, such loans may entail additional credit risks compared to owner-occupied residential mortgage lending. However, the Bank believes that the higher yields and shorter terms compensate the Bank for the increased credit risk associated with such loans. Commercial lending including real-estate related entails significant additional risks when compared with one- to four-family residential lending 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 for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial 2 borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. In addition, due to the type and nature of the collateral, and, in some cases the absence of collateral, consumer lending generally involves more credit risk when compared with one- to four-family residential lending. Consumer lending collections are typically dependent on the borrower's continuing financial stability, and thus, are more likely to be adversely effected 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 often does not warrant further substantial collection efforts against the borrower and is usually turned over to a collection agency. Year 2000 Timely and accurate data processing is critical to the operation of the Company. Certain computer programs used by the Company may be impacted by the programming weakness regarding the year 2000. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the application year. Any of the Company's programs that have a time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failure or miscalculating. The Company has entered into a new seven year $2.1 million agreement with a data servicing provider for its core application systems. The conversion is planned to occur in the fourth quarter of 1998 and will address the year 2000 issues with testing to begin immediately thereafter. In addition, certain commercial customers could experience problems related to this issue. These problems could impact a customers ability to operate. This may negatively effect their cash flow and their ability to handle their debt service requirements. The Company is surveying its commercial customers to determine the risks associated with year 2000. 3 Types of Loans. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the dates indicated.
At December 31, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ----------- ---------- --------------- --------- $ % $ % $ % $ % $ % --- --- --- --- --- --- --- --- --- -- (Dollars in Thousands) Type of Loans: Commercial, Financial and Agricultural...................$ 26,589 14.2 $ 29,680 16.7 $33,891 22.0 $ 31,378 22.2 $31,421 23.0 Real Estate-construction.......... 2,046 1.1 1,602 0.9 1,380 0.9 3,480 2.5 1,748 1.3 Real Estate-residential........... 54,227 29.0 54,547 30.8 55,718 36.2 53,810 38.1 51,313 37.5 Real Estate-commercial............ 32,986 17.7 36,852 20.8 39,103 25.4 37,098 26.2 38,364 28.0 Leases to Individuals............. 33,877 18.1 17,048 9.6 --- -- --- -- --- -- Installment Loans to Individuals.. 37,082 19.9 37,503 21.2 23,800 15.5 15,543 11.0 13,948 10.2 -------- ----- -------- ----- ------- ----- -------- ----- ------- ----- Total Loans 186,807 100.0 177,232 100.0 153,892 100.0 141,309 100.0 136,794 100.0 Less unearned income.............. 1,167 2,611 1,798 608 799 Allowance for loan losses.............. 3,250 2,616 2,125 1,893 1,864 --------- -------- -------- -------- -------- Total loans, net.................$ 182,390 $172,005 $149,969 $138,808 $134,131 ========= ======== ======== ======== ========
4 Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for all categories of loans as of December 31, 1997. Scheduled repayments are reported in the maturity category in which payment is due.
Less than One to Over One Year Five Years Five Years Total Commercial, Financial and Agricultural $ 8,660 $ 17,134 $ 795 $ 26,589 Real Estate- Construction 2,046 --- --- 2,046 Residential 4,551 17,461 32,215 54,227 Commercial 6,186 14,256 12,544 32,986 Leases (net) 2,671 31,206 --- 33,877 Installment loans to individuals 9,400 27,682 --- 37,082 ------- -------- ------- -------- Total $33,514 $107,739 $45,554 $186,807 ======= ======== ======= ======== Loans with fixed-rate $20,622 $73,356 $9,779 $103,757 Loans with floating rates 12,892 34,383 35,775 83,050 ------- -------- ------- -------- Total $33,514 $107,739 $45,554 $186,807 ======= ======== ======= ========
5 Nonaccrual, Past Due and Restructured Loans. The following table sets forth information regarding non-accrual loans, other real estate owned ("OREO"), and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated and restructured loans. The Bank had no troubled debt restructurings as defined in Statement of Financial Accounting Standards No. 114, "Accounting by creditors for impairment of a loan."
At December 31, --------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) Loans accounted for on a non-accrual basis: Commercial and all other ................................. $ 963 $ 1,633 $ 1,572 $ 2,754 $ 3,276 Real estate .............................................. 1,112 1,790 2,205 2,175 2,631 Consumer ................................................. 33 28 48 -- -- ------- ------- ------- ------- ------- Total ...................................................... $ 2,108 $ 3,451 $ 3,825 $ 4,929 $ 5,907 ======= ======= ======= ======= ======= Accruing loans which are contractually past 90 days or more: Commercial and all other ................................ $ 44 $ 38 $ 55 $ 553 $ 609 Real estate ............................................. -- -- -- 2,716 2,061 Consumer ................................................ 23 4 -- 7 5 ------- ------- ------- ------- ------- Total ...................................................... $ 67 $ 42 $ 55 $ 3,276 $ 2,675 ======= ======= ======= ======= ======= Total non-performing loans ................................. $ 2,175 $ 3,493 3,880 $ 8,205 $ 8,582 Other real estate owned .................................... 537 2,283 1,944 $ 1,377 $ 1,715 ------- ------- ------- ------- ------- Total non-performing assets ................................ $ 2,712 $ 5,776 $ 5,824 $ 9,582 $10,297 ======= ======= ======= ======= ======= Total non-performing loans to total loans .................. 1.17% 2.00% 2.55% 5.83% 6.31% Total non-performing loans to total assets ................. .83 % 1.34% 1.79% 4.18% 4.43% Total non-performing assets to total assets ................ 1.03% 2.22% 2.68% 4.89% 5.32%
Potential Problem Loans. As of December 31, 1997, 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, 1997 and 1996 the recorded investment in loans considered impaired in accordance with Statement No. 114 and 118 were $2,334,000 and $2,877,000 respectively. 6 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated:
At December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Total loans receivable ..................................... $ 185,640 $ 174,621 $ 152,094 $ 140,701 $ 135,995 Average loans receivable ................................... 183,625 160,517 145,990 136,314 135,659 Allowance balances at beginning of period .................. $ 2,616 $ 2,125 $ 1,893 $ 1,864 $ 2,342 Charge-offs: Commercial and all other ................................ (380) (820) (448) (709) (767) Real estate ............................................. (119) (226) (353) (306) (587) Consumer ................................................ (264) (320) (123) (82) (79) Leases .................................................. (67) -- -- -- -- --------- --------- --------- --------- --------- Total ...................................................... (830) (1,366) (924) (1,097) (1,433) Recoveries: Commercial and all other ................................. 72 70 513 31 24 Real estate .............................................. 3 16 3 3 0 Consumer ................................................. 34 60 21 22 16 --------- --------- --------- --------- --------- Total ...................................................... 109 146 537 56 40 --------- --------- --------- --------- --------- Provisions charged to expense .............................. 1,355 1,710 619 1,070 915 --------- --------- --------- --------- --------- Allowance balance at end of period ......................... $ 3,250 $ 2,616 $ 2,125 $ 1,893 $ 1,864 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding ............................... 1.75% 1.50% 1.40% 1.35% 1.37% Net loans charged off as a percent of average loans outstanding ................................ .39% 0.76% 0.27% .76% 1.03%
7 Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated.
At December 31, 1997 1996 1995 1994 1993 ----------------- ---------------- ---------------- ----------------- ------------------- (Dollars in thousands) % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial, financial and agricultural $ 610 14.2% $ 871 16.7% $ 927 22.0% $ 793 22.2% $ 963 23.0% Real estate - construction ........... 15 1.1 38 0.9 14 0.9 29 2.5 19 1.3 Real estate - mortgage ............... 641 46.7 727 51.6 909 61.6 759 64.3 810 65.5 Installment loans to individuals ..... 276 19.9 260 21.2 155 15.5 87 11.0 72 10.2 Leases ............................... 169 18.1 85 9.6 -- -- -- -- -- -- Unallocated .......................... 1,539 -- 635 -- 120 -- 225 -- -- -- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total ........................... $3,250 100% $2,616 100.0% $2,125 100.0% $1,893 100.0% $1,864 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(1) Includes specific reserves for assets classified as loss. 8 Investment Activities General. The Company maintains a portfolio of investment securities consisting principally of obligations of the U.S. Government and its agencies and obligations of state, counties and municipalities including school districts. The Company considers its investment portfolio a source of earnings and liquidity. Securities Portfolio. Carrying values of securities at the dates indicated are as follows: At December 31 ------------------------------------ (Dollars in thousands) 1997 1996 1995 -------- ---------- -------- Securities: (carrying value) U.S. Treasury Securities................ $ 8,034 $ 3,994 $ 5,521 U.S. Government Agencies................................ 18,024 25,857 18,717 State and political subdivisions........................... 9,621 13,979 12,003 Corporate Notes and bonds............... --- 503 972 Mortgage-backed Securities.............. 18,961 11,359 9,028 Equity Securities....................... 2,891 2,019 2,640 ------- ------- ------- Total Securities $57,531 $57,711 $48,881 ======= ======= ======= Fair value of Securities.............................. $57,888 $57,946 $49,034 ======= ======= ======= 9 Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company's securities portfolio at December 31, 1997. 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 is based upon expected average lives rather than contractual terms. Equity securities with no stated maturity are classified as "one year or less."
After One through After Five through One Year or Less Five Years Ten Years After Ten Years Total Securities ----------------- ----------------- ------------------ ---------------- ------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average Value Yield % Value Yield % Value Yield % Value Yield Value Yield Yield % (Dollars in thousands) U.S. Treasury Securities .... $ 3,501 5.74 $ 4,533 5.93 $ --- -- $ -- -- $ 8,034 $ 8,034 5.85 U.S. Government Agencies .... -- -- 8,507 6.43 8,524 6.80 993 7.11 18,024 18,024 6.64 State and political ......... -- -- 752 6.66 977 7.30 7,892 8.57 9,621 9,978 subdivisions(3) .......... 8.30 Mortgage-backed Securities(1) 2,013 6.67 8,349 6.67 6,742 6.70 1,857 6.96 18,961 18,961 6.71 Equity Securities(2) ........ 2,891 3.92 -- -- -- -- -- -- -- 2,891 2,891 ------- ---- ------- ---- ------- ---- ------- ---- ------- ------- ---- Total Investment Securities $ 8,405 5.34 $22,141 6.43 $16,243 6.79 $10,742 8.16 $57,531 $57,888 6.69 ======= ==== ======= ==== ======= ==== ======= ==== ======= ======= ====
(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 $8,159 in securities classified as held-to-maturity with a market value of $8,516. 10 Deposit Activities. General. The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to 5 years for retail and IRA instruments. The Bank participates in Jumbo CD ($100,000 and over) markets with local municipalities and school districts. Other services the Bank offers it's customers on a limited basis include cash management, direct deposit and ACH activity. 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, 1997. (Dollars in thousands) Certificates of Deposits ------------ Maturity Period - --------------- Within three months.............................. $11,897 Over three through six months.................... 5,178 Over six through twelve months................... 3,652 Over twelve months............................... 2,597 ------- $23,324 ======= 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.
(Dollars in thousands) Year ended December 31, ------------------------------- 1997 1996 1995 -------- -------- --------- Short-term borrowings: Average balance outstanding ............................ $ 7,892 $ 4,902 $ 2,631 Maximum amount outstanding at any month-end during the period........................... 13,456 11,967 9,277 Weighted average interest rate during the period ............................................. 5.11% 5.04% 5.53% Total short-term borrowings at end of period ................................................. $ 4,990 $ 3,227 $ 2,031
11 Trust Activities The Bank operates a Trust Department which provides estate planning, investment management and financial planning to Bank customers. At December 31, 1997, the Bank acted as trustee for $47.2 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, 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 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. WTRO Properties Inc. is a wholly-owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank through WTRO plans to foreclose upon. At December 31, 1997, WTRO had no real estate assets. The Company expects WTRO to be active during 1998. Personnel As of December 31, 1997, the Company and the Bank had 104 full-time and 24 part-time employees. None of the Company employees are represented by a collective bargaining group. The Company believes that its relationship with its employees is good. Regulation Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Regulation of the Company - ------------------------- General. The Company is a bank holding company within the meaning of Pennsylvania Banking Code of 1965 and the Bank Holding Company Act of 1956 (the "Act"). As such, the Company is subject to regulation by the PDB and the Board of Governors of the Federal Reserve System ("FRB"). In addition, the FRB has enforcement authority over the Company and its non-bank subsidiaries which also permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for stockholders of the Company. A bank holding company is prohibited under the Act from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the FRB considers 12 whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh the possible adverse effects. As a bank holding company, the Company is required to file with the FRB an annual report and any additional information as the FRB may require pursuant to the Act. The FRB also examines the Company and its subsidiaries. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower. Furthermore, under amendments to the Act and regulations of the FRB, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or providing any property or services. Generally, this provision provides that a bank may not extend credit, lease or sell property, or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to the bank holding company, or to any other subsidiary of the bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, the bank holding company, or any subsidiary of the bank. Permitted Non-Banking Activities. The FRB permits bank holding companies to engage in non-banking activities or businesses so closely related to banking or to managing or controlling banks so as to be a proper incident thereto. FRB approval notice is required before the Company or a non-bank subsidiary of the Company may engage in any such activities or before such a business may be acquired. The FRB is authorized to differentiate between activities that are initiated by a bank holding company or a subsidiary and activities commenced by acquisition of a going concern. Regulatory Capital Requirements. The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The FRB capital adequacy guidelines are similar to those imposed on the Bank by the FDIC. See "Regulation of the Bank - Regulatory Capital Requirements." Commitments to Affiliated Depository Institutions. Under FRB policy, the Company will be expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy. The enforceability and precise scope of this policy is unclear, however, in light of recent judicial precedent; however, should the Bank require the support of additional capital resources, it should be anticipated that Company will be required to respond with any such resources available to it. Pennsylvania Regulation of Acquisition of the Company. The Company is organized under Pennsylvania law. Because the Company will not be a "registered company" under Pennsylvania law, the Company included in its Articles of Incorporation certain provisions governing mergers, takeovers, business combinations, and other similar transactions applicable to registered companies in Pennsylvania. Federal Securities Law. The Company Common Stock is registered under the 1934 Act and therefore, the Company is subject to the information, reporting, proxy solicitation, and insider trading restrictions and requirements under the 1934 Act. 13 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, 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. 14 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. 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, 1997. 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. The Bank paid $25,321 in FICO Bond assessments in 1997. Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and 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, 1997, the Bank exceeded all regulatory capital requirements and is classified as "well capitalized." 15 The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation, the highest- rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill, and certain purchased mortgage servicing rights and purchased credit and relationships. The FDIC also requires that state-chartered banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier I capital and supplementary (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. 16 The following table sets forth the Company's regulatory capital position as of December 31, 1997 as compared to the minimum capital requirements imposed by the FDIC. The Bank's ratios do not differ significantly from the Company's ratios presented below.
Percent of Amount Adjusted Assets ------------ --------------- (Dollars in Thousands) Leverage Capital................................... $ 21,920 8.34% Required......................................... 10,518 4.00% ------------ ---- Excess........................................... $ 11,402 4.34% ============ ==== Tier 1 Capital..................................... $ 21,920 11.27% Required......................................... 7,778 4.00% ------------ ---- Excess........................................... $ 14,142 7.27% ============ ==== Total Capital...................................... $ 24,361 12.53% Required......................................... 15,557 8.00% ------------ ---- Excess........................................... $ 8,804 4.53% ============ ====
The Bank is also subject to more stringent PDB guidelines. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC. The Bank was in compliance in both the FDIC and Pennsylvania capital requirements at December 31, 1997. 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. 17 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, NOW and Super NOW 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, 1997, the Bank met its reserve requirements. Item 2. Description of Properties - ----------------------------------- The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and seven additional branch offices. The Bank's total investment in office property and equipment is $12.7 million with a net book value of $7.3 million at December 31, 1997. 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. Item 4. Submission of Matters to a Vote of Security-Holders -------------------------------------------------- None. 18 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, 1997("Annual Report") on page 17 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 2, and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Conditions and Results - -------------------------------------------------------------------------------- of Operations - ------------- The above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on pages 9 through 18 and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------- Except as set forth below, the above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on pages 13 through 14 and is incorporated herein by reference. The table that follows sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, 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 Company's operations to changes in interest rates are reasonable. The interest rate sensitivity of the Company'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. 19 The Company has no off-balance sheet derivatives positions and its operating results are not subject to foreign currency exchange or commodity price risk. Based on its internal model, the Company believes its net interest income at risk with a 200 basis point change is within policy limits.
Less than 90 days One to Over (Dollars in thousands) 90 Days to 1 Year Five Years Five Years Total ----------------------------------------------------------- Interest Earning Assets Money market instruments $ 3,853 0 $ -- $ -- $ 3,853 -------- --------- -------- -------- -------- Loans & Leases Receivable 49,379 41,866 84,066 10,329 185,640 Securities 5,133 3,598 24,088 14,712 57,531 -------- --------- -------- -------- -------- Total Rate Sensitive Assets 58,365 55,464 108,154 25,041 247,024 Interest bearing Liabilities Time Deposits 28,524 47,560 32,936 -- 109,020 Interest-bearing checking Accounts 1,071 3,218 17,162 -- 21,451 Money Market and Savings Accounts 6,481 19,650 46,087 -- 72,218 Other Borrowed Funds 4,990 -- 2,000 -- 6,990 -------- --------- -------- -------- -------- Total Rate Sensitive Liabilities 41,066 70,428 98,185 -- 209,679 Incremental Gap $ 17,299 $(14,964) $ 9,969 $ 25,041 Cumulative Gap 17,299 2,335 12,304 37,345 Cumulative gap to total assets 6.57% .89% 4.67% 14.19%
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Consolidated Financial Statements of Norwood Financial Corp. and its subsidiaries, together with the report thereon by Beard & Company, Inc. appears in the Annual Report on pages 19 through 35 and are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- Form 8-K filed September 9, 1997. On September 9, 1997, the Board of Directors of Norwood Financial Corp., Honesdale, Pennsylvania, ("Corporation") unanimously determined that it would discontinue the engagement of S.R. Snodgrass, A.C. Wexford, Pennsylvania, ("SRS"), as its independent auditors and determined that the Corporation will engage Beard & Company, Inc., Certified Public Accountants, Reading Pennsylvania, ("Beard"), as the Corporation's auditors for the fiscal year ending December 31, 1997. The Corporation's decisions were effective September 9, 1997. 20 SRS audited the consolidated financial statements of the Corporation for the years ended December 31, 1996 and 1995. The termination of SRS was not due to any disagreements with SRS as to any matters of accounting policies, procedures or practices or with respect to financial statement disclosure. SRS's report on the financial statements for the most recent fiscal year of the Corporation did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. 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 28, 1998 (the "Proxy Statement"), which was filed with the Commission on March 31, 1998 is incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement at pages 7 through 11. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement at pages 2 through 4. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement at page 12. 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) Financial Statements of the Company are incorporated by reference to the following indicated pages of the Annual Report to shareholders. PAGE ---- Independent Auditors' Report................................... 19 Consolidated Balance Sheets as of December 31, 1997 and 1996... 20 Consolidated Statements of Income For the Years Ended December 31, 1997, 1996 and 1995............................. 21 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995......... 22 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............................. 23 Notes to Consolidated Financial Statements..................... 24-35 The remaining information appearing in the Annual Report is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Articles of Incorporation of Norwood Financial Corp.* 3.2 Bylaws of Norwood Financial Corp.* 4.0 Specimen Stock Certificate of Norwood Financial Corp.* 10.1 Employment Agreement with William W. Davis, Jr., President and Chief Executive Officer ** 10.2 Employment Agreement with Lewis J. Critelli, Chief Financial Officer ** 10.3 Form of Change-in-Control Severance Agreement with 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) 22 13.0 Annual Report to Stockholders for the fiscal year ended December 31, 1997 21.0 Subsidiary of the Registrant (see "Item 1. Business - General" and "-Subsidiary Activity" herein) 27.0 Financial Data Schedule*** (b) Reports on Form 8-K. On October 3, 1997, the Registrant filed an amendment to a current report on Form 8-K regarding its change in accountants (Item 7). On December 11, 1997, the Registrant filed a current report on Form 8-K regarding a two-for-one stock split in the form of a 100% stock dividend. - --------------------- * Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No. 28366. ** Incorporated herein by reference into this document from the Exhibits to the Registrant's Form 10-K filed with the Commission on March 31, 1997, File No. 0-28366. *** Only in electronic filing. 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 26, 1998 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 Senior Vice President and Chief Financial Officer Office and Director (Principal Financial and Accounting Officer) (Principal Executive Officer) Date: March 24, 1998 Date: March 26, 1998 By: /s/Charles E. Case By: /s/John E. Marshall Charles E. Case John E. Marshall Director Director Date: March 24, 1998 Date: March 24, 1998 By: /s/Daniel J. O'Neill By: /s/Dr. Kenneth A. Phillips Daniel J. O'Neill Dr. Kenneth A. Phillips Director Director Date: March 24, 1998 Date: March 24, 1998 By: Gary P. Rickard By: /s/Russell L. Ridd Gary P. Rikard Russell L. Ridd Director Director Date: March 24, 1998 Date: March 24, 1998 By: /s/Harold A. Shook By: /s/John J. Weidner Harold A. Shook John J. Weidner Director Director Date: March 24, 1998 Date: March 24, 1998
EX-13 2 EXHIBIT 13 1997 ANNUAL REPORT Norwood Financial Corp. Five Year Financial Summary
Summary of Selected Financial Data (Dollars in thousands, except per share data) At or for the years ended December 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- --------- -------- ---------- Summary of Operations Net interest income $ 11,064 $ 10,142 $ 8,927 $ 7,651 $ 7,097 Provision for loan losses 1,355 1,710 619 1,070 915 Gains on sale of securities 70 787 146 268 853 Gain on termination of pension plan 597 -- -- -- -- Other income 1,258 1,044 819 829 690 Other expense 7,860 7,923 6,819 5,935 5,450 -------- -------- --------- -------- -------- Income before income taxes 3,773 2,347 2,454 1,743 2,275 Federal income tax expense 1,067 468 652 391 573 -------- -------- --------- -------- -------- NET INCOME $ 2,706 $ 1,872 $ 1,802 $ 1,352 $ 1,702 ======== ======== ========= ======== ======== Basic and diluted earnings per share(1) (2) $ 1.63 $ 1.10 $ 1.01 $ 0.75 $ 0.95 Cash dividends declared per share(2) 0.44 0.42 0.39 0.38 0.38 Return on average assets 1.04% 0.78% 0.88% 0.69% 0.90% Return on average equity 11.92% 8.45% 8.17% 6.25% 8.55% Balances at Year-End Total assets $263,250 $260,572 $ 217,262 $196,108 $193,607 Total loans 185,640 174,621 152,094 140,701 135,995 Allowance for loan losses 3,250 2,616 2,125 1,893 1,864 Total deposits 226,754 229,462 187,299 168,487 166,053 Stockholders' equity 24,594 21,519 22,782 21,642 20,395 Book value per share $ 13.82 $ 12.10 $ 12.94 $ 12.02 $ 11.33 Stockholders' equity to total assets 9.34% 8.26% 10.49% 11.04% 10.53% Tier 1 Capital to risk-adjusted assets 11.27% 10.26% 13.93% 14.58% 14.06% Total Capital to risk adjusted assets 12.53% 11.51% 15.18% 15.83% 15.31% Allowance for loan losses to total loans 1.75% 1.50% 1.40% 1.35% 1.37% Non-Performing assets to total assets 1.03% 2.22% 2.68% 4.89% 5.32%
(1) The earnings per share amounts prior to 1997 have been restated as required to comply with SFAS No. 128, for further discussion of earnings per share and the impact of SFAS No. 128, see Note 1 to the consolidated financial statements. (2) Earnings and dividends per share have been adjusted to reflect the two-for-one stock split in the form of a 100% stock dividend in December 1997. 2 TO OUR SHAREHOLDERS... We are very pleased and proud to report to shareholders that all the goals set for 1997 were met and in some cases, surpassed. Net income for the year totaled $2,706,000. This represented a 44.6% increase over the $1,872,000 earned in 1996. Total non-performing assets were $2,712,000 at year end which represented a 47% reduction from year-end 1996. As a result, our earning asset ratio steadily improved over the course of 1997 and ended at 94.6% compared to 92.7% at the start of the year. Our loan and lease portfolio grew by $11 million and ended the year at $185.6 million. Net charge-offs, while still out of line with our peer group, declined from $1,219,000 to $721,000, but more importantly we were able to increase our allowance for loan loss to an all time high of $3,250,000, which represents 1.75% of loans, compared to $2,616,000 or 1.50% a year ago. Another indication of improving loan quality is that loan delinquency showed a downward trend throughout 1997 giving another clear indication all weak credits have been recognized. Operating expenses for 1997 declined by .8% compared to 1996. Our efficiency ratio, which measures how effectively income is generated improved to 62% from 64.6% in 1996. Finally, our return on assets was 1.04% compared to .78% in 1996 and return on equity increased to 11.92% versus 8.45% the prior year. As a result of this performance, the Board of Directors in December felt it appropriate to raise your quarterly cash dividend by 14.3%. Also at that December meeting, a 2-for-1 stock split in the form of a 100% stock dividend was declared which was payable February 2nd to all shareholders who owned shares as of the January 15th record date. The market accepted the news in a very positive fashion and your shares appreciated 24% as of year end. During 1997 a number of new products and services were offered to our customer base. We introduced the Wayne Bank VISA check card, an Investor Account, our First Place Checking Account Program, a Business Equity Line of Credit and the Wayne Bank Platinum VISA Credit Card. Over the course of 1997 a number of personnel changes were made which we feel strengthen the Company over the long term. During the third quarter we hired Wayne D. Wilcha, CPA as Vice President and Trust Officer to head our Trust Department. Wayne brings to us 5 years of public accounting experience and seven years of trust tax and trust administration experience. We also hired Joseph A. Kneller as Vice President and Information Systems Manager. Joe brings over 30 years of experience in bank operating systems and technology to the management team. During the fourth quarter, we restructured the organization chart and promoted Edward C. Kasper to Senior Vice President and Senior Loan Officer to head the Corporate Bank. John H. Sanders was promoted to Senior Vice President and head of the Retail Bank. We should also note Fred Marsh, Vice President and Cashier retired on December 31st, after a thirty year career at Wayne Bank. We wish Fred all the best in his retirement and thank him for his dedication to the Bank. He will be missed. During the second quarter, we completed the renovation of our new Installment Loan/Dealer Financial Center on the second floor of our administrative offices. This new unit improved operating efficiencies and allows us to better serve our consumer loan customers as we have diversified our loan portfolio over the past year and placed more emphasis in this area. Also during the quarter, we established an Internet Website. You can visit us at-www.waynebank.com. In closing, we feel we are in a strong position to face the challenges and opportunities we will confront in 1998. It is clearly evident that we must grow our balance sheet if we are to continue the positive earnings trend we enjoyed over the past year. During 1998, a major portion of time and effort is also going to be devoted to updating all our computer systems to make certain we are year 2000 compliant. We expect conversions to take place early in the fourth quarter of the year. It will be a true test to allocate the appropriate amount of time in training all employees with the new system, while not taking our eyes off customer focus. We will also introduce a discount brokerage service in the second quarter of the year so our customers can do all their financial transactions at one location. And finally, in order to expand marketability and enhance shareholder value, Norwood Financial Corp. Common Stock (NWFL) is now listed on the NASDAQ National Market. The Board, Management and Staff are committed to providing excellent customer service and enhancing the quality of life in the communities we serve. We sincerely appreciate your confidence and support /s/ William W. Davis, Jr. /s/ Russell Z. Ridd 3 Retail Banking Wayne Bank does an exceptional job of servicing its customers through eight community offices and 10 automated teller machines located in Wayne and Pike counties. Our product line is continuously enhanced to offer our customers the best in value added services. In September, we proudly introduced our First Place Checking Plus account. This account has over 20 features which truly make it the "Best in Checking". A significant number of current customers have taken advantage of this product, as well as many new additions to the Wayne Bank family. In April, we introduced the Wayne Bank Visa Check Card, which allows our customers to access their checking account not only at automated teller machines, but also when paying for purchases made at over 12 million business locations worldwide. Our customers can also qualify for the Wayne Bank Visa Platinum Plus card which offers credit lines up to $100,000. The Investor Account, which offers interest rates comparable to broker cash management accounts attracted close to $6 million in deposits. Throughout 1997, the Bank offered a series of retail loan promotions. These included special mortgage programs, a new home equity line of credit tied to prime rate and an unsecured installment loan holiday cash offer. In 1998, we will implement a new "Loan By Mail" program to increase convenience. In May, we opened our new Centralized Consumer Loan Center which supports our branches in servicing our customers. This new center improves loan turnaround time and processes applications with new technology which prepares all the loan documents. Our Centralized Loan Center also supports our indirect automobile lending and leasing product. We offer a choice of financing in five counties through sixty automobile dealers. Our auto leasing program experienced significant growth in 1997 and has over 1,500 customers. In addition to automobiles, we are one of the leading marine and recreational lenders in our market area. 4 Corporate Banking Wayne Bank specializes in meeting the needs of the local business community. We recognize that each business is unique with its own individual character. Our commercial lenders are experts in working with the entrepreneur in assisting to grow their business. We understand that the small business owner needs a simple, convenient credit product, and with that in mind, we designed our new "Business Equity Line of Credit". This new line offers flexible payment terms, with no annual 30 day payout, renewal every five years and access to the line by simply writing a check. Wayne Bank participates in the Small Business Administration Guaranteed Loan Program. This is geared for start-up companies that may not have the financial track record to qualify for other loan products. We also offer construction and permanent financing for commercial real estate projects. We've financed many area businesses with a variety of terms and flexible payment schedules individualized for the customer. Our floor plan financing has assisted local dealers in managing their inventory. The Bank's deposit accounts for small business offer an effective manner to manage funds. In addition to traditional bank accounts, we offer cash management services for the most efficient use of funds. Wayne Bank is proud of its record in helping the local economy by assisting the business community. We were recently recognized by the United States Small Business Administration as a leader in small business lending in Pennsylvania. 5 Trust Services The Trust Department offers a full range of trust and asset management services. The professional staff offers expertise in customized estate and tax planning. As executor of an estate we administer all the financial affairs of the estate as specified. In order to meet the unique needs of each client to reach their financial goals, we offer both investment advisory management services in which we would provide investment advice and custodial service in which the client makes their own investment decisions and we would supply the record keeping. For trust management services, our staff personally carries out the provisions of individualized trusts. Norwood Investment Corp. The ability to offer customers many investment options is a major goal. To that end, we formed Norwood Investment Corp. We are able to provide our customers with alternative investments, including access to many different mutual funds and fixed and variable rate annuities. During 1998 we plan to expand the product line to include discount brokerage services. 6 Enhanced Customer Service Through Technology We believe investments in technology are key to improving customer service. During 1997, through technology we improved our process for new accounts which allows our customer service representative more time to talk with our customers. We centralized our consumer lending function which provides our branch managers more opportunities to meet with their customers. Our check imaging technology and "Simplify Your Life" statement system which we introduced in 1996, has greatly improved our ability to research items for our customers. Our investment in technology will continue in 1998. During the year we will be implementing new computer systems to improve our products and services. Each investment is measured against the criteria of "How will this allow us to better meet our customers' needs?" Community Involvement As a community bank, we are committed to the growth of the markets which we serve. Wayne Bank Directors, Officers and Staff have a rich tradition of being looked upon as community leaders and that continues today. Giving something back to the community through financial support is only a part of our involvement in the community. Throughout the Bank, we have a commitment to get involved, make a difference and be part of the solution. During 1997, we took an active role in programs which work to bring new jobs to our area, educate our youth, preserve our local history, and conserve the environment. Our sponsorship of local artists and our participation in various music festivals and county fairs continued in 1997. We are proud of our communities and dedicated to helping them prosper in all ways. 7 OUR BOARD OF DIRECTORS: Administrative Offices: 717 Main Street P.O. Box 269 Honesdale, PA 18431 Community Offices: 717 Main Street Honesdale, PA 18431 254 Willow Avenue Honesdale, PA 18431 Belmont & Water Streets Waymart, PA 18472 Route 6 East Hawley, PA 18428 111 West Harford Street Milford, PA 18337 Weis Market, Route 590 Hamlin, PA 18427 Richardson Avenue Shohola, PA 18458 Route 370 & Lake Como Road Lakewood, PA 18439 Automated Teller Machine Only: Grand Union Matamoras/Westfall Mr. B's Minit Mart Greeley The Hideout Lake Ariel Our Board of Directors: Russell L. Ridd Chairman of the Board William W. Davis, Jr. President & Chief Executive Officer John E. Marshall Secretary of the Board President, Marshall Machinery, Inc. Charles E. Case Vice President, C.R. Case & Sons, Inc. Harold A. Shook President, Shooky's Distributor Daniel J. O'Neill Superintendent, Wayne Highlands School District Dr. Kenneth A. Phillips Optometrist Gary P. Rickard Partner, Clearfield Farms John J. Weidner President, Weidner Companies 8 MANAGEMENT'S DISCUSSION AND ANALYSIS Introduction This management's discussion and analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations for Norwood Financial Corp. (The Company) and its subsidiary Wayne Bank (the Bank) for the years ended December 31, 1997, 1996 and 1995. This section should be read in conjunction with the consolidated financial statements and related footnotes. Certain amounts have been adjusted to reflect a two-for-one stock split in the form of a 100% stock dividend declared on December 9, 1997 and payable February 2, 1998. Results of Operations - Summary Net income for the Company for the year 1997 was $2,706,000 compared to $1,872,000 for the year 1996. This represents an increase of $834,000 or 44.6% over prior year. Basic and diluted earnings per share for 1997 were $1.63 increasing from $1.10 in 1996. Return on average assets and return on average equity showed similar improvement at 1.04% and 11.92% respectively in 1997 compared to .78% and 8.45% respectively in 1996. The increase in earnings was principally attributable to growth in net interest income, reduction in the provision for loan losses and higher levels of fee income. Net interest income on a fully taxable equivalent basis (fte) totaled $11,419,000 for 1997, an increase of $841,000 or 8% from 1996. The improvement in net interest income was due to the $22.5 million growth in average earning assets during 1997. The Company also made significant progress in reducing its level of non-performing loans during 1997, which totaled $2,175,000 at December 31, 1997, a decrease of 37.7% from year-end 1996. In addition, net charge-offs for 1997 totaled $721,000, down sharply from $1,219,000 in 1996. As a result, the Company reduced its provision for loan losses to $1,355,000 in 1997 compared to $1,710,000 in 1996. Fee based income for 1997 was $1,258,000 an increase of $214,000 or 20.5% over 1996. During 1997, the Company completed the modernization of its employee benefit plans and recorded a non-recurring gain on the termination of the defined benefit pension plan of $597,000, which was $343,000 after related taxes. Gains on sales of securities were down significantly in 1997 at $70,000 compared to $787,000 in 1996. During 1996, the Company took advantage of the then current stock market conditions to sell a portion of its portfolio of equity holdings in other financial institutions. Operating expenses decreased $62,000 from 1996 and totaled $7,861,000. Operating expenses were favorably impacted by the lower level of other real estate costs and losses, less legal and other professional fees. Net income for the Company for the year 1996 was $1,872,000 compared to $1,802,000 for the year 1995. Basic and diluted earnings per share for 1996 were $1.10 increasing from $1.01 in 1995. Return on average assets and return on average equity were .78% and 8.45%, respectively for 1996 compared to .88% and 8.15%, respectively, in 1995. Earnings for the year were favorably impacted by the increase in net interest income, higher levels of fee income and gains on securities sales. During 1996 the Company incurred a higher provision for loan losses, expenses associated with other real estate and costs of three branch offices acquired from Meridian Bank. Net interest income (fte) of $10,578,000 for the year 1996 showed an increase of $1,454,000 or 15.9% principally due to the higher level of loans. The Company took aggressive [GRAPHIC OMITTED] [GRAPHIC OMITTED] 9 action to bolster its allowance for loan losses and reduce its level of non-performing loans and assets in 1996. This resulted in a provision for loan losses of $1,710,000 in 1996 compared to $619,000 in 1995. Fee income improved in 1996 with higher levels of service charges on deposits and trust fees. Operating expenses of $7,923,000 increased $1,104,000, or 16.2%. Increases were principally attributable to three new branch offices purchased from Meridian Bank and accounted for under the purchase method of accounting, implementation of an auto leasing product and costs associated with resolving non-performing assets. Operating expenses were favorably impacted by lower Federal Deposit Insurance Corporation (FDIC) assessment factor in 1996, resulting in a decrease in premiums from $220,000 for the year-ended December 31, 1995 to $2,000 for the year ended December 31, 1996. During 1996, the Company took advantage of current stock market conditions to sell a portion of its portfolio of stock holdings in other financial institutions at a gain on sale of $828,000. Total net gains on securities sales were $787,000 in 1996 compared to $146,000 in 1995. FINANCIAL CONDITION Total Assets Total assets at December 31, 1997 were $263.3 million compared to $260.6 million at year-end 1996. An increase in loans of $11.0 million to $185.6 million was principally funded by growth in core deposits of $4.9 million, increased capital of $3.1 million and cash flow from maturities of short-term investments. Total balance sheet growth was constrained by the level of total deposit growth. As a result of the Company utilizing other funding sources, time deposits greater than $100,000 decreased $5.7 million to $23.3 million at year-end 1997 which was attributable to a lower level of school district time deposits. Core retail deposits increased $4.9 million during 1997. Loans Receivable Loans receivable represent the largest percentage of the Company's earning assets. At December 31, 1997 total loan and lease outstandings were $185.6 million, an increase of $11 million or 6.3% over 1996. Loan growth was principally in retail lending centered in home equity financings, indirect automobile lending and auto leasing, which have increased $3 million, $3.2 million and $16.8 million respectively. Residential real estate lending totaled $40.0 million at year-end which is a decrease of $3.1 million from prior year. This decrease represents pre-payments and refinancings in the adjustable rate mortgage portfolio as fixed rate products have become more favorable during 1997. The Company sells the majority of its fixed rate residential loan production and had total fixed rate mortgages of $3.1 million at year-end with an additional $2.4 million sold in the secondary market during the year. The Company services $12.5 million of mortgage loans that have been sold in the secondary market. Commercial loans consist principally of loans made to small businesses within the Company's market and are usually secured by real estate and other assets of the borrower. Commercial and commercial real estate loans totaled $59.6 million at year-end 1997 compared to $66.5 million in 1996. The Company continued its shift in loan mix to a higher percentage of consumer credits, which represented 45.4% of the portfolio; residential real estate, 22.1% and commercial of 32.5% in 1997 compared to 37.2% and 24.7% and 38.1% respectively in 1996. For the year 1997, total loans averaged $183.6 million with an fte yield of 8.83% compared to $160.5 million and 9.08% during 1996. The yield on loans decreased principally due to a change in the loan mix towards consumer credits which generally have yields lower than commercial loans. Total interest income on loans was $16,205,000 on an fte basis which is an increase of 11.2% over 1996. [GRAPHIC OMITTED] 10 Non-Performing Assets and Allowance for Loan Losses Non-performing assets consist of non-performing loans and real estate acquired through foreclosure which is held for sale. Loans are placed on non-accrual status when management believes that a borrower's financial condition is such that collection of principal and interest is doubtful. Commercial and real estate related loans are generally placed on non-accrual when interest is 90 days delinquent. The Company, during 1997, continued to make progress in reducing its level of non-performing loans. At December 31, 1997, non-performing loans totaled $2,175,000 and represented 1.17% of total loans and leases compared to $3,493,000 and 2.00% at year-end 1996. Two credit relationships represent $1,067,000 or 49.1% of total non-performing loans at December 31, 1997. The Company is taking aggressive action to resolve these two situations. Total non-performing assets which includes other real estate totaled $2,712,000 and represented 1.04% of total assets down significantly from $5,776,000 and 2.22% at December 31, 1996. At year-end other real estate was $537,000 reflecting a decrease of $1,745,000 from the prior year principally due to sales of $1,975,000. Net losses resulting from these sales totalled $111,000 in 1997. The allowance for loan losses totaled $3,250,000 at year-end 1997 and represented 1.75% of total loans compared to $2,616,000 or 1.50% at year-end 1996. Net charge-offs for 1997 were $721,000 down significantly from $1,219,000 in 1996. The decrease in charge-offs was principally due to lower level of non-performing loans in 1997. With less charge-offs, the Company reduced its provision for loan losses to $1,355,000 from $1,710,000 in 1996. With a lower level of non-performing loans and higher allowance for loan losses, the coverage ratio of allowance for loan losses to non-performing loans improved to 149.5% in 1997 from 74.9% in 1996. The Company's loan review process assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes a review of the risks inherent in the loan portfolio. It includes a credit review and gives consideration to areas of exposure such as concentration of credit in specific industries, economic and industry conditions, trends in delinquencies, collections and collateral value coverage. General reserve percentages are identified by loan type and credit grading and allocated accordingly. Larger credit exposures are analyzed individually. Management considers the allowance for loan losses at December 31, 1997 adequate based on the loan mix and level of classifications. The following table sets forth information with respect to the Company's allowance for loan losses at the dates indicated: (in thousands)
At December 31 ------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Allowance balance at beginning of period $ 2,616 $ 2,125 $ 1,893 $ 1,864 $ 2,342 Charge-Offs: Commercial and all other (380) (820) (448) (709) (767) Real Estate (119) (226) (353) (306) (587) Installment (264) (320) (123) (82) (79) Lease Financing (67) -- -- -- -- ------- ------- ------- ------- ------- Total (830) (1,366) (924) (1,097) (1,433) ------- ------- ------- ------- ------- Recoveries: Commercial and all other 72 71 513 31 24 Real Estate 3 16 3 3 -- Installment 34 60 21 22 16 ------- ------- ------- ------- ------- Total 109 147 537 56 40 ------- ------- ------- ------- ------- Provision expense 1,355 1,710 619 1,070 915 ------- ------- ------- ------- ------- Allowance balance at end of period $ 3,250 $ 2,616 $ 2,125 $ 1,893 $ 1,864 ======= ======= ======= ======= ======= Allowance for loan losses as a percent of total loans outstanding 1.75% 1.50% 1.40% 1.35% 1.37% Net loans charged off as a percent of average loans outstanding 0.39% 0.76% 0.27% 0.76% 1.03% Allowance for loan losses as a percent of non-performing loans 149.4% 74.9% 54.6% 23.1% 21.7%
11 The following table sets forth information regarding non-performing assets. The Bank had no troubled debt restructurings as defined in FAS No. 114. As of December 31, 1997, there were no loans not previously discussed where known information about possible credit problems of borrowers cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.
At December 31 ---------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- -------- (In Thousands) Loans accounted for on a non-accrual basis: Commercial and all other $ 963 $ 1,633 $ 1,572 $ 2,754 $ 3,276 Real estate 1,112 1,790 2,205 2,175 2,631 Consumer 33 28 48 -- -- ------- ------- ------- ------- ------- Total $ 2,108 $ 3,451 $ 3,825 $ 4,929 $ 5,907 ------- ------- ------- ------- ------- Accruing loans which are contractually past due 90 days or more: Commercial and all other $ 44 $ 38 $ 55 $ 553 $ 609 Real estat -- -- -- 2,716 2,061 Consumer 23 4 -- 7 5 ------- ------- ------- ------- ------- Total 67 $ 42 $ 55 $ 3,276 $ 2,675 ======= ======= ======= ======= ======= Total non-performing loans $ 2,175 $ 3,493 $ 3,880 $ 8,205 $ 8,582 Other real estate owned 537 2,283 1,944 1,377 1,715 ------- ------- ------- ------- ------- Total non-performing assets $ 2,712 $ 5,776 $ 5,824 $ 9,582 $10,297 ======= ======= ======= ======= ======= Total non-performing loans to total loans 1.17% 2.00% 2.55% 5.83% 6.31% Total non-performing loans to total assets .83% 1.34% 1.79% 4.18% 4.43% Total non-performing assets to total assets 1.03% 2.22% 2.68% 4.89% 5.32%
Securities The securities portfolio consists principally of U.S. Government agencies, including mortgage backed securities, U.S. Treasury securities and obligations of state and political subdivisions. In accordance with Statement of Financial Accounting Standard #115 "Accounting for Certain Investments in Debt and Equity Securities" the Company classifies its investments into two categories: held-to-maturity and available-for sale. The Company does not have a trading account. Securities classified as held-to-maturity are those in which the Company has the ability and the intent to hold until contractual maturity. At December 31, 1997, this account totaled $8,159,000 and consisted of longer term municipal obligations. Securities classified as available-for-sale are eligible to be sold due to liquidity needs or changes in interest rates. These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded as an adjustment to capital. At December 31, 1997, $49,372,000 in securities were so classified and carried at their fair value. At December 31, 1997, the Company's securities portfolio totaled $57,531,000 with U.S. Government agencies representing 31.3%; mortgage-backed securities, 33.0%; municipal obligations, 16.7%; U.S. Treasuries 14.0% and equity securities of 5.0%. At December 31, 1997, the portfolio contained no collateralized mortgage obligations, structured notes, step-up bonds and no off-balance sheet derivatives were in use. The portfolio totaled $57,711,000 at year-end 1996. The Company took actions to shorten the average repricing term of the portfolio during 1997. This decision was based on a change in the mix of the loan portfolio towards a higher percentage of fixed rate loans. To offset the increase in fixed loans, the investment portfolio was restructured to reprice in a shorter time interval. The average repricing term was 5.4 years at December 31, 1997, down from 6.7 years in 1996. The Company sold $9.4 million of longer term municipals, mortgage-backed securities and U.S. Government agencies and redeployed the proceeds into shorter-term U.S. Treasuries, adjustable rate and balloon mortgage-backed securities. With a shorter repricing term and with the lower rate interest environment, the fte yield on the portfolio decreased to 6.85% from 7.06% in 1996. At December 31, 1997, the Company had $4.0 million of short-term CDs with the Federal Home Loan Bank all of which mature prior to March 31, 1998. These deposits represent a substitute to Federal Funds sold and offered slightly higher yields. 12 Deposits Total deposits at December 31, 1997 were $226.8 million compared to $229.5 million at year-end 1996. The decrease in deposits was principally due to a lower level of time deposits over $100,000 and the use of cash management sweep accounts by certain large balance demand deposit account customers. Time deposits over $100,000 which consist principally of school district and other public funds with maturities generally less than one year, were $23.3 million decreasing from $28.9 million at year-end 1996. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand and security portfolio structure. In addition to demand deposits of $24.1 million the company has $2.7 million of cash management accounts which represent customers excess funds invested in overnight repurchase agreements. Core retail deposits increased $4.9 million from the prior year. This increase was principally in money market demand accounts and interest-bearing checking accounts. Market Risk Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates. Net interest income, which is the primary source of the Company's earnings, is impacted by changes in interest rates and relationship of different interest rates. To manage the impact of the rate changes the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. ALCO monitors these repricing characteristics and identifies strategies; including management of liability costs and maturities, structure of the securities portfolio, and various lending activities to insulate net interest income from the effects of changes in interest rates. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. At December 31, 1997, the level of net interest income at risk in a 200 basis points increase or decrease in interest rates was within the policy limits. Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between interest-sensitive assets and interest-sensitive liabilities. An asset or liability is considered interest-sensitive if the rate it yields is subject to change or if it produces a cash-flow in a given period which must be redeployed by the Company. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals. At December 31, 1997, the Bank had a positive 30 day gap position of $22.7 million. A positive gap means that interest-sensitive assets are higher than interest-sensitive liabilities at the time interval. This would indicate that in a declining rate environment, the yield on earning assets would decrease faster than the cost of interest-bearing liabilities in the 30 day time frame. This risk is managed by ALCO strategies, including securities portfolio structure, pricing of deposit liabilities, loan pricing and structure of fixed and variable rate products. The Company analyzes and measures the time periods in which interest-earning assets and interest-bearing liabilities will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. 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 13 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. Finally, the ability of borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. The operating results of the Company are not subject to foreign currency exchange or commodity price risk. Liquidity Maintenance of liquidity is coordinated by ALCO. Liquidity can be viewed as the ability to fund customers borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company's primary sources of liquidity include deposit generation, asset maturities and cash flow from loans and securities. At December 31, 1997, the Company had cash and cash equivalents of $10.9 million in the form of cash, due from banks and interest bearing deposits with other institutions. In addition, the Company had total securities available for sale of $49.4 million which could be used for liquidity needs. This totals $59.3 million and represents 22.5% of total assets. The Company also monitors other liquidity measures all of which were within policy guidelines at December 31, 1997. The Company believes its liquidity position is adequate. The Company's primary source of liquidity is its ability to generate core deposits. This has been a consistent source of funding and has been enhanced by the acquisition and the opening of three new offices since 1994. During 1997, growth in core deposits of $4.9 million funded 45% of loan growth. The remaining growth was funded by a $3.1 million increase in equity and the use of cash flow from maturities of short-term investments. The Company also maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support liquidity needs. The short-term borrowing capacity from the FHLB was in excess of $53 million. At year-end 1997 the Company had a $2 million borrowing from the FHLB with a scheduled maturity in December 1999. Results of Operations Net Interest Income Net interest income is the most significant source of revenue for the Company and is the difference between income earned on loans and securities and interest paid on deposits and other borrowings. For the year-ended December 31, 1997 net interest income on a fully taxable basis (fte) was $11,419,000 an increase of $841,000 or 8% over 1996. The resultant fte net interest spread and net interest margin for the year 1997 were 4.10% and 4.70% respectively compared to 4.24% and 4.80% respectively in 1996. Total fte interest income for 1997 was $20,212,000, an increase of $1,522,000 or 8.1% from the prior year. As the earning asset yield declined 15 basis points to 8.33% from 8.48% in 1996, this increase in interest income was the result of a $22.5 million increase in average earning assets. Interest expense totaled $8,793,000 for 1997, an increase of $681,000 or 8.4% from 1996. The cost of interest bearing liabilities was 4.23% compared to 4.24% in the prior year. Net interest margin, which is a measurement of net return on interest-earning assets, declined 10 basis points to 4.70% principally due to lower yields on earning assets. However, this was partially offset by a higher percentage of average earning assets of 93.3% in 1997 compared to 91.9% for 1996. Interest income earned on loan receivables totaled $16,198,000 with a yield of 8.83% in 1997 compared to $14,558,000 with a yield of 9.08% in 1996. The decrease in yield was principally due to shift in loan mix with increases in lower yielding indirect automobile loans and automobile leases and decreases in higher yielding commercial loans. Average loans increased $23.1 million to $183.6 million. [GRAPHIC OMITTED] 14 Loans and leases represented 75.6% of earning assets in 1997 increasing from 72.9% in 1996. Total securities averaged $55.9 million in 1997 and with an fte interest income of $3,826,000 and yield of 6.85% compared to $54.6 million, $3,855,000 and 7.06% respectively in 1996. The decrease in yield was principally due to shortening of the average repricing term in 1997 and the lower interest rate environment. Interest-bearing deposits averaged $197.7 million increasing $13.8 million from average 1996. The average cost for 1997 was 4.14% compared to 4.16% in 1996. Decreases in costs of transaction and savings accounts were partially offset by an increase in the percentage of time deposits which represented 56.4% of the total interest bearing deposits compared to 52% in 1996. Short-term borrowings averaged $7.7 million at an average cost of 4.84% compared to $4.9 million at 5.03% in 1996. For the year-ended December 31, 1996 fte net interest income was $10,578,000 an increase of $1,455,000 over 1995. The resultant fte net interest spread and net interest margin for the year 1996 were 4.25% and 4.80% respectively compared to 4.16% and 4.82% respectively in 1995. Total fte interest income for 1996 was $18,690,000 an increase of $2,671,000 or 16.7% over 1995. The increase was principally due to growth in earning assets of $30.8 million, or 16.3%, with a yield of 8.48% in 1996 compared to 8.46% in 1995. A decrease in yield on loans to 9.08% from 9.18% was offset by a higher yielding securities portfolio. The yield on loans declined due to a lower prime rate environment and a change in the mix of the loan portfolio. On average, loans receivable increased $14.5 million or 10%, with growth principally in lower yielding indirect automobile lending and auto leasing. The total securities portfolio averaged $54.6 million in 1996 compared to $34.0 million in 1995. The increase reflects the deployment of the deposits acquired from the Meridian branches into the investment portfolio. The yield on the portfolio improved to 7.06% from 6.09% principally due to an increase in higher yielding municipal bonds and lengthening of maturities. Interest-bearing deposits increased $29.1 million on average in 1996. The costs of these deposits decreased to 4.16% in 1996 from 4.21% in 1995. The average cost of all categories of deposits decreased. This decrease was partially offset by a change in the deposit mix as higher costing time deposits represented 52% of total interest bearing deposits in 1996 compared to 50.1% in 1995. Other borrowed funds averaged $4.9 million in 1996 at a rate of 5.03% compared to $2.6 million and 5.49% in 1995. Total interest expense for 1996 was $8,112,000 an increase of $1,216,000 or 17.6% with cost of 4.24% in 1996 and 4.30% in 1995. Other Income Other income excluding the non-recurring gain on the termination of the pension plan and gains on sales of securities totaled $1,258,000, an increase of $214,000 or 20.5% over 1996. The increase was principally due to a higher level of service charges and fees. In 1997, the Company instituted an ATM surcharge on non-bank customers which totaled $89,000. The Wayne Bank VISA check card introduced in April 1997 provided $17,000 of income. Sales of mutual funds and annuities through Norwood Investment Corp. totaled $75,000 in 1997 on product sold of $2.2 million increasing from revenues of $32,000 in 1996. During 1997, the Company completed its modernization of the employee benefit plans and recognized a gain on the termination of the Company's defined benefit pension plan of $597,000 which was $343,000 after taxes. Securities gains totaled $70,000 down significantly from $787,000 in 1996. Other income excluding securities gains was $1,044,000 for 1996, an increase of $225,000 over 1995. All categories of fee-based income reflected improvement over 1995. Service charges and fees of $709,000 increased $142,000 due to an increase in the deposit fee schedule in 1996 and increase in volume. Trust fees likewise were increased in 1996 and totaled $169,000 compared to $124,000 in 1995. For 1996 income from the sale of mutual funds and annuities through Norwood Investment Corp totaled $32,000 compared to $14,000 in 1995. 15 Other Expenses Other expenses totaled $7,861,000 for 1997 a decrease of $62,000 from 1996. Salaries and benefits which represent 46.3% of total expenses were $3,639,000, a decrease of $143,000 from 1996. This was principally due to lower level of full-time equivalent employees and lower costs related to the 401(k) plan. Expenses associated with other real estate were $269,000 declining from $516,000 in 1996 due to less losses realized on property sales in 1997 and lower other expenses. Occupancy and equipment expenses increased $77,000 and $90,000 respectively due to a full year impact of Meridian branches acquired in 1996 and computer equipment installed in 1996. Professional fees declined to $323,000 from $445,000 due to lower legal expenses related to problem loans of $23,000 and other legal fees decreased $35,000 due to expenses incurred in 1996 related to the holding company formation and initial Securities and Exchange Commission registration. All other expenses increased $291,000 or 18% principally due to increased costs related to auto leasing volume of $103,000 and increased amortization of intangible assets incurred with the Meridian branches of $175,000. Total other expenses for 1996 were $7,923,000 compared to $6,819,000 in 1995. Expenses for 1996 were impacted by the acquisition of the Meridian branches which accounted for $475,000 of the increase, in addition costs associated with non-performing assets increased in 1996 as other real estate costs totaled $516,000 compared to $416,000 in 1995. The Company incurred legal fees of $173,000 related to problem loans compared to $144,000 in 1995. The Company also had start-up expenses associated with its auto leasing product and a full year of staffing its indirect lending center of $175,000. There were additional legal and consulting fees related to formation of the holding company, initial registration to become a public company and changes to employee benefit plans. FDIC insurance premiums decreased $218,000 for the year due to the rate reduction as a result of the Bank Insurance Fund (BIF) reaching its required level of capitalization, thereby reducing deposit insurance premiums. Salary and employee benefit expense totaled $3,782,000 and represented 47.8% of other expense compared to $3,288,000 in 1995. At December 31, 1996, the Company had total full-time equivalent staff of 124 compared to 113 in 1995, with the increase principally due to additional branch staff. During 1996 the Company amended its deferred profit sharing plan to allow eligible employees to make 401(k) contributions. The Company also adopted an Employee Stock Ownership Plan in 1996. Income Taxes Income tax expense for the year 1997 was $1,067,000 for an effective tax rate of 28.2% compared to an expense of $468,000 and an effective rate of 20.0% in 1996. The higher level of taxes was principally due to an increase in pre-tax income of $1,433,000 and a lower level of tax-exempt securities in 1997. Income tax expense for 1995 was $652,000 for an effective tax rate of 26.6%. During 1996 the Company had a higher level of tax-exempt income as well as $114,000 less pre-tax income as compared to 1995. Capital and Dividends The Company believes a strong capital position is essential to support balance sheet growth, increase the revenue stream, serve the needs of the Company's customers and yield an attractive return to stockholders. The capital base also provides added protection against losses. Total stockholders' equity at December 31, 1997 was $24.6 million, an increase of $3.1 million or 14.4% from 1996. The increase in equity was principally due to retention of earnings of $1,983,000 after dividends declared of $723,000, and an $861,000 increase in net unrealized gain on the Company's available-for-sale securities portfolio. At December 31, 1997 the Company had a leverage capital ratio of 8.34%, tier 1 risk-based capital of 11.27% and total risk-based capital of 12.53% compared to 7.71%, 10.26% and 11.51% respectively in 1996. 16 The Company declared a two-for-one stock split in the form of 100% stock dividend on December 9, 1997 payable February 2, 1998. The following dividends, stock price and book value have been adjusted accordingly. Cash dividend declared in 1997 were $.435 per share compared to $.42 per share in 1996. The following table sets forth the price range and cash dividends declared per share regarding common stock for the period indicated: Price Range Cash Dividend ----------- ------------- High Low paid per share ---- ---- -------------- Year 1996 - --------- First Quarter $ 17.37 $ 16.62 $ .105 Second Quarter 17.00 16.25 .105 Third Quarter 16.75 16.12 .105 Fourth Quarter 16.75 16.12 .105 Year 1997 - --------- First Quarter $ 17.25 $ 16.50 $ .105 Second Quarter 17.00 16.75 .105 Third Quarter 17.50 17.00 .105 Fourth Quarter 20.50 17.00 .120 The book value of the common stock was $13.82 at December 31, 1997 compared to $12.10 at prior year end. Inflation The impact of inflation upon banks differs from the impact upon non-financial institutions. The majority of assets and liabilities of a bank are monetary in nature and therefore change with movements in the inflation rate. The exact impact of inflation on the Bank is difficult to measure. Inflation may cause operating expenses to increase at a rate not matched by increased earnings. Inflation may also affect the borrowing needs of consumers, thereby affecting growth of the Bank's assets. Inflation may also affect the general level of interest rates, which could have an effect on the Bank's profitability. However, as discussed previously, the Bank strives to manage its interest-sensitive assets and liabilities offsetting the effects of inflation. Year 2000 Issues The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the application year. Any of the Company's programs that have a time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company has entered into a new multi-year agreement with a data processing provider for its core application systems. The conversion is planned to occur in the fourth quarter of 1998 and will address the Year 2000 issues. The Company presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted. However, if such modifications and conversions are not completed timely, the Year 2000 problem may have a material impact on the operations of the Company. 17 Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax Equivalent Basis, dollars in thousands)
Year Ended December 31 1997 1996 1995 ---------------------------- --------------------------- ---------------------------- Average Ave Average Ave Average Ave Balance(2) Interest(1) Rate Balance(2) Interest(1) Rate Balance(2) Interest(1) Rate ---------- ----------- ---- ---------- ---------- ---- ---------- ----------- ---- ASSETS Interest Earning Assets: Federal Funds Sold $ 2,490 $ 141 5.66% $ 4,585 $ 239 5.21% $ 8,252 $ 483 5.85% Interest bearing deposits with banks 713 40 5.61 532 29 5.45 1,152 70 Securities held to maturity 8,745 742 8.48 10,331 864 8.36 15,397 794 5.16 Securities available for sale Taxable 43,525 2,803 6.44 39,703 2,618 6.59 10,905 700 6.42 Tax-exempt 3,624 281 7.75 4,604 373 8.10 7,709 576 7.47 --------- --------- ---- --------- --------- ---- --------- --------- ---- Total securities available for sale 47,149 3,084 6.54 44,307 2,991 6.75 18,614 1,276 6.85 Loans (3,4) 183,625 16,205 8.83 160,517 14,567 9.08 145,990 13,396 9.18 --------- -------- --------- --------- --------- --------- ---- Total interest earning assets 242,722 20,212 8.33 220,272 18,690 8.48 189,405 16,019 8.46 Non-interest earning assets: Cash and due from banks 6,440 6,343 5,534 Allowance for loan losses (2,918) (2,243) (2,118) Other Assets 13,937 15,392 11,886 --------- --------- --------- Total non-interest earning assets 17,459 19,492 15,302 --------- --------- --------- TOTAL ASSETS $ 260,181 $ 239,764 $ 204,707 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest bearing demand deposits $ 47,245 $ 1,241 2.63% $ 44,889 $ 1,244 2.77% $ 39,056 $ 1,101 2.82% Savings deposits 44,570 1,203 2.70 43,402 1,213 2.79 38,296 1,148 3.00 Time deposits 105,920 5,745 5.42 95,679 5,190 5.42 77,535 4,274 5.51 --------- --------- ---- --------- --------- ---- --------- --------- ---- Total interest bearing deposits 197,735 8,189 4.14 183,970 7,647 4.16 154,887 6,523 4.21 Short-term borrowings 7,726 374 4.84 4,907 247 5.03 2,639 145 5.49 Other borrowings 2,486 230 9.25 2,581 218 8.45 2,706 227 8.39 --------- -------- --------- --------- --------- --------- ---- Total interest bearing liabilities 207,947 8,793 4.23 191,458 8,112 4.24% 160,232 6,895 4.30 Non-interest bearing liabilities Demand deposits 25,584 22,874 19,728 Other liabilities 3,954 3,282 2,635 --------- --------- --------- Total non-interest bearing liabilities 29,538 26,156 22,363 Stockholders' equity 22,696 22,150 22,112 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 260,181 $ 239,764 $ 204,707 --------- --------- --------- Net interest income (tax-equivalent basis) 11,419 4.10% 10,578 4.24% 9,123 4.16% ==== ==== ==== Tax equivalent basis adjustment (355) (436) (197) --------- --------- --------- Net Interest Income $ 11,064 $ 10,142 $ 8,926 ========= ========= ========= Net Interest margin (tax-equivalent basis) 4.70% 4.80% 4.82% ==== ==== ====
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. 2. Average balances have been calculated based on daily balances. 3. Loan balances include non-accrual loans and are net of unearned income. 4. Loan yields include the effect of amortization of deferred fees net of costs. RATE/VOLUME ANALYSIS The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/Decrease --------------------------------------------------------------- 1997 compared to 1996 1996 compared to 1995 ------------------------------ ------------------------------ Variance due to Variance due to ------------------------------ ------------------------------ (Dollars in thousands) VOLUME RATE NET VOLUME RATE NET Interest Earning Assets: Federal funds sold ($ 117) $ 19 ($ 98) ($ 196) ($ 48) ($ 244) Interest bearing deposits with banks 10 1 11 (34) (7) (41) Securities held to maturity (134) 12 (122) (317) 387 70 Securities available for sale Taxable 247 (62) 185 1,898 20 1,918 Tax-exempt (77) (15) (92) (248) 45 (203) ------- ------- ------- ------- ------- ------- Total securities available for sale 171 (78) 93 1,650 65 1,715 Loans receivable 2,049 (411) 1,638 1,320 (149) 1,171 ------- ------- ------- ------- ------- ------- Total interest earning assets 1,978 (456) 1,522 2,422 249 2,671 Interest bearing liabilities: Interest bearing demand deposits 64 (67) (3) 162 (19) 143 Savings deposits 32 (42) (10) 146 (81) 65 Time deposits 555 -- 555 985 (69) 916 ------- ------- ------- ------- ------- ------- Total interest bearing deposits 651 (109) 542 1,293 (169) 1,124 Short-term borrowings 137 (10) 127 115 (13) 102 Other borrowings (8) 20 12 (11) 2 (9) ------- ------- ------- ------- ------- ------- Total interest bearing liabilities 780 (99) 681 1,398 (181) 1,217 Net interest income(tax-equivalent basis) $ 1,198 ($ 357) $ 841 $ 1,025 $ 430 $ 1,454 ======= ======= ======= ======= ======= =======
(1) Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate. 18 BEARD & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders Norwood Financial Corp. Honesdale, Pennsylvania We have audited the accompanying consolidated balance sheet of Norwood Financial Corp. and its subsidiary as of December 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Norwood Financial Corp. and its subsidiary for the years ended December 31, 1996 and 1995 were audited by other auditors whose report, dated February 14, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 financial statements referred to above present fairly, in all material respects, the financial position of Norwood Financial Corp. and its subsidiary as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Beard & Company, Inc. -------------------------- Beard & Company, Inc. Harrisburg, Pennsylvania January 30, 1998 19 CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 ----------------------- (In Thousands) ASSETS Cash and due from banks $ 6,571 $ 7,072 Interest-bearing deposits with banks 4,353 1,187 Federal funds sold -- 6,850 Securities available for sale 49,372 48,906 Securities held to maturity, fair value 1997 $ 8,516; 1996 $ 9,040 8,159 8,805 Loans receivable, net of allowance for loan losses 1997 $ 3,250; 1996 $ 2,616 182,390 172,005 Bank premises and equipment, net 7,300 7,769 Other real estate 537 2,283 Accrued interest receivable 1,358 1,558 Other assets 3,210 4,137 ----------------------- Total assets $ 263,250 $ 260,572 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 24,065 $ 25,389 Interest-bearing demand 21,451 20,201 Money market deposit accounts 28,812 26,682 Savings 43,406 44,025 Time 109,020 113,165 ----------------------- Total deposits 226,754 229,462 Short-term borrowings 4,990 3,227 Other borrowings 2,000 2,442 Accrued interest payable 2,365 2,224 Other liabilities 2,547 1,698 ----------------------- Total liabilities 238,656 239,053 STOCKHOLDERS' EQUITY Common stock, par value $ .10 per share; authorized 10,000,000 shares; issued 1997 1,801,592 shares; 1996 900,796 shares 180 90 Surplus 4,384 4,444 Retained earnings 20,844 18,861 Treasury stock, at cost 1997 22,394 shares; 1996 11,230 shares (344) (345) Net unrealized appreciation on securities available for sale, net of taxes 1,280 419 Unearned Employee Stock Ownership Plan (ESOP) shares (1,750) (1,950) ----------------------- Total stockholders' equity 24,594 21,519 ----------------------- Total liabilities and stockholders' equity $ 263,250 $ 260,572 =======================
See Notes to Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 1996 1995 --------------------------- (In Thousands, Except Per Share Data) Interest income: Loans receivable, including fees $16,198 $14,558 $13,396 Securities: Taxable 2,803 2,618 1,508 Tax-exempt 675 811 366 Interest-bearing deposits with other institutions 40 28 70 Federal funds sold 141 239 483 --------------------------- Total interest income 19,857 18,254 15,823 --------------------------- Interest expense: Deposits 8,189 7,647 6,523 Short-term borrowings 374 247 146 Other 230 218 227 --------------------------- Total interest expense 8,793 8,112 6,896 Net interest income 11,064 10,142 8,927 Provision for loan losses 1,355 1,710 619 --------------------------- Net interest income after provision for loan losses 9,709 8,432 8,308 --------------------------- Other income: Service charges and fees 859 709 567 Income from fiduciary activities 165 169 124 Net realized gains on sales of securities 70 787 146 Gain on termination of pension plan 597 -- -- Other 234 166 128 --------------------------- Total other income 1,925 1,831 965 --------------------------- Other expenses: Salaries and employee benefits 3,639 3,782 3,288 Occupancy 693 616 541 Furniture and equipment 594 504 340 Other real estate owned operations 269 516 416 Federal deposit insurance premiums 27 2 220 Advertising 163 210 182 Taxes, other than income 240 221 201 Professional fees 323 445 336 Amortization of intangible assets 291 116 40 Other 1,622 1,511 1,255 --------------------------- Total other expenses 7,861 7,923 6,819 --------------------------- Income before income taxes 3,773 2,340 2,454 Income tax expense 1,067 468 652 --------------------------- Net income $ 2,706 $ 1,872 $ 1,802 =========================== Basic and diluted earnings per common share $ 1.63 $ 1.10 $ 1.01 ===========================
See Notes to Consolidated Financial Statements. 21 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995
Net Unrealized Appreciation On Securities Unearned Common Retained Treasury Available ESOP Stock Surplus Earnings Stock For Sale Shares Total ------------------------------------------------------------------------------ (In Thousands) Balance, December 31, 1994 $ 900 $ 3,568 $ 16,593 $ -- $ 580 $ -- $ 21,641 Net income -- -- 1,802 -- -- -- 1,802 Cash dividends declared, $ .39 per share -- -- (691) -- -- -- (691) Purchase of treasury stock -- -- -- (561) -- -- (561) Net change in unrealized appreciation on securities available for sale, net of taxes -- -- -- -- 591 -- 591 ------------------------------------------------------------------------------ Balance, December 31, 1995 900 3,568 17,704 (561) 1,171 -- 22,782 Transfer in connection with formation of holding company (810) 810 -- -- -- -- -- Net income -- -- 1,872 -- -- -- 1,872 Cash dividends declared, $ .42 per share -- -- (715) -- -- -- (715) Purchase of treasury stock -- -- -- (1,733) -- -- (1,733) Sale of shares of common stock to ESOP -- 53 -- 1,947 -- (2,000) -- Issuance of treasury stock -- 1 -- 2 -- -- 3 Stock options exercised -- 12 -- -- -- -- 12 Release of earned ESOP shares -- -- -- -- -- 50 50 Net change in unrealized appreciation on securities available for sale, net of taxes -- -- -- -- (752) -- (752) ------------------------------------------------------------------------------ Balance, December 31, 1996 90 4,444 18,861 (345) 419 (1,950) 21,519 Net income -- -- 2,706 -- -- -- 2,706 Cash dividends declared, $ .435 per share -- -- (723) -- -- -- (723) Two-for-one stock split in the form of a 100% stock dividend 90 (90) -- -- -- -- -- Issuance of treasury stock -- -- -- 1 -- -- 1 Release of earned ESOP shares -- 30 -- -- -- 200 230 Net change in unrealized appreciation on securities available for sale, net of taxes -- -- -- -- 861 -- 861 ------------------------------------------------------------------------------ Balance, December 31, 1997 $ 180 $ 4,384 $ 20,844 $ (344) $ 1,280 $ (1,750) $ 24,594 ==============================================================================
See Notes to Consolidated Financial Statements. 22 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995 ------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,706 $ 1,872 $ 1,802 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,355 1,710 619 Depreciation 709 600 480 Amortization of intangible assets 291 116 40 Deferred income taxes 1,184 771 (219) Net realized gain on sales of securities (70) (787) (146) Losses on sale of other real estate, net 111 216 267 Net gain on sale of mortgage loans (56) (52) (49) Mortgage loans originated for sale (4,210) (5,063) (3,314) Proceeds from sale of mortgage loans 4,266 5,115 3,363 Decrease (increase) in accrued interest receivable 200 (53) 236 Increase in accrued interest payable 141 392 582 Other, net (94) (723) 848 ------------------------------------------- Net cash provided by operating activities 6,533 4,114 4,509 ------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 9,423 3,081 5,086 Proceeds from maturities and principal reductions on mortgage-backed securities 11,703 11,376 5,173 Purchases (20,268) (27,023) (4,866) Securities held to maturity: Proceeds from maturities 650 3,665 20,695 Purchases -- (250) (35,440) Net increase in loans (12,079) (25,519) (14,136) Purchase of bank premises and equipment (240) (1,363) (587) Proceeds from sales of other real estate 1,975 1,475 1,209 Proceeds received from branch acquisition -- 17,716 -- ------------------------------------------- Net cash used in investing activities (8,836) (16,842) (22,866) ------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (2,708) 22,717 18,812 Net increase in short-term borrowings 1,763 1,196 442 Repayments of other borrowings (2,442) (140) (130) Proceeds from other borrowings 2,000 -- -- Stock options exercised -- 12 -- Acquisition of treasury stock -- (1,733) (561) Proceeds from issuance of treasury stock 1 3 -- Release of ESOP shares 200 50 -- Cash dividends paid (696) (716) (677) ------------------------------------------- Net cash provided by (used in) financing activities (1,882) 21,389 17,886 ------------------------------------------- Increase (decrease) in cash and cash equivalents (4,185) 8,661 (471) Cash and cash equivalents: Beginning of year 15,109 6,448 6,919 ------------------------------------------- End of year $ 10,924 $ 15,109 $ 6,448 ===========================================
See Notes to Consolidated Financial Statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING POLICIES Reorganization and nature of operations: On December 12, 1995, the stockholders of the Wayne Bank (Bank) approved the reorganization of the Bank into a bank holding company structure. After approval by regulatory authorities, the reorganization was completed on March 29, 1996. Each issued and outstanding share of the common stock, par value $ 1.00, of the Bank immediately prior to the reorganization was converted into and exchanged for one share of common stock, par value $ .10, of Norwood Financial Corp. (Company). As a result of this transaction, the Bank and its wholly-owned real estate subsidiary, WCB Realty Corp. became a wholly-owned subsidiary of the Company. The Bank is a state-chartered bank located in Honesdale, Pennsylvania. The Company derives substantially all of its income from the banking and bank related services which include interest earnings on commercial mortgage, residential real estate, commercial and consumer loan financings, as well as interest earnings on investment securities and deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All intercompany accounts and transactions have been eliminated in consolidation. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized appreciation or depreciation is reported as increases or decreases in stockholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the period to maturity. Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Loans receivable: Loans generally are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing those amounts over the contractual life of the loan. The Company provides automobile financing to its customers through direct financing leases. These direct 24 financing leases are carried at the Company's net investment, which includes the sum of aggregate rentals receivable and the estimated residual value of the leased automobiles less unearned income. Unearned income is amortized over the leases terms by methods that approximate the interest method. A loan is generally considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Allowance for loan losses: The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses related to impaired loans that are identified for evaluation is based on discounted cash flows using the loan's initial effective interest rate or the fair value, less selling costs, of the collateral for certain collateral dependent loans. By the time a loan becomes probable of foreclosure, it has been charged down to fair value, less estimated costs to sell. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives. Other real estate: Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the loss on foreclosed real estate. Branch acquisition and intangible assets: On March 25, 1996, the Company acquired certain assets and all the deposit liabilities of three branch offices of Meridian Bank. The transaction was accounted for as a purchase. The Company assumed deposit liabilities of $20,169,279 and acquired cash funds and premises and equipment totaling $1,008,000. The premium paid to acquire these offices amounted to $1,790,000. 25 Intangible assets are comprised of goodwill and core deposit acquisition premiums and are included in other assets. Goodwill is amortized over a fifteen year period. Core deposit acquisition premiums, which were developed by specific core deposit life studies, are being amortized over seven to nine years. The amortization of intangible assets amounted to $ 291,000, $116,000 and $ 40,000 for the years ended December 31, 1997, 1996 and 1995 respectively. Annual assessments of the carrying values and remaining amortization periods of intangible assets are made to determine possible carrying value impairment and appropriate adjustments, as deemed necessary. Income taxes: Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiary file a consolidated federal income tax return. Advertising costs: The Company follows the policy of charging the costs of advertising to expense as incurred. Stock dividend and per share data: In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to the Statement No. 128 requirements. On December 9, 1997, the Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend on common stock outstanding, payable on February 1, 1998 to shareholders of record on January 15, 1998. The stock split resulted in the issuance of 900,796 additional common shares. The effect of this stock split has been recorded as of December 31, 1997. All per share data has been adjusted for the effect of the stock split. Cash flow information: For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the years ended December 31, 1997, 1996 and 1995, were $ 8,652,000, $ 7,719,000 and $ 6,313,000 respectively. There were no cash payments for income taxes in 1997 compared to $ 787,000 and $ 620,000 in 1996 and 1995 respectively. Non-cash investing activities for 1997, 1996 and 1995 included foreclosed mortgage loans transferred to real estate owned of $ 341,000, $ 2,074,000 and $ 2,043,000 respectively. Off-balance sheet financial instruments: In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial instruments are recorded in the balance sheets when they become receivable or payable. Trust assets: Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements since such items are not assets of the Company. Trust income is reported on the accrual method. 26 Reclassifications: Certain items in the 1996 and 1995 consolidated financial statements have been reclassified to conform with the 1997 consolidated financial statement presentation. These reclassifications had no effect on net income or stockholders' equity. SECURITIES The amortized cost and fair value of securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Appreciation Depreciation Value ----------------------------------------------------- (In Thousands) December 31, 1997: Available for sale: U.S. Treasury securities $ 8,009 $ 26 $ (1) $ 8,034 U.S. Government agencies 18,003 68 (47) 18,024 States and political subdivisions 1,440 22 -- 1,462 Mortgage-backed securities 18,903 71 (13) 18,961 ----------------------------------------------------- 46,355 187 (61) 46,481 Equity securities 1,078 1,813 -- 2,891 ----------------------------------------------------- $ 47,433 $ 2,000 $ (61) $ 49,372 ==================================================== Held to maturity: States and political subdivisions $ 8,159 $ 361 $ (4) $ 8,516 ==================================================== December 31, 1996: Available for sale: U.S. Treasury securities $ 4,001 $ 4 $ (11) $ 3,994 U.S. Government agencies 25,995 52 (190) 25,857 States and political subdivisions 5,219 18 (63) 5,174 Corporate securities 500 3 -- 503 Mortgage-backed securities 11,477 2 (120) 11,359 ----------------------------------------------------- 47,192 79 (384) 46,887 Equity securities 1,051 968 -- 2,019 ----------------------------------------------------- $ 48,243 $ 1,047 $ (384) $ 48,906 ==================================================== Held to maturity: States and political subdivisions $ 8,805 $ 242 $ (7) $ 9,040 ====================================================
Equity securities consist of Pennsylvania community banks, Federal Home Loan Bank and Federal Reserve Bank stock. The amortized cost and fair value of securities as of December 31, 1997, by contractual maturity are shown below. Expected maturities may differ from contractual maturities or call dates because borrowers may have the right to prepay obligations with or without call or prepayment penalties. Securities Available Securities Held For Sale To Maturity -------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------- (In Thousands) Due in one year or less $ 3,498 $ 3,501 $ -- $ -- Due after one year through five years 13,263 13,292 500 500 Due after five years through ten years 9,189 9,212 290 304 Due after ten years 1,502 1,515 7,369 7,712 -------------------------------------- 27,452 27,520 8,159 8,516 Mortgage-backed securities 18,903 18,961 -- -- Equity securities 1,078 2,891 -- -- -------------------------------------- $47,433 $49,372 $ 8,159 $ 8,516 ====================================== Gross realized gains and gross realized losses on sales of securities available-for-sale were $ 80,000 and $ 10,000 respectively in 1997, $ 830,000 and $ 43,000 respectively in 1996, and $ 319,000 and $ 173,000 respectively in 1995. Securities with a carrying value of $ 19,729,000 and $ 27,995,000 at December 31, 1997 and 1996 were pledged to secure public deposits, U.S. Treasury demand notes, securities sold under agreements to repurchase and for other purposes as required or permitted by law. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The components of loans receivable at December 31 were as follows: 1997 1996 ------------------- (In Thousands) Real estate: Residential $ 54,227 $ 54,547 Commercial 32,986 36,852 Construction 2,046 1,602 Commercial, financial and agricultural 26,589 29,680 Consumer loans to individuals 37,082 37,503 Lease financing, net of unearned income 33,877 17,048 ------------------- 186,807 177,232 Less: Unearned income 1,167 2,611 Allowance for loan losses 3,250 2,616 ------------------- $182,390 $172,005 =================== 27 The Bank's net investment in direct financing leases at December 31 consist of: 1997 1996 -------------------- Minimum lease payments receivable $ 17,360 $ 10,137 Estimated unguaranteed residual values 22,524 10,311 Unearned income (6,007) (3,400) -------------------- $ 33,877 $ 17,048 ==================== The following table presents changes in the allowance for loan losses: Years Ended December 31, 1997 1996 1995 ------------------------------ (In Thousands) Balance, beginning $ 2,616 $ 2,125 $ 1,893 Provision for loan losses 1,355 1,710 619 Recoveries 109 147 537 Loans charged off (830) (1,366) (924) ------------------------------ Balance, ending $ 3,250 $ 2,616 $ 2,125 ============================== The recorded investment in impaired loans, not requiring an allowance for loan losses was $ 1,704,000 and $ 2,437,000 at December 31, 1997 and 1996 respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $ 630,000 and $ 440,000 at December 31, 1997 and 1996 respectively. The related allowance for loan losses associated with these loans was $ 21,000 and $ 52,000 at December 31, 1997 and 1996 respectively. For the years ended December 31, 1997, 1996 and 1995, the average recorded investment in these impaired loans was $ 2,716,000, $ 3,228,000 and $ 3,378,000 and the interest income recognized on these impaired loans was $ 68,000, $ 12,000 and $117,000 respectively. PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 1997 1996 ----------------- (In Thousands) Land $ 989 $ 1,004 Buildings and improvements 7,789 7,569 Furniture and equipment 3,927 3,887 ----------------- 12,705 12,460 Less accumulated depreciation 5,405 4,691 ----------------- $ 7,300 $ 7,769 ================= DEPOSITS Aggregate time deposits in denominations of $ 100,000 or more were $23,324,000 and $ 28,890,000 at December 31, 1997 and 1996 respectively. At December 31, 1997, the scheduled maturities of time deposits are as follows (in thousands): 1998 $ 76,045 1999 23,570 2000 4,550 2001 4,855 -------- $109,020 ======== BORROWINGS Short-term borrowings at December 31 consist of the following: 1997 1996 --------------- (In Thousands) Securities sold under agreements to repurchase $2,825 $2,659 Federal funds purchased 1,085 -- U.S. Treasury demand notes 1,000 568 Other 80 -- --------------- $4,990 $3,227 =============== The outstanding balances and related information of short-term borrowings are summarized as follows: Years Ended December 31, 1997 1996 ----------------- (In Thousands) Average balance during the year $ 7,892 $ 4,902 Average interest rate during the year 5.11 % 5.04 % Maximum month-end balance during the year $13,456 $11,969 Securities sold under agreements to repurchase generally mature within one day from the transaction date. Securities with amortized costs and fair values of $ 4,749,000 and $ 4,742,000 at December 31, 1997 and $ 5,047,000 and $5,124,000 at December 31, 1996 were pledged as collateral for these agreements. The securities underlying the agreements were under the Company's control. 28 The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $ 4,800,000 which expires in March 1998. There were no borrowings under this line of credit at December 31, 1997 and 1996. Other borrowings at December 31, 1997 of $ 2,000,000 consist of an advance from the FHLB bearing interest at a rate of 6.04% and which matures on December 23, 1999. Other borrowings of $ 2,442,000 at December 31, 1996 consisted of a mortgage bond payable with the Wayne County Development Authority at an average interest rate of 7.79% over the life of the bond issue. These bonds were issued to finance the Company's main office headquarters which also served as collateral for the bonds. During 1997, the Company elected to exercise their option and retire these bonds. EMPLOYEE BENEFIT PLANS In the third quarter of 1997, the Company terminated its defined benefit pension plan which covered substantially all employees and officers. Upon termination, vested participants were allowed to roll their accumulated benefits into either the Company's profit-sharing plan, an IRA, an annuity contract, an alternative retirement investment account or were paid cash. At the time of the termination, the Company determined the amount that the plan assets exceeded the accumulated benefit obligation of eligible participants of which 25% $(102,000) was transferred to the Company's 401(k) plan. The remaining plan assets were transferred to the Company and it recognized a pre-tax gain of $ 597,000 in the third quarter of 1997 included in other income in the accompanying consolidated financial statements. Pension expense related to this plan for the years ended December 31, 1996 and 1995 was as follows: 1996 1995 -------------- (In Thousands) Service cost $ 170 $ 140 Interest cost on projected benefit obligation 183 170 Return on plan assets (212) (183) Net amortization (5) (5) -------------- Net periodic pension cost $ 136 $ 122 ============== The actuarial present value of accumulated benefit obligations at December 31, 1996 was $ 2,152,000, including vested benefit obligations of $2,112,000. The following table sets forth the funded status and amounts recognized in the balance sheet at December 31, 1996 (in thousands): Projected benefit obligation $ 2,901 Plan assets at fair value (2,762) ------- Projected benefit obligation in excess of plan assets 139 Unrecognized prior service costs (21) Unrecognized transition amounts 113 Unrecognized net gain from past experience different from that assumed 90 ------- Accrued pension costs $ 321 ======= The weighted discount rate used to measure the projected obligation was 7.00%, the rate of future increase in future compensation levels was 6.00%, and the long-term rate of return on assets was 8.00% for 1996 and 8.50% for 1995. The Company has a defined contributory profit-sharing plan which, effective November 1, 1996, included the adoption of a 401(k) plan. The plan permits employees to make pre-tax contributions up to 15% of the employee's compensation. The amount of contributions to the plan, including matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21 are eligible to participate in the plan after one year of employment. Employee contributions are vested at all times, and any Company contributions are fully vested after five years. The Company's contributions are expensed as the cost is incurred, funded currently, and amounted to $ 132,000, $170,000 and $ 140,000 for the years ended December 31, 1997, 1996 and 1995 respectively. On August 27, 1996, the Board of Directors approved the creation of a leveraged employee stock ownership plan ("ESOP") for the benefit of employees who meet the eligibility requirements which include having completed one year of service with the Company and having attained age twenty-one. The ESOP Trust purchased shares of the Company's common stock with proceeds from a loan from 29 the Company. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments. The loan bears interest at the prime rate adjusted annually. Interest is payable annually and principal payable in equal annual installments over ten years. The loan is secured by the shares of the stock purchased. As the debt is repaid, shares are released from collateral and allocated to qualified employees based on the proportion of debt service paid in the year. The Company accounts for its leveraged ESOP in accordance with Statement of Position 93-6. Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in the consolidated balance sheets. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and dividends on unallocated ESOP shares are recorded as a reduction of debt. Compensation expense for the ESOP was $ 237,000 and $ 51,000 for the years ended December 31, 1997 and 1996 respectively. 1997 1996 ----------------------- Allocated shares 15,150 3,030 Shares released for allocation -- -- Unreleased shares 106,062 118,182 ----------------------- Total ESOP shares 121,212 121,212 ======================= Fair value of unreleased shares $2,201,000 $1,906,000 ======================= INCOME TAXES The components of the provision for federal income taxes are as follows: Years Ended December 31, ----------------------------- 1997 1996 1995 ----------------------------- (In Thousands) Current $ (117) $ (303) $ 871 Deferred 1,184 771 (219) ----------------------------- $ 1,067 $ 468 $ 652 ============================= Income tax expense of the Company is less than the amounts computed by applying statutory federal income tax rates to income before income taxes because of the following: Percentage Of Income Before Income Taxes -------------------------- Years Ended December 31, -------------------------- 1997 1996 1995 Tax at statutory rates 34.0 % 34.0 % 34.0 % Tax exempt interest income, net of interest expense disallowance (5.4) (10.4) (4.6) Low-income housing tax credit (1.5) (2.5) (2.4) Other 1.2 (1.1) (0.4) --------------------------- 28.3 % 20.0 % 26.6 % =========================== The income tax provision includes $ 24,000, $ 268,000 and $ 50,000 of income taxes relating to realized securities gains for the years ended December 31, 1997, 1996 and 1995 respectively. The net deferred tax liability included in other liabilities in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities: 1997 1996 ------------------ (In Thousands) Deferred tax assets: Allowance for loan losses $ 698 $ 488 Deferred loan origination fees 45 85 Allowance for other real estate losses 82 104 Accrued pension -- 134 Allowance for loss on other assets 85 85 Deferred compensation 43 110 Core deposit intangible 87 44 Partnership credit carryforward 116 58 Minimum tax credit carryforward 912 74 Other 116 37 ------------------ Total deferred tax assets 2,184 1,219 ------------------ Deferred tax liabilities: Net unrealized gain on securities 659 244 Premises and equipment 242 222 Lease financing 3,126 967 Other 10 40 ------------------ Total deferred tax liabilities 4,037 1,473 ------------------ Net deferred tax liability $(1,853) $ (254) ================== 30 TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS Certain directors and executive officers of the Bank, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, were in the ordinary course of business at normal terms, including interest rates and collateralization, prevailing at the time and did not represent more than normal risks. At December 31, 1997 and 1996, such loans amounted to $ 3,437,000 and $ 4,461,000 respectively. During 1997, new loans to such related parties totaled $ 2,185,000 and repayments aggregated $ 3,209,000. REGULATORY MATTERS AND STOCKHOLDERS' EQUITY The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material affect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the regulators has categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's or Bank's category. The Bank's actual capital amounts and ratios are also presented in the table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------- Amount Ratio Amount Ratio(1) Amount Ratio(1) ------------------------------------------------------------- (In Thousands) As of December 31, 1997: Total capital (to risk weighted assets) $ 23,565 12.41% 15,191 8.00% $18,989 10.00% Tier 1 capital (to risk weighted assets) 21,184 11.15% 7,600 4.00% 11,400 6.00% Tier 1 capital (to average assets) 21,184 8.13% 10,422 4.00% 13,028 5.00% As of December 31, 1996: Total capital (to risk weighted assets) $ 21,281 11.61% $14,664 8.00% $18,330 10.00% Tier 1 capital (to risk weighted assets) 18,986 10.36% 7,331 4.00% 10,966 6.00% Tier 1 capital (to average assets) 18,986 7.54% 10,072 4.00% 12,590 5.00%
- -------------------- (1) Compliance with the requirement results from a value that must be greater than or equal to the ratio shown. The Company's ratios do not differ significantly from the Bank's ratios presented above. The Bank is required to maintain average cash reserve balances in vault cash or with the Federal Reserve Bank. The amount of these restricted cash reserve balances at December 31, 1997 was approximately $ 1,182,000. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 1997, $ 18,106,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed above. STOCK OPTION PLAN The Company adopted a Stock Option Plan for the directors, officers and employees of the Company which was approved by stockholders in 1995. An aggregate of 500,000 shares of authorized but unissued common stock of the Company were reserved for future issuance under the Plan. The stock options typically have expiration terms ranging between one and ten years subject to certain extensions and early terminations. The per share exercise price of a stock option shall be, at a minimum, equal to the fair value of a share of common stock on the date the option is granted. 31 A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 -------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------------------------------------------------- Outstanding, beginning of year 41,620 $ 16.54 29,970 $ 16.63 -- $ -- Granted 18,000 17.13 19,750 16.44 29,970 16.63 Exercised -- -- (1,000) 16.63 -- -- Forfeited (4,050) 16.63 (7,100) 16.63 -- -- -------------------------------------------------------------------- Outstanding, end of year 55,570 $ 16.72 41,620 $ 16.54 29,970 $ 16.63 ==================================================================== Exercisable at end of year 37,570 $ 16.53 21,870 $ 16.63 -- -- ====================================================================
Exercise prices for options outstanding as of December 31, 1997 ranged from $ 16.44 to $ 17.33 per share. The weighted average remaining contractual life is 9.0 years. As permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro form a information regarding net income and earnings per share is required by Statement 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995 respectively: risk-free interest rates of 5.75%, 6.39% and 5.61%; dividend yields of 2.4%, 2.6% and 2.3% volatility factors of the expected market price of the Company's common stock of .21, .07. and .07; and a weighted-average expected life of the option of 8, 9 and 9 years. For purposes of pro form a disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro form a information follows (in thousands, except for earnings per share information): Years Ended December 31, --------------------------------- 1997 1996 1995 --------------------------------- Net income: As reported $ 2,706 $ 1,872 $ 1,802 ================================= Pro form a $ 2,640 $ 1,796 $ 1,731 ================================= Basic and diluted earnings per share: As reported $ 1.63 $ 1.10 $ 1.01 ================================= Pro form a $ 1.59 $ 1.06 $ 0.98 ================================= EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, ------------------------------------- 1997 1996 1995 ------------------------------------- Numerator, net income $2,706,000 $1,872,000 $1,802,000 Denominator: Denominator for basic earnings per share, weighted average shares 1,660,998 1,706,090 1,779,140 Effect of dilutive securities, employee stock options 3,474 13 -- ------------------------------------- Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 1,664,472 1,706,103 1,779,140 ===================================== Basic and diluted earnings per common share $ 1.63 $ 1.10 $ 1.01 =====================================
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instru- 32 ments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's financial instrument commitments is as follows: December 31, 1997 1996 ----------------- (In Thousands) Commitments to extend credit $14,749 $25,346 Standby letters of credit 540 1,144 ----------------- $15,289 $26,490 ================= Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer and generally consists of real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, when deemed necessary, supporting those commitments. CONCENTRATIONS OF CREDIT RISK The Bank operates primarily in Wayne and Pike Counties, Pennsylvania and, accordingly, has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region's economy. These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal lending limits to any single borrower or group of borrowers. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at December 31, 1997 and 1996: . For cash and due from banks, interest-bearing deposits with banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. . For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. . The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Disclosure of the fair value of leases receivable is not required and has not been included in the table below. 33 . The fair value of accrued interest receivable and accrued interest payable is the carrying amount. . The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits for similar remaining maturities. .The fair value of short-term borrowings approximate their carrying amount. . The fair value of other borrowings are estimated using discounted cash flow analyses based upon the Company's current borrowing rates for similar types of borrowing arrangements. . The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements. The estimated fair value of the Company's financial instruments were as follows:
December 31, 1997 December 31, 1996 ----------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------- (In Thousands) Financial assets: Cash and due from banks, interest-bearing deposits with banks and federal funds sold $ 10,924 $ 10,924 $ 15,109 $ 15,109 Securities 57,531 57,888 57,711 57,946 Loans receivable, net 148,513 150,008 154,957 159,179 Accrued interest receivable 1,358 1,358 1,558 1,558 Financial liabilities: Deposits 226,754 26,775 229,462 229,480 Short-term borrowings 4,990 4,990 3,227 3,227 Other borrowings 2,000 2,012 2,442 2,632 Accrued interest payable 2,365 2,365 2,224 2,224 Off-balance sheet financial instruments: Commitments to extend credit and outstanding letters of credit -- -- -- --
NORWOOD FINANCIAL CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION Balance Sheets December 31 1997 1996 ----------------- (In Thousands) ASSETS Cash on deposit in bank subsidiary $ 290 $ 395 Interest bearing deposit with another institution 500 -- Securities available for sale 330 207 Investment in bank subsidiary 23,714 21,051 Other assets 43 61 ----------------- $24,877 $21,714 ================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES $ 283 $ 195 STOCKHOLDERS' EQUITY 24,594 21,519 ----------------- $24,877 $21,714 ================= Statements of Income For The Period March 29, 1996 Year Ended to December 31, December 31, 1997 1996 --------------------------- (In Thousands) Income: Dividends from bank subsidiary $ 723 $ 2,549 Interest income from bank subsidiary 162 -- Other interest income 14 41 Gain on sale of securities -- 2 --------------------------- 899 2,592 Expenses 54 14 --------------------------- Income before income taxes 845 2,578 Income tax expense (benefit) 41 (3) --------------------------- 804 2,581 Equity in undistributed earnings of subsidiary 1,902 1,190 --------------------------- Net income $ 2,706 $ 1,391 =========================== 34 Statements of Cash Flows
For The Period March 29, 1996 Year Ended to December 31, December 31, 1997 1996 --------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,706 $ 1,391 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (1,902) 1,190 Other, net 86 (64) --------------------------------- Net cash provided by operating activities 890 2,517 --------------------------------- CASH FLOWS PROVIDED BY INVESTING ACTIVITIES Sale of securities available for sale -- 82 Purchase of securities available for sale -- (282) --------------------------------- Net cash used in investing activities -- (200) --------------------------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Stock options exercised -- 12 Proceeds from issuance of treasury stock 1 3 Acquisition of treasury stock -- (1,447) Release of ESOP shares 200 50 Cash dividends paid (696) (540) --------------------------------- Net cash used in financing activities (495) (1,922) --------------------------------- Increase in cash and cash equivalents 395 395 Cash and cash equivalents: Beginning 395 -- --------------------------------- Ending $ 790 $ 395 =================================
35
Norwood Financial Corp. Officers Russell L. Ridd Lynne Wetzel Chairman of the Board Assistant Vice President William W. Davis, Jr. Laurie J. Bishop President and Chief Executive Officer Assistant Community Officer Manager Lewis J. Critelli John F. Carmody Senior Vice President and Chief Financial Officer Community Office Manager Edward C. Kasper Danny J. Davis Senior Vice President Consumer Loan Officer John H. Sanders Thomas M. Didato Senior Vice President Loan Review Officer John E. Marshall Ronald J. Ferrance, Jr. Secretary Installment Lending & Leasing Manager Wayne Bank Officers Joann Fuller Deposit Operations Manager Russell L. Ridd Carolyn K. Gwozdziewycz Chairman of the Board Consumer Loan Officer William W. Davis, Jr. Debra Hedrick President and Chief Executive Officer Community Office Manager Lewis J. Critelli Robert H. Johnson Senior Vice President and Chief Financial Officer Community Officer Manager Edward C. Kasper Paul J. Kovatch Senior Vice President & Senior Loan Officer/ Consumer Loan Officer Corporate Bank Norma S. Kuta John H. Sanders Community Office Manager Senior Vice President/Retail Bank Lisa M. Lalley John E. Marshall Loan Operations Manager Secretary William E. Murray Joseph A. Kneller Assistant Community Office Manager Vice President Diane L. Richter Pauline A. Kovatch Assistant Community Office Manager Vice President and Assistant Secretary Barbara A. Ridd Frank R. Redington Mortgage Loan Officer Vice President Janet V. Schields Wayne D. Wilcha, CPA Community Office Manager Vice President and Trust Officer Nancy M. Worobey Peter Bochnovich Community Office Manager Assistant Vice President William J. Zernhelt Nancy A. Hart Assistant Community Office Manager Controller and Assistant Secretary Norwood Investment Corp. Kelley J. Lalley Assistant Vice President William W. Davis, Jr. President and Chief Executive Officer Gerald J. LaPoint Assistant Vice President and Assistant Secretary Lewis J. Critelli Senior Vice President Anthony F. Torquato Assistant Vice President Scott C. Rickard Vice President 36
Investor Information: Stock Listing Norwood Financial Corp. stock is traded on the nasdaq National Market under the symbol NWFL. The following firms are known to make a market in the Company's stock: Hopper Soliday & Co., Inc. 1703 Oregon Pike Lancaster, PA 17601 717-560-3015 Legg Mason Wood Walker, Inc. The Stadium Office Park 330 Montage Mountain Road Suite 201 Scranton, PA 18507 717-346-9300 Sandler O'Neill & Partners, LP 2 World Trade Center, 104th Floor New York, NY 10048 212-466-7800 Janney Montgomery Scott, Inc. 1801 Market Street Philadelphia, PA 19103 215-665-6000 Transfer Agent: Illinois Stock Transfer Company, 223 West Jackson Blvd., Suite 210, Chicago, IL 60606. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at (312) 427-2953. Dividend Calendar: Dividends on Norwood Financial Corp. common stock, if approved by the Board of Directors are customarily paid on February 1, May 1, August 1 and November 1. SEC Reports and additional information: A copy of the Company's report on Form 10-K for its fiscal year ended December 31, 1997 including financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission may be obtained upon written request of any stockholder, investor or analyst by contacting Lewis J. Critelli, Senior Vice President and Chief Financial Officer, Norwood Financial Corp. 717 Main Street, P.O. Box 269, Honesdale, PA 18431, (717) 253-8512 EX-27 3 ARTICLE 9 FDS FOR FORM 10-K
9 1000 12-MOS DEC-31-1997 DEC-31-1997 6,571 4,353 0 0 49,372 8,159 8,516 185,640 3,250 263,250 226,754 4,990 2,547 2,000 0 0 180 24,414 263,250 16,198 3,478 181 19,857 8,189 8,793 11,064 1,355 70 7,861 3,773 3,773 0 0 2,706 1.63 1.63 4.70 2,108 67 0 0 2,616 830 109 3,250 3,250 0 1,539
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