EXHIBIT 13
(Five Year Financial Summary)---------------------------------------------------
Summary of Selected Financial Data
(dollars in thousands, except per share data)
For the years ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Summary of Operations
- ---------------------
Net interest income $12,134 $11,741 $11,064 $10,142 $8,927
NET INCOME $3,508 $3,236 $2,706 $1,872 $1,802
Net income per share-Basic $2.09 $1.93 $1.63 $1.10 $1.01
Diluted $2.08 $1.91 $1.63 $1.10 $1.01
Cash dividends declared 0.59 0.50 0.44 0.42 0.39
Return on average assets 1.19% 1.21% 1.04% 0.78% 0.88%
Return on average equity 12.81% 12.38% 11.92% 8.45% 8.17%
Balances at Year-End
- --------------------
Total assets $314,827 $279,017 $263,149 $260,572 $217,262
Loans receivable 205,160 186,919 185,640 174,621 152,094
Total deposits 243,507 233,767 226,754 229,462 187,299
Shareholders' equity 26,654 27,728 24,594 21,519 22,782
Allowance for loan losses to total loans 1.63% 1.78% 1.75% 1.50% 1.40%
Non-performing assets to total assets 0.24% 0.30% 1.03% 2.22% 2.68%
Tier 1 Capital to risk-adjusted assets 11.98% 12.30% 11.27% 10.26% 13.93%
Total Capital to risk-adjusted assets 13.50% 14.00% 12.53% 11.51% 15.18%
[GRAPHICS OMITTED] 99 ANNUAL REPORT
- --------------------------------------------------(Norwood Financial Corp)-----3
[BOX GRAPHIC OMITTED] 1999 Annual Report
- ---------------------(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, 1999,
1998 and 1997. This section should be used in conjunction with the consolidated
financial statements and related footnotes.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward- looking statements. When used in this
discussion, the words "believes," anticipates," "contemplates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operation - Summary
Net income for the Company for the year 1999 was $3,508,000 compared to
$3,236,000 for the year 1998. This represents an increase of $272,000 or 8.4%
over prior year. Basic and diluted earnings per share for 1999 were $2.09 and
$2.08 respectively increasing from $1.93 and $1.91 respectively in 1998. Return
on average equity showed similar improvement at 12.81% in 1999 increasing from
12.38% in 1998. The return on average assets for the current year was 1.19%
compared to 1.21% in 1998.
The increase in earnings was principally attributable to higher levels
of fee income, growth in net interest income and reduction in the provision for
loan losses. Net interest income on a fully taxable equivalent basis (fte)
totaled $12,475,000 for 1999, an increase of $454,000 or 3.8% from 1998. The
improvement in net interest income was due to $25.9 million growth in average
earning assets during 1999, and a lower cost of funds which partially offset a
decline in asset yields. The Company made continued progress in reducing its
level of non-performing assets during 1999, which totaled $767,000 at December
31, 1999, or .24% of total
[GRAPHICS OMITTED]
Graph discloses [Diluted]Earnings per Share
95 $1.01
96 $1.10
97 $1.63
98 $1.91
99 $2.08
10
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
assets, compared to $826,000 and .30% at year-end 1998. As a result, the Company
reduced its provision for loan losses to $470,000 in 1999 compared to $720,000
in 1998.
Other income excluding securities gains for 1999 was $1,875,000 an
increase of $248,000 or 15.2% over 1998. Other income represented 13.1% of total
revenues in 1999, improving from 11.9% in 1998. Gains on sales of securities
were $59,000 in 1999 compared to $48,000 in 1998.
During 1999 other expenses increased $509,000 or 6.3% over 1998 to
$8,576,000. The increase was principally due to increase in data processing
costs related to new information systems, increase in losses related to
disposing of automobiles from the leasing portfolio; $409,000 in 1999 compared
to $157,000 in 1998, and the cost of opening a branch; $230,000. Expenses were
favorably impacted by lower level of other real estate costs and less legal fees
related to non-performing assets.
Net income for the Company for the year 1998 was $3,236,000 compared to
$2,706,000 for the year 1997. This represents an increase of $530,000 or 19.6%
over prior year. Basic and diluted earnings per share for 1998 were $1.93 and
$1.91 respectively increasing from $1.63 in 1997. Return on average assets and
return on average equity showed similar improvement at 1.21% and 12.38%
respectively in 1998 compared to 1.04% and 11.92% respectively in 1997.
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 (fte) totaled $12,021,000 for 1998, an increase
of $602,000 or 5.3% from 1997. The improvement in net interest income was due to
$10.0 million growth in average earning assets during 1998, increase in earning
asset ratio, and lower cost of funds which offset a decline in asset yields. The
Company made continued progress in reducing its level of non-performing loans
during 1998, which totaled $622,000 at December 31, 1998, or .33% of total
loans, compared to $2,175,000 and 1.17% at year-end 1997. As a result, the
Company reduced its provision for loan losses to $720,000 in 1998 compared to
$1,355,000 in 1997.
Other income excluding securities gains for 1998 was $1,627,000 an
increase of $369,000 or 29.2% over 1997. During 1997, the Company recorded a
non-recurring gain on the termination of pension plan of $597,000 which was
$343,000 after related taxes with no such gains in 1998. Gains on sales of
securities were $48,000 in 1998 compared to $70,000 in 1997.
During 1998, other expenses increased 2.6% over 1997 to $8,066,000. The
increase was principally due to additional costs related to data processing
system conversion. Expenses were favorably impacted by lower level of other real
estate costs and legal fees related to non-performing assets.
[GRAPHICS OMITTED]
Graph discloses Net Income ($ In Thousands)
95 $1,802
96 $1,872
97 $2,706
98 $3,236
99 $3,508
- ------------------------------------------------(Norwood Financial Corp)------11
[BOX GRAPHIC OMITTED] 99 Annual Report
Financial Condition
Total Assets
Total assets at December 31, 1999 were $314.8 million compared to
$279.0 million at year-end 1998, an increase of $35.8 million or 12.8%. The
Company funded an $18.3 million growth in loans and $16.6 million increase in
investments available for sale with borrowings from the Federal Home Loan Bank
of Pittsburgh (FHLB) of $28.0 million and growth in deposits of $9.7 million.
Loans Receivable
Loans receivable, which include automobile leases represent the largest
percentage of the Company's earning assets. At December 31, 1999 total loans
receivable were $205.2 million compared to $186.9 million in 1998, an increase
of $18.3 million or 9.8%. Loan growth in retail lending which was centered in
home equity financings, and indirect automobile lending was partially offset by
lower levels of automobile leases. Residential mortgages totaled $38.8 million
at year-end increasing from $36.1 million at December 31, 1998. This increase is
net of pre-payments and refinancings principally in the adjustable rate mortgage
portfolio. Fixed rate mortgage products were more favorable during the first
half of 1999 due to lower interest rate environment with the fixed rate
portfolio increasing $4.8 million to $14.1 million at December 31, 1999. With
the increase in long-term interest rates during the third and fourth quarter of
1999, which impacts residential mortgage rates, the Company had a lower level of
mortgage originations during the period. In the current interest rate
environment, the Company may experience a continued slow down in mortgage
lending in early 2000. There can be no assurances however to the direction of
interest rates or the local real estate market. The Company sells a portion of
its longer term fixed rate residential loan production for interest rate risk
management, with $1.7 million sold in the secondary market during the year. The
Company services $15.5 million of mortgage loans that it has previously sold
into secondary market.
The Company's indirect portfolio which consists of loans made through
dealers increased $10.8 million to total $45.1 million at year-end, with the
growth principally in used automobiles. The weighted average maturity of the
portfolio is 47 months with an average life of 23 months.
The Company began slowing down its volume of automobile lease
originations in late 1997 and stopped originations entirely during the third
quarter of 1999. This was done to monitor experience in early terminations, the
amount of off-lease vehicles returned and the market values of vehicles returned
compared to residual values. As a result, total leases declined $9.9 million in
1999 to $24.0 million at December 31, 1999.
[GRAPHICS OMITTED]
Graph discloses Total Assets ($ In Millions)
95 $217
96 $261
97 $263
98 $279
99 $315
[GRAPHICS OMITTED]
Graph discloses Total Loans ($ In Millions)
95 $152
96 $175
97 $186
98 $187
99 $205
12
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Residual losses totaled $381,000 for 1999. The Company's reserve for residual
losses totaled $311,000 at December 31, 1999 with residual value of $17.8
million compared to $307,000 and $24.1 million at prior year end. The Company
liquidates its returned off-lease vehicles through various used car dealers and
automobile auction centers. At December 31, 1999 the Company had an inventory of
automobiles to liquidate of $974,000.
Commercial loans consist principally of loans made to small businesses
within the Company's market which are usually secured by real estate and other
assets of the borrower.
Commercial and commercial real estate loans totaled $67.2 million at
year-end 1999 compared to $56.3 million in 1998, an increase of $10.9 million or
17.6%. The Company opened a new office in Monroe County in June 1999, which
accounted for $5.3 million of the increase in commercial loans.
For the year 1999, total loans averaged $196.0 million with an fte
yield of 8.32% compared to $186.9 million and 8.73% during 1998. Total interest
income on loans (fte) was $16,303,000 compared to $16,316,000 in 1998.
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 interest is doubtful. Commercial and real
estate related loans are generally placed on non-accrual when interest is 90
days delinquent. When loans are placed on non-accrual, accrued interest income
is reversed from current earnings.
At December 31, 1999, non-performing loans totaled $657,000 and
represented .32% of total loans receivable compared to $622,000 and .33% at
year-end 1998. Total non-performing assets which includes other real estate
totaled $767,000 and represented .24% of total assets decreasing from $826,000
and .30% at December 31, 1998. At year-end 1999, non-performing assets consisted
principally of residential real estate loans, with the largest such loan
totaling $299,000.
The allowance for loan losses totaled $3,344,000 at year-end 1999 and
represented 1.63% of total loans receivable compared to $3,333,000 or 1.78% at
year-end 1998. Net charge-offs for 1999 were $459,000, consisting principally of
losses in the consumer loan and lease portfolios, decreasing from $637,000 in
1998. With the continued low level of non-performing loans and less charge-offs,
the Company reduced its provision for loan losses to $470,000 from $720,000 in
1998. The coverage ratio of allowance for loan losses to non-performing loans
was 508.9% at December 31, 1999.
[GRAPHICS OMITTED]
Graph discloses Nonperforming Assets to Total Assets
95 2.68%
96 2.22%
97 1.03%
98 .30%
99 .24%
- -------------------------------------------------Norwood Financial Corp-------13
[GRAPHICS OMITTED] 99 ANNUAL REPORT
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 are allocated accordingly. Larger
credit exposures are analyzed individually. Management considers the allowance
at December 31,1999 adequate for the loan mix and classifications.
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated:
At December 31
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Allowance balance at beginning of period $3,333 $3,250 $2,616 $2,125 $1,893
Charge-Offs:
Commercial and all other (12) (294) (380) (820) (448)
Real Estate (17) (14) (119) (226) (353)
Installment (419) (366) (264) (320) (123)
Lease Financing (184) (115) ( 67) -- --
------ ------ ------- ------ ------
Total (632) $ (789) (830) (1,366) (924)
Recoveries:
Commercial and all other 74 89 72 71 513
Real Estate -- 7 3 16 3
Installment 84 50 34 60 21
Lease Financing 16 6 -- -- --
------ ------ ------- ------ ------
Total 173 152 109 147 537
Provision expense 470 720 1,355 1,710 619
------ ------ ------- ------ ------
Allowance balance at end of period 3,344 $3,333 $3,250 $2,616 $2,125
===== ====== ====== ====== ======
Allowance for loan losses as a percent
of total loans outstanding 1.63% 1.78% 1.75% 1.50% 1.40%
Net loans charged off as a percent of
average loans outstanding .23% .34% 0.39% 0.76% 0.27%
Allowance for loan losses as a
percent of non-performing loans 508.9% 535.8% 149.5% 74.9% 54.7%
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, 1999, there were no loans not previously discussed where
known information about possible credit problems of borrowers caused management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
14
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
At December 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Commercial and all other $ 64 $ 65 $ 963 $1,633 $1,572
Real estate 513 503 1,112 1,790 2,205
Installment 19 20 33 28 48
------ ------ ------ ------ ------
Total $ 596 $ 588 $2,108 $3,451 $3,825
Accruing loans which are contractually
past due 90 days or more:
Commercial and all other $ -- $ -- $ 44 $ 38 $ 55
Real estate -- -- -- -- --
Installment/leases 61 34 23 4 --
------ ------ ------ ------ ------
Total $ 61 $ 34 $ 67 $ 42 $ 55
====== ====== ====== ====== ======
Total non-performing loans $ 657 $ 622 $2,175 $3,493 $3,880
Other real estate owned 110 204 537 2,283 1,944
------ ------ ------ ------ ------
Total non-performing assets $ 767 $ 826 $2,712 $5,776 $5,824
====== ====== ====== ====== ======
Non-performing loans to total loans .32% .33% 1.17% 2.00% 2.55%
Non-performing loans to total assets .21% .22% .83% 1.34% 1.79%
Non-performing assets to total assets .24% .30% 1.03% 2.22% 2.68%
Securities
The securities portfolio consists principally of United States
Government agencies issues, including mortgage backed securities, U.S. Treasury
securities, municipal obligations, and corporate debt. In accordance with
SFAS#115 "Accounting for Certain Investments in Debt and Equity Securities" the
Company classifies its investments into two categories: held to maturity (HTM)
and available for sale (AFS). The Company does not have a trading account.
Securities classified as HTM are those in which the Company has the ability and
the intent to hold until contractual maturity. At December 31, 1999, this
account totaled $7.5 million and consisted of longer term municipal obligations.
Securities classified as AFS 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 and reported in the equity section of the balance sheet as other
comprehensive income. At December 31, 1999, $78.9 million in securities were so
classified and carried at their fair value.
During the second quarter of 1999, the Company funded $15 million of
security purchases, principally mortgage-backed issues, with borrowings from the
FHLB. The transaction generated $147,000 of net interest income for 1999. Any
changes in interest rates could affect the yield and prepayment rates on the
investments and cost of the borrowings.
- -------------------------------------------------Norwood Financial Corp-------15
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Interest rates increased during 1999 with the benchmark 30 Year
Treasury Bill yielding over 6.40% by year-end compared to 5.00% late in 1998.
This increase in rates caused a slow down in the cashflow received from
mortgage-backed securities and therefore extended the modified duration of the
securities. At December 31, 1999, the modified duration was 4.9 years compared
to 3.5 years at the prior year-end. Generally in a raising interest rate
environment the fair value of the Company's available for sale portfolio
decreases.
At December 31, 1999, the Company's securities portfolio (HTM and AFS)
totaled $86.3 million with the percentage of obligations of U.S. Government
agencies 21.0%; mortgage-backed securities, 52.7%; municipal obligations, 14.1%;
U.S. Treasuries, 4.6% and other of 7.6%. At December 31, 1999, the portfolio
contained no collateralized mortgage obligations (CMOs), structured notes,
step-up bonds and no off-balance sheet derivatives were in use. The portfolio
totaled $69.9 million at year-end 1998.
Deposits
Total deposits at December 31, 1999 were $243.5 million compared to
$233.8 million at year-end 1998, an increase of $9.7 million or 4.2%. The
increase was principally in core transaction accounts and time deposits over
$100,000. The new branch office in Monroe County contributed $3.7 million of the
increase in deposits. Interest bearing demand deposits increased $2.7 million or
11.4% to $26.7 million, reflecting growth in new retail checking account
products. The tiered rate Investor Account for high-balance accounts totaled
$10.5 million compared to $9.3 million at year-end 1998.
Time deposits over $100,000, which consist principally of school
district and other public funds with maturities generally less than one year,
were $32.5 million at December 31, 1999, increasing from $27.6 million at
year-end 1998. These deposits are subject to competitive bid and the Company
bases its bid on current interest rates, loan demand, investment portfolio
structure and relative cost of other funding sources. In addition to demand
deposits of $26.8 million the Company has $7.6 million of cash management
accounts which represent commercial customers excess funds invested in
over-night securities, which the Company considers core-funding.
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.
16
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Net interest income, which is the primary source of the Company's
earnings, is impacted by changes in interest rates and the 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. 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, 1999, the level of net interest income at risk
in a 200 basis points increase or decrease was within the policy limits.
Imbalance in repricing opportunities at a given point in time reflects
interest-sensitivity gaps measured as the difference between rate-sensitive
assets and rate-sensitive liabilities. 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, 1999, the Bank had a negative 90 day interest
sensitivity gap of $14.3 million or 4.5% of total assets. A negative gap means
that interest-sensitive liabilities are higher than interest-sensitive assets at
the time interval. This would indicate that in a rising rate environment, the
cost of interest-bearing liabilities would increase faster than the yield on
earning assets in the 90 day time frame. This risk is managed by ALCO
strategies; including shortening the investment portfolio, pricing of deposit
liabilities to attract longer term time deposits, loan pricing to encourage
variable rate products and evaluation of loan sales of longer term mortgages.
The Company analyzes and measures the time periods in which rate
sensitive assets (RSA) and rate sensitive liabilities (RSL) 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
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.
- -------------------------------------------------Norwood Financial Corp-------17
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The following table displays interest-sensitivity as of December 31, 1999:
(in thousands)
3 Months 3 Through 1 Through Over
Or Less 12 Months 3 Years 3 Years Total
------- --------- ------- ------- -----
Federal funds sold and int
bearing deposits $ 2,368 $ -- $ -- $ -- $ 2,368
Securities (1) 4,878 8,587 30,083 42,804 86,352
Loans receivable (1) 43,842 47,331 98,907 15,080 205,160
------ ------ ------ ------ -------
Total rate sensitive assets
(RSA) $51,088 $55,918 $128,990 $ 57,884 $293,880
======= ======= ======== ======== ========
Non-interest bearing demand(2) $ 3,356 $10,068 $13,424 $ -- $ 26,848
Interest bearing demand/savings (2) 6,692 9,780 39,123 13,157 68,752
Money Market deposit
accounts (2) 4,798 14,394 12,795 -- 31,987
Time deposits 33,282 37,399 45,179 -- 115,860
Other borrowings 17,259 332 21,009 -- 38,600
------ ------- -------- -------- --------
Total rate sensitive liabilities
(RSL) $65,387 $71,973 $131,530 $ 13,157 $282,047
======= ======= ======== ======== ========
Interest sensitivity gap ($14,299) $16,055) $2,540 $ 44,727
Cumulative gap ($14,299) ($30,354) ($32,894) $ 11,833
Cumulative gap to total assets (4.5%) (9.6%) (10.4%) 3.8%
(1) Included in the period in which interest rates were next scheduled to
adjust or the period in which they were due. Annual prepayments were
assumed based on historical experience and management judgement.
(2) These are non-maturity deposits generally subject to immediate
withdrawal. However, management considers a certain amount to be core
deposits with longer effective maturities. This is based on retention
experience in changing interest rate environment.
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
loan repayments and securities.
At December 31, 1999, the Company had cash and cash equivalents of
$10.8 million in the form of cash,
18
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
due from banks, Federal Funds sold and short-term deposits with other
institutions. In addition, the Company had total securities available for sale
of $78.9 million which could be used for liquidity needs. This totals $89.7
million and represents 28.5% of total assets compared to $74.9 million and 26.8%
of total assets at December 31, 1998. The Company also monitors other liquidity
measures all of which were within policy guidelines at December 31, 1999. The
Company believes its liquidity position is adequate.
The Company maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The borrowing capacity from FHLB was in excess of $57 million.
At year-end 1999 the Company had $30 million in borrowings from the FHLB.
Results of Operations
Net Interest
Net interest income is the difference between income earned on loans
and securities and interest paid on deposits and other borrowings. For the year
ended December 31, 1999 net interest income (fte) was $12,475,000 an increase of
$454,000 or 3.8% over 1998. The resultant fte net interest spread and net
interest margin for the year 1999 were 3.85% and 4.48% respectively compared to
4.08% and 4.76% respectively in 1998.
Total fte interest income for 1999 was $21,590,000, an increase of
$1,092,000 or 5.3% from prior year. As the earning asset yield declined 36 basis
points to 7.75% from 8.11% in 1998, this increase in interest income was the
result of $25.9 million growth in average earning assets. Interest expense
totaled $9,115,000 for 1999, increasing $638,000 or 7.5% from 1998. The Company
was able to reduce its cost of interest-bearing liabilities to 3.90% compared to
4.03% in the prior year. As a result of a 36 basis point decline in earning
asset yields only partially offset by 13 basis point decline in cost of
interest-bearing liabilities, net interest spread decreased to 3.85% from 4.08%
in 1998. Net interest margin, which is the measurement of net return on earning
assets also decreased to 4.48% in 1999 from 4.76%. The decrease in net interest
margin was due in part to mix of earning asset growth, with 35% of the growth
due to loans and 65% in securities, which at a yield of 6.27% is lower than the
8.32% for loans. The funding mix also contributed to the decline in net interest
margin as borrowed funds increased $15.5 million at a cost of 5.52% and
deposits, which have a lower cost, increased $9.7 million on average.
- -------------------------------------------------Norwood Financial Corp-------19
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Interest income earned on loans totaled $16,303,000 with a yield of
8.32% in 1999 compared to $16,316,000 with a yield of 8.73% in 1998. The
decrease in yield was due in part to lower interest rate environment with an
average prime rate of 8.00% in 1999 compared to 8.36% in 1998. However, prime
rate at December 31, 1999 was 8.50%, increasing from 7.75% at the prior
year-end. Average loans increased $9.1 million to $196.0 million. Loans and
leases represented 70.3% of earning assets in 1999 compared to 74% in 1998.
Securities available for sale averaged $72.2 million in 1999 with an
fte interest income of $4,524,000 and yield of 6.27% compared to $55.0 million,
$3,375,000 and 6.14% respectively in 1998. The increase in yield was principally
due to the higher interest rate environment in the second half of 1999, and the
resulting extension in the average life of the portfolio.
Interest-bearing deposits averaged $207.9 million increasing $7.2
million from average in 1998. The cost of deposits for 1999 was 3.78% compared
to 3.99% in 1998. The Company decreased its costs of savings accounts by 25
basis points and time deposits by 23 basis points. Also, the percentage of time
deposits decreased to 51.5% of total interest bearing deposits compared to 52.3%
in 1998. Short-term borrowings, principally cash management accounts, averaged
$8.2 million at a cost of 3.66% compared to $7.6 million at 4.63% in 1998. Other
borrowings, which consist of advances from the FHLB increased on average to
$17.5 million in 1999, compared to $2.0 in 1998. The increase in borrowings were
used principally to fund purchases of mortgage-backed securities.
For the year ended December 31, 1998 net interest income (fte) was
$12,021,000 an increase of $602,000 or 5.3% over 1997. The resultant fte net
interest spread and net interest margin for the year 1998 were 4.08% and 4.76%
respectively compared to 4.10% and 4.70% respectively in 1997.
Total fte interest income for 1998 was $20,498,000, an increase of
$286,000 or 1.4% from prior year. As the earning asset yield declined 22 basis
points to 8.11% from 8.33% in 1997, this increase in interest income was the
result of $10.0 million growth in average earning assets. Interest expense
totaled $8,477,000 for 1998, a decrease of $316,000 or 3.6% from 1997. The
Company was able to reduce its cost of interest bearing liabilities to 4.03%
compared to 4.23% in the prior year. As a result of a 22 basis point decline in
earning asset yields only partially offset by 20 basis point decline in cost of
interest-bearing liabilities, net interest spread decreased to 4.08% from 4.10%
in 1997. However, net interest margin, which is the measurement of net return on
earning assets increased to 4.76% from 4.70%. This increase was caused by a
higher earning asset ratio of 94.2% compared to 93.3% in 1997, and an increase
in non-interest bearing
20
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
liabilities of $2.0 million and equity of $3.4 million. The ratio of earning
assets to interest-bearing liabilities improved to 120.% in 1998 from 116.7% in
1997.
Interest income earned on loans totaled $16,316,000 with a yield of
8.73% in 1998 compared to $16,205,000 with a yield of 8.83% in 1997. The
decrease in yield was principally due to lower interest rate environment with an
average prime rate of 8.36% in 1998 compared to 8.44% in 1997. Prime rate at
December 31, 1998 was 7.75%. During 1998 there continued a shift in loan mix
with increases in lower yielding retail loans and decreases in higher yielding
commercial loans. Average loans increased $3.3 million to $186.9 million. Loans
and leases represented 74.0% of earning assets in 1998 decreasing from 75.6% in
1997.
Total securities (HTM and AFS) averaged $63.0 million in 1998 with an
fte interest income of $4,051,000 and yield of 6.43% compared to $55.9 million,
$3,826,000 and 6.85% respectively in 1997. The decrease in yield was principally
due to shortening of the average repricing term in 1998, lower interest rate
environment, and purchases of lower coupon mortgage-backed securities.
Interest-bearing deposits averaged $200.7 million increasing $3 million
from average 1997. The average cost of deposits for 1998 was 3.99% compared to
4.14% in 1997. The Company decreased its costs of transaction and savings
accounts by 15 basis points and 26 basis points respectively. Also, the
percentage of time deposits decreased to 52.3% of total interest bearing
deposits compared to 53.6% in 1997. Short-term borrowings averaged $7.6 million
at a cost of 4.63% compared to $7.7 million at 4.84% in 1997.
Other Income
Other income, excluding gains on sales of securities, totaled
$1,875,000 in 1999, an increase of $248,000 or 15.2% over 1998. Other income
represented 13.1% of total revenues increasing from 11.9% in 1998. Service
charges and fees were $1,235,000 in 1999 compared to $1,087,000 in 1998, an
increase of $148,000. The increase is due in part to growth in fee-based retail
checking accounts; $38,000 and increase in automated teller machine income;
$14,000. The Wayne Bank Visa Check Card generated $64,000 in revenues,
increasing from $50,000 in 1998 and merchant card processing fees totaled
$79,000, an increase of $21,000 from 1998.
Commissions on sales of mutual funds, annuities and discount brokerage
through Norwood Investment Corp totaled $148,000 on sales of $6.4 million
compared to $134,000 in revenues on sales of $5.3 million in 1998. The Company
sold $1.7 million in residential mortgages for a gain of $19,000 declining from
a gain of $100,000 on $7.2 million in sales in 1998. The decrease in volume sold
is due to the increasing interest rate
- -------------------------------------------------Norwood Financial Corp-------21
[GRAPHICS OMITTED] 99 ANNUAL REPORT
environment during 1999. Trust income totaled $255,000 for 1999, an increase of
$82,000 or 47.4% over prior year. The increase is due in part to final
termination charges on closed accounts and higher estate income.
Other income for 1998, excluding gains on sales of securities and
non-recurring gain on termination of pension plan recorded in 1997, totaled
$1,627,000, an increase of $369,000 over 1997. Other income represented 11.9% of
total revenues increasing from 10.2% in 1997.
Service charges and fees were $1,087,000 in 1998 compared to $859,000
in 1997, an increase of $228,000. The increase was principally due to growth in
fee-bearing retail checking accounts of $44,000, and increase in overdraft fees
of $107,000. The Company increased fees on deposit products effective August 1,
1998. The Wayne Bank Visa Check Card, which was introduced in April 1997,
generated $50,000 in revenues, increasing $33,000 from 1997.
Commissions on mutual funds and annuities through Norwood Investment
Corp. totaled $134,000 on sales of $5.3 million compared to $75,000 on sales of
$2.2 million in 1997. During 1998, the Company sold $7.2 million in residential
mortgages for a gain of $100,000 compared to $57,000 in gains for 1997.
Other Income
(000)
1999 1998 1997
------- ------- -------
Service charges on
Deposit Accounts $ 213 $ 193 $ 145
ATM Fees 142 128 125
NSF Fees 478 440 333
Other Service Chgs. & Fees 402 326 256
Trust Income 255 173 165
Mutual Funds & Annuities 148 134 75
Gain on Sales of Loans 19 100 57
Other Income 218 133 102
------- ------- -------
$ 1,875 $ 1,627 $ 1,258
Net realized gains on
sales of securities 59 48 70
Gain on termination of
pension plan -- -- 597
------- ------- -------
Total $ 1,934 $ 1,675 $ 1,925
======= ======= =======
Other Expenses
Other expenses totaled $8,576,000 for 1999 compared to $8,067,000 in
1998, an increase of $509,000 or 6.3%. Salary and employee benefit costs which
represent 47.6% of other expense, were $4,081,000 for 1999,
22
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
an increase of $195,000 or 5.0%. The increase was principally due to staff
expenses related to a new branch location opened in June 1999. Total expenses
including staffing, rental and other expenses related to a new branch were
$230,000. Other real estate owned costs decreased to $5,000 from $115,000 in
1998 due to lesser number of properties in 1999. Legal expenses declined in 1999
to $49,000 from $74,000 in 1998 principally due to lower costs related to
non-performing loans.
In the fourth quarter of 1998 the Bank converted its data processing
core application systems from an in-house system to an outsourced environment.
As a result of monthly fees, data processing expense increased to $409,000 in
1999 compared to $290,000 in 1998. This was partially offset by decrease in
equipment costs. The Bank also incurred certain one-time costs associated with
conversion of lease processing system and its ATM network, both of which
occurred in the second quarter of 1999. Costs related to the disposition of
automobiles from the leasing portfolio were $409,000 compared to $157,000 in
1998. The increase was principally due to greater number of cars returned in
1999, the short terms of the maturing leases and the lower market values
compared to residual values. These losses were partially offset by lease
termination fee income of $78,000 in 1999 and $45,000 in 1998.
The efficiency ratio for 1999 improved to 56.9% from 58.0% in 1998.
Other expenses totaled $8,067,000 for 1998 compared to $7,861,000 in
1997, an increase of 2.6%. Salary and employee benefit costs which represents
48.2% of other expense was $3,886,000 for 1998, an increase of $247,000 or 6.8%.
The increase was principally in the benefits area with higher costs related to
Employee Stock Ownership Plan (ESOP) and 401(k) Plan. Other real estate owned
costs decreased to $115,000 from $254,000 in 1997 due to lower net losses of
$22,000 in 1998 compared to $111,000 in 1997. Legal expenses declined in 1998 to
$74,000 from $189,000 in 1997 principally due to lower costs related to
non-performing loans.
In the fourth quarter of 1998 the Bank converted its data processing
core application systems from an in-house system to an outsourced environment.
As a result of conversion related costs and processing, data processing expense
increased to $290,000 in 1998 compared to $150,000 in 1997.
Income Taxes
Income tax expense for the year 1999 was $1,514,000 for an effective
tax rate of 30.1% compared to an expense of $1,393,000 and an effective rate of
30.1% in 1998. The effective tax rate is lower than the
- -------------------------------------------------Norwood Financial Corp-------23
[GRAPHICS OMITTED] 99 ANNUAL REPORT
statutory rate of 34% due to holdings of municipal obligations and certain loans
which provide income partially exempt from Federal income taxes.
Income tax expense for 1998 was $1,393,000 for an effective tax rate of
30.1% compared to an expense of $1,067,000 and an effective rate of 28.2% in
1997. During 1998 the Company had a higher level of pre-tax income of $856,000
and lower levels of tax exempt income which increased the effective rate.
Capital and Dividends
Total stockholders' equity at December 31, 1999 was $26.7 million,
compared to $27.7 million at year-end 1998. The change was principally due to
retention of earnings of $2,523,000 after dividends declared of $985,000, a
$2,974,000 decrease in other comprehensive income due to fair value changes on
the Company's available for sale securities portfolio as a result of increasing
interest rates and the purchase of 41,219 shares of treasury stock, at a cost of
$941,000. At December 31, 1999 the Company had leverage capital ratio of 9.15%,
Tier 1 risk-based capital of 11.98% and total risk-based capital of 13.50%
compared to 9.09%, 12.30% and 14% respectively in 1998.
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 1998
First Quarter $ 34.00 $ 20.75 $ .12
Second Quarter 34.00 27.75 .12
Third Quarter 27.00 22.00 .12
Fourth Quarter 24.00 20.50 .14
Year 1999
First Quarter $ 24.00 $ 21.25 $ .14
Second Quarter 24.00 21.00 .14
Third Quarter 24.125 23.00 .14
Fourth Quarter 23.25 20.50 .17
The book value of the common stock was $15.28 at December 31, 1999
compared to $15.56 at prior year end. At year-end the stock price was $20.75
compared to $22.25 at December 31, 1998.
[GRAPHICS OMITTED]
Graph discloses Cash Dividend Declared
95 $ .39
96 $ .42
97 $ .44
98 $ .50
99 $ .59
24
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
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 interest rates. 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
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. The Company has operated and evaluated its computer
systems following January 1, 2000 and has not identified any errors. Systems
will continue to be monitored to assess whether they are at risk of
misinterpreting any future dates. The Company has not been informed of any such
problem experienced by its vendors or its customers, nor by any of the utilities
that provide services to the Company.
The Company will continue to monitor its significant vendors of goods
and services with respect to Year 2000 problems they may encounter as those
issues may effect the Company's ability to continue operations, or might
adversely affect the Company's financial position, results of operations and
cash flows. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
The expectations of the Company contained in this section on Year 2000
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements. All forward looking statements in this section are
based on information available to the Company on the date of this document, and
the Company assumes no obligation to update such forward looking statements.
- -------------------------------------------------Norwood Financial Corp-------25
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Summary of Quarterly Results (unaudited)
(dollars in thousands, except per share amounts)
1999
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Net interest income $ 3,109 $ 3,186 $ 3,016 $ 2,823
Provision for loan losses 130 110 100 130
Net realized gains on sales of securities -- 1 34 24
Other income 520 524 398 433
Other expenses 2,206 2,255 2,131 1,984
------------ -------------- ---------- ----------
Income before income taxes 1,293 1,346 1,217 1,166
Income tax expense 367 426 368 353
------------ ----------- ---------- ----------
NET INCOME $ 926 $ 920 $ 849 $ 813
============ =========== ========== ==========
Basic earnings per share $ 0.56 $ 0.55 $ 0.50 $ 0.48
============ =========== ========== ==========
Diluted earnings per share $ 0.55 $ 0.55 $ 0.50 $ 0.48
============ =========== ========== ==========
1998
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Net interest income $ 3,042 $ 2,973 $ 2,917 $ 2,809
Provision for loan losses 180 180 180 180
Net realized gains on sales of securities 21 12 -- 15
Other income 430 446 408 343
Other expenses 2,122 1,977 2,011 1,957
------------ -------------- ---------- ----------
Income before income taxes 1,191 1,274 1,134 1,030
Income tax expense 356 384 343 310
------------ -------------- ---------- ----------
NET INCOME $ 835 $ 890 $ 791 $ 720
============ ============== ========== ==========
Basic earnings per share $ 0.50 $ 0.53 $ 0.47 $ 0.43
============ ============== ========== ==========
Diluted earnings per share $ 0.49 $ 0.52 $ 0.47 $ 0.43
============ ============== ========== ==========
26
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Consolidated Balance Sheets
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- --------------------------------
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 $ 2,031 $ 94 4.63% $ 1,108 $ 56 5.05% $ 2,490 $ 141 5.66
Interest bearing
deposits with banks 755 14 1.99 1,678 75 4.47 713 40
Securities held to maturity 7,633 655 8.57 8,014 676 8.44 8,745 742 8.48
Securities available for sale
Taxable 69,401 4,335 6.25 53,116 3,248 6.11 43,525 2,803 6.44
Tax-exempt 2,800 189 6.75 1,883 127 6.74 3,624 281 7.75
------- ----- ------- ----- ------- -----
Total securities
available for sale 72,201 4,524 6.27 54,999 3,375 6.14 47,149 3,084 6.54
Loans receivable (3,4) 196,005 16,303 8.32 186,877 16,316 8.73 183,625 16,205 8.83
------- ----- ------- ----- ------- -----
Total interest
earning assets 278,625 21,590 7.75 252,676 20,498 8.11 242,722 20,212 8.33
Non-interest
earning assets:
Cash and due
from banks 7,409 6,451 6,440
Allowance for
loan losses (3,359) (3,277) (2,918)
Other assets 13,237 12,265 13,937
-------- --------- ---------
Total non-interest
earning assets 17,287 15,439 17,459
-------- --------- ---------
TOTAL ASSETS $295,912 $ 268,115 $ 260,181
======== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liablities:
Interest- bearing
demand and
money market $ 58,076 1,397 2.41 $ 52,691 1,306 2.48 $ 47,245 1,241 2.63
Savings 42,676 934 2.19 43,068 1,049 2.44 44,570 1,203 2.70
Time 107,152 5,520 5.15 104,980 5,647 5.38 105,920 5,745 5.42
------- ----- ------- ----- ------- -----
Total interest-
bearing deposits 207,904 7,851 3.78 200,739 8,002 3.99 197,735 8,189 4.14
Short-term borrowings 8,187 300 3.66 7,648 354 4.63 7,726 374 4.84
Other borrowings 17,464 964 5.52 2,000 121 6.05 2,486 230 9.25
------- ----- ------- ----- ------- -----
Total interest
bearing liabilities 233,555 9,115 3.90 210,387 8,477 4.03 207,947 8,793 4.23
Non-interest bearing
liabilities:
Non-interest bearing
demand deposits 28,059 25,490 25,584
Other liabilities 6,921 6,093 3,954
-------- --------- ---------
Total non-interest
bearing liabilities 34,980 31,583 29,538
Shareholders' equity 27,377 26,145 22,696
-------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $295,912 $ 268,115 $ 260,181
======== ========= =========
Net interest income
(tax-equivalent basis) 12,475 3.85% 12,021 4.08% 11,419 4.10%
==== ==== ====
Tax-equivalent
basis adjustment (341) (280) (355)
------- -------- ----------
Net Interest Income $12,134 $ 11,741 $ 11,064
======= ======== ==========
Net Interest margin
(tax-equivalent basis) 4.48% 4.76% 4.70
==== ==== ====
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 fully taxable equivalent effect of changes in volumes
and rates on interest income and interest expense.
Increase/(Decrease)
----------------------------------------------------------------
(dollars in thousands) 1999 compared to 1998 1998 compared to 1997
------------------------------ -------------------------------
Variance due to Variance due to
------------------------------ -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
INTEREST EARNING ASSETS
Federal funds sold $ 43 ($ 5) $ 38 ($ 71) ($ 14) ($ 85)
Interest bearing deposits with banks (30) (31) (61) 45 (10) 35
Securities held to maturity (33) 12 (21) (62) (4) (66)
Securities available for sale
Taxable 1,016 71 1,087 592 (147) 445
Tax-exempt 62 0 62 (121) (33) (154)
------- ------- ------- ------- ------- -------
Total securities available for sale 1,078 71 1,149 471 (180) 291
Loans receivable (3,4) 778 (791) (13) 285 (174) 111
------- ------- ------- ------- ------- -------
Total interest earning assets 1,836 (744) 1,092 668 (382) 286
Interest bearing liablities:
Interest- bearing demand and money market 130 (39) 91 138 (73) 65
Savings (9) (106) (115) (40) (114) (154)
Time 115 (242) (127) (51) (47) (98)
------- ------- ------- ------- ------- -------
Total interest- bearing deposits 236 (387) (151) 47 (234) (187)
Short-term borrowings 24 (78) (54) (4) (16) (20)
Other borrowings 855 (12) 843 (39) (70) (109)
------- ------- ------- ------- ------- -------
Total interest bearing liabilities 1,114 (476) 638 4 (320) (316)
------- ------- ------- ------- ------- -------
Net interest income(tax-equivalent basis) $ 722 ($ 268) $ 454 $ 664 ($ 62) $ 602
======= ======= ======= ======= ======= =======
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.
27
An Independent Member of
Beard BDO
& Company Inc. Seidman
Certified Public Accountants Alliance
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Norwood Financial Corp.
Honesdale, Pennsylvania
We have audited the accompanying consolidated balance sheets of Norwood
Financial Corp. and its subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/Beard & Company, Inc.
Harrisburg, Pennsylvania
January 28, 2000
28
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
- ------------(Consolidated Balance Sheets)
December 31, 1999 1998
---- ----
(In Thousands)
ASSETS
Cash and due from banks $ 8,430 $ 7,954
Interest-bearing deposits with banks 398 1,284
Federal funds sold 1,970 3,360
--------- ---------
Cash and cash equivalents 10,798 12,598
Securities available for sale 78,875 62,270
Securities held to maturity, fair value 1999 $ 7,411; 1998 $ 8,151 7,477 7,645
Loans receivable, net of allowance for loan losses 1999 $ 3,344; 1998 $ 3,333 201,816 183,586
Bank premises and equipment, net 6,739 7,077
Other real estate 110 204
Accrued interest receivable 1,646 1,441
Other assets 7,366 4,196
--------- ---------
TOTAL ASSETS $ 314,827 $ 279,017
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 26,848 $ 27,264
Interest-bearing demand 26,660 23,926
Money market deposit accounts 31,987 30,324
Savings 42,152 42,579
Time 115,860 109,674
--------- ---------
TOTAL DEPOSITS 243,507 233,767
Short-term borrowings 8,600 7,776
Long-term debt 30,000 2,000
Accrued interest payable 2,385 2,283
Other liabilities 3,681 5,463
--------- ---------
TOTAL LIABILITIES 288,173 251,289
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $ .10 per share; authorized 10,000,000 shares;
issued 1,803,824 shares 180 180
Surplus 4,603 4,542
Retained earnings 25,763 23,240
Treasury stock, at cost 1999 59,889 shares; 1998 22,347 shares (1,214) (343)
Accumulated other comprehensive income (loss) (1,319) 1,655
Unearned Employee Stock Ownership Plan (ESOP) shares (1,359) (1,546)
--------- ---------
Total stockholders' equity 26,654 27,728
--------- ---------
Total liabilities and stockholders' equity $ 314,827 $ 279,017
========= =========
See Notes to Consolidated Financial Statements.
29
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Consolidated Statements of Income
Years Ended December 31, 1999 1998 1997
--------- -------- ---------
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable, including fees $16,249 $16,311 $16,198
Securities:
Taxable 4,335 3,248 2,807
Tax-exempt 557 530 671
Interest-bearing deposits with other institutions 14 74 40
Federal funds sold 94 55 141
------- ------- -------
Total interest income 21,249 20,218 19,857
------- ------- -------
Interest expense:
Deposits 7,851 8,002 8,189
Short-term borrowings 300 354 374
Other 964 121 230
------- ------- -------
Total interest expense 9,115 8,477 8,793
------- ------- -------
Net interest income 12,134 11,741 11,064
Provision for loan losses 470 720 1,355
------- ------- -------
Net interest income after provision for loan losses 11,664 11,021 9,709
------- ------- -------
Other income:
Service charges and fees 1,235 1,087 859
Income from fiduciary activities 255 173 165
Net realized gains on sales of securities 59 48 70
Gain on termination of pension plan -- -- 597
Other 385 367 234
------- ------- -------
Total other income 1,934 1,675 1,925
------- ------- -------
Other expenses:
Salaries and employee benefits 4,081 3,886 3,639
Occupancy 712 708 693
Furniture and equipment 475 534 594
Data processing related operations 409 290 150
Other real estate owned 5 115 254
Advertising 94 120 163
Professional fees 186 254 323
Taxes, other than income 251 249 240
Amortization of intangible assets 185 214 291
Other 2,178 1,697 1,512
------- ------- -------
Total other expenses 8,576 8,067 7,861
------- ------- -------
Income before income taxes 5,022 4,629 3,773
Income tax expense 1,514 1,393 1,067
------- ------- -------
Net income $ 3,508 $ 3,236 $ 2,706
======= ======= =======
Earnings per share:
Basic $ 2.09 $ 1.93 $ 1.63
======= ======= =======
Diluted $ 2.08 $ 1.91 $ 1.63
======= ======= =======
See Notes to Consolidated Financial Statements
30
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Consolidated Sttements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Other
Comprehensive Unearned
Common Retained Treasury Income ESOP
Stock Surplus Earnings Stock (Loss) Shares Total
----- ------- -------- ----- ------ ------ -----
(In Thousands)
Balance, December 31, 1996 $ 90 $ 4,444 $ 18,861 $ (345) $ 419 $(1,950) $21,519
------
Comprehensive income:
Net income -- -- 2,706 -- -- -- 2,706
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- 861 -- 861
------
Total comprehensive income 3,567
------
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
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1997 180 4,384 20,844 (344) 1,280 (1,750) 24,594
------
Comprehensive income:
Net income -- -- 3,236 -- -- -- 3,236
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- 375 -- 375
------
Total comprehensive income 3,611
-------
Cash dividends declared,
$ .50 per share -- -- (840) -- -- -- (840)
Stock options exercised -- 37 -- -- -- -- 37
Issuance of treasury stock -- -- -- 1 -- -- 1
Release of earned ESOP shares -- 121 -- -- -- 204 325
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1998 180 4,542 23,240 (343) 1,655 (1,546) 27,728
------
Comprehensive income:
Net income -- -- 3,508 -- -- -- 3,508
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- (2,974) -- (2,974)
------
Total comprehensive income 534
------
Cash dividends declared,
$ .59 per share -- -- (985) -- -- -- (985)
Stock options exercised -- (9) -- 70 -- -- 61
Acquisition of treasury stock -- -- -- (941) -- -- (941)
Release of earned ESOP shares -- 70 -- -- -- 187 257
------ -------- -------- ------- -------- ------- --------
Balance, December 31, 1999 $ 180 $ 4,603 $ 25,763 $(1,214) $ (1,319) $(1,359) $ 26,654
====== ======== ======== ======= ======== ======= ========
See Notes to Consolidated Financial Statements
- -------------------------------------------------Norwood Financial Corp-------31
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Consolidated Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
-------- -------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,508 $ 3,236 $ 2,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 470 720 1,355
Depreciation 670 670 709
Amortization of intangible assets 185 214 291
Deferred income taxes (63) 1,317 1,184
Net realized gain on sales of securities (59) (48) (70)
Losses on sale of other real estate, net (9) 22 111
Net gain on sale of mortgage loans (19) (100) (56)
Mortgage loans originated for sale (1,714) (7,126) (4,210)
Proceeds from sale of mortgage loans 1,733 7,226 4,266
(Increase) decrease in accrued interest receivable (205) (83) 200
Increase (decrease) in accrued interest payable 102 (82) 141
Earnings on life insurance policy (41) -- --
Other, net 750 980 (94)
-------- -------- --------
Net cash provided by operating activities 5,309 6,946 6,533
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 7,696 5,012 9,423
Proceeds from maturities and principal reductions on
mortgage-backed securities 14,421 16,031 11,703
Purchases (43,240) (33,417) (20,268)
Securities held to maturity, proceeds from maturities 175 515 650
Net increase in loans (19,909) (3,203) (12,079)
Purchase of life insurance policy (3,070) -- --
Purchase of bank premises and equipment (311) (446) (240)
Proceeds from sales of other real estate 197 1,000 1,975
-------- -------- --------
Net cash used in investing activities (44,041) (14,508) (8,836)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 9,740 7,013 (2,708)
Net increase in short-term borrowings 824 2,786 1,763
Repayments of long-term debt (2,000) -- (2,442)
Proceeds from long-term debt 30,000 -- 2,000
Stock options exercised 61 37 --
Acquisition of treasury stock (941) -- --
Proceeds from issuance of treasury stock -- 1 1
Release of ESOP shares 187 204 200
Cash dividends paid (939) (805) (696)
-------- -------- --------
Net cash provided by (used in) financing activities 36,932 9,236 (1,882)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,800) 1,674 (4,185)
Cash and cash equivalents:
Beginning of year 12,598 10,924 15,109
-------- -------- --------
End of year $ 10,798 $ 12,598 $ 10,924
======== ======== ========
See Notes to Consolidated Financial Statements.
32
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....ANNUAL REPORT 99 Box Graphics
Notes to Consolidated Financial Statements
Summary of Accounting Policies
Nature of operations:
Norwood Financial Corp. (Company) was formed in March 1996 and is a one
bank holding company. Wayne Bank (Bank) is 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 gains and
losses are reported in other comprehensive income, 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.
- -------------------------------------------------Norwood Financial Corp-------33
[GRAPHICS OMITTED] 99 ANNUAL REPORT
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 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 and
amortization of fees 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
34
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
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 other real
estate owned expenses.
Intangible assets:
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 $ 185,000, $
214,000 and $ 291,000 for the years ended December 31, 1999, 1998 and 1997,
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
- -------------------------------------------------Norwood Financial Corp-------35
[GRAPHICS OMITTED] 99 ANNUAL REPORT
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:
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and are determined using the treasury stock
method.
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, 1999, 1998
and 1997, were $ 9,013,000, $ 8,560,000 and $ 8,652,000, respectively. Cash
payments for income taxes for the years ended December 31, 1999, 1998 and 1997
were $ 994,000, $ 29,000 and $ -0-, respectively. Non-cash investing activities
for 1999, 1998 and 1997 included foreclosed mortgage loans transferred to real
estate owned and repossession of other assets of $ 1,280,000, $ 1,579,000 and $
341,000, 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.
36
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Comprehensive income:
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on available for
sale securities, are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects
are as follows:
Years Ended December 31,
1999 1998 1997
------- ------- -------
(In Thousands)
Unrealized holding gains (losses) on available for sale securities $(4,569) $ 618 $ 1,346
Less reclassification adjustment for gains realized in income 59 48 70
------- ------- -------
Net unrealized gains (losses) (4,510) 570 1,276
Income tax (benefit) (1,536) 195 415
------- ------- -------
Net of tax amount $(2,974) $ 375 $ 861
======= ======= =======
Segment reporting:
The Company acts as an independent community financial service provider
and offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine network, the Company offers a full array of commercial and retail
financial services, including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of safe
deposit services. The Company also performs personal, corporate, pension and
fiduciary services through its Trust Department.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, mortgage banking and trust
operations of the Company. As such, discrete information is not available and
segment reporting would not be meaningful.
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities," which
was amended by Statement No. 137 and which becomes effective for the Company
January 1, 2001.
- -------------------------------------------------Norwood Financial Corp-------37
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The adoption of the Statement is not expected to have a significant impact on
the financial condition or results of operations of the Company.
SECURITIES
The amortized cost and fair value of securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain (Losses) Value
-------- -------- -------- --------
(In Thousands)
December 31, 1999:
Available for sale:
U.S. Treasury securities $ 4,006 $ 2 $ (20) $ 3,988
U.S. Government agencies 18,781 -- (611) 18,170
States and political subdivisions 4,925 -- (251) 4,674
Corporate obligations 2,520 -- (213) 2,307
Mortgage-backed securities 47,766 -- (2,243) 45,523
-------- -------- -------- --------
77,998 2 (3,338) 74,662
Equity securities 2,878 1,335 -- 4,213
-------- -------- -------- --------
$ 80,876 $ 1,337 $ (3,338) $ 78,875
======== ======== ======== ========
Held to maturity:
States and political subdivisions $ 7,477 $ 30 $ (96) $ 7,411
======== ======== ======== ========
December 31, 1998:
Available for sale:
U.S. Treasury securities $ 5,511 $ 74 $ (4) $ 5,581
U.S. Government agencies 19,496 169 (37) 19,628
States and political subdivisions 3,703 125 (17) 3,811
Corporate obligations 1,704 85 -- 1,789
Mortgage-backed securities 28,211 180 (65) 28,326
-------- -------- -------- --------
58,625 633 (123) 59,135
Equity securities 1,136 1,999 -- 3,135
-------- -------- -------- --------
$ 59,761 $ 2,632 $ (123) $ 62,270
======== ======== ======== ========
Held to maturity:
States and political subdivisions $ 7,645 $ 506 $ -- $ 8,151
======== ======== ======== ========
Equity securities consist of Pennsylvania community banks and Federal Home Loan
Bank stock.
The amortized cost and fair value of securities as of December 31,
1999, by contractual maturity or call date, 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.
38
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Securities Available Securities Held
For Sale To Maturity
-------------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands)
Due in one year or less $ 5,700 $ 5,653 $ -- $ --
Due after one year through five years 13,205 12,919 -- --
Due after five years through ten years 4,717 4,540 100 101
Due after ten years 6,624 6,027 7,377 7,310
------- ------- ------- -------
30,246 29,139 7,477 7,411
Mortgage-backed securities 47,766 45,523 -- --
Equity securities 2,878 4,213 -- --
------- ------- ------- -------
$80,876 $78,875 $ 7,477 $ 7,411
======= ======= ======= =======
Gross realized gains and gross realized losses on sales of securities
available-for-sale were $ 65,000 and $ 6,000, respectively, in 1999; $ 54,000
and $ 6,000, respectively, in 1998, and $ 80,000 and $ 10,000, respectively, in
1997.
Securities with a carrying value of $ 41,285,000 and $ 29,632,000 at
December 31, 1999 and 1998 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:
1999 1998
---- ----
(In Thousands)
Real estate:
Residential $ 56,984 $ 52,392
Commercial 49,796 30,734
Construction 3,339 3,046
Commercial, financial and agricultural 17,440 25,559
Consumer loans to individuals 54,026 42,061
Lease financing, net of unearned income 23,974 33,860
-------- -----------
205,559 187,652
Less:
Unearned income and deferred fees 399 733
Allowance for loan losses 3,344 3,333
-------- -----------
$201,816 $ 183,586
======== ===========
- -------------------------------------------------Norwood Financial Corp-------39
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The Bank's net investment in direct financing leases at December 31 consist of:
1999 1998
-------- --------
Minimum lease payments receivable $ 9,061 $ 14,579
Estimated unguaranteed residual values 17,759 24,122
Unearned income (2,846) (4,841)
-------- --------
$ 23,974 $ 33,860
======== ========
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Balance, beginning $ 3,333 $ 3,250 $ 2,616
Provision for loan losses 470 720 1,355
Recoveries 173 152 109
Loans charged off (632) (789) (830)
------- ------- -------
Balance, ending $ 3,344 $ 3,333 $ 3,250
======= ======= =======
The recorded investment in impaired loans, not requiring an allowance
for loan losses was $ 360,000 and $ 642,000 at December 31, 1999 and 1998,
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $ -0- at both December 31, 1999 and 1998. For the years
ended December 31, 1999, 1998 and 1997, the average recorded investment in these
impaired loans was $ 365,000, $ 669,000 and $ 2,716,000 and the interest income
recognized on these impaired loans was $ -0-, $ 77,000 and $ 68,000,
respectively.
Premesis and Equipment
Components of premises and equipment at December 31 are as follows:
1999 1999
-------- --------
(In Thousands)
Land and improvements $ 944 $ 944
Buildings and improvements 7,225 7,220
Furniture and equipment 2,469 2,163
-------- --------
10,638 10,327
Less accumulated depreciation (3,899) (3,250)
-------- --------
$ 6,739 $ 7,077
======== ========
40
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....ANNUAL REPORT 99 Box Graphics
Deposits
Aggregate time deposits in denominations of $ 100,000 or more were $
32,487,000 and $ 27,535,000 at December 31, 1999 and 1998, respectively. At
December 31, 1999, the scheduled maturities of time deposits are as follows (in
thousands):
2000 $ 71,186
2001 31,144
2002 8,847
2003 2,741
2004 1,942
--------------
$ 115,860
==============
Borrowings
Short-term borrowings at December 31 consist of the following:
1999 1998
------ ------
(In Thousands)
Securities sold under agreements to repurchase $7,600 $7,612
U.S. Treasury demand notes 1,000 164
------ ------
$8,600 $7,776
====== ======
The outstanding balances and related information of short-term borrowings are
summarized as follows:
Years Ended December 31,
1999 1998
---- ----
(In Thousands)
Average balance during the year $ 8,187 $ 7,648
Average interest rate during the year 3.66% 4.63%
Maximum month-end balance during the year $26,462 $14,284
Securities sold under agreements to repurchase generally mature within
one day to one year from the transaction date. Securities with amortized costs
and fair values of $ 8,684,000 and $ 8,415,000 at December 31, 1999 and $
6,992,000 and $ 7,042,000 at December 31, 1998 were pledged as collateral for
these agreements. The securities underlying the agreements were under the
Company's control.
The Company has a line of credit commitment available from the Federal
Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $ 15,000,000 which
expires in March 2000. There were no borrowings under this line of credit at
December 31, 1999 and 1998.
- -------------------------------------------------Norwood Financial Corp-------41
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Other borrowings consisted of the following at December 31, 1999 and
1998 (in thousands):
1999 1998
---- ----
Notes with the Federal Home Loan Bank (FHLB):
Note due December 1999 at 6.04% $ -- $ 2,000
Fixed note due January 2000 at 5.28 3,000 --
Fixed note due January 2000 at 5.78 4,000 --
Fixed note due January 2000 at 6.04 2,000 --
Fixed note due February 2000 at 5.72 3,000 --
Fixed note due March 2000 at 5.78 3,000 --
Convertible note due December 2006 at 6.19% 5,000 --
Convertible note due April 2009 at 4.83% 5,000 --
Convertible note due April 2009 at 5.07% 5,000 --
------- -------
$30,000 $ 2,000
======= =======
Employee Benefit Plans
In 1997, the Company terminated its defined benefit pension plan which
covered substantially all employees and officers. 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 1997
included in other income in the accompanying consolidated financial statements.
The Company has a defined contributory profit-sharing plan which
includes provisions 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 $ 115,000, $ 175,000 and $ 132,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
In 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 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
42
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
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 $ 285,000, $ 324,000 and $ 237,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The status of the ESOP shares are as follows:
1999 1998
---------- ----------
Allocated shares 37,665 27,365
Shares released from allocation 1,327 120
Unreleased shares 82,220 93,727
---------- ----------
Total ESOP shares 121,212 121,212
---------- ----------
Fair value of unreleased shares $1,706,000 $2,132,000
========== ==========
Income Taxes
The components of the provision for federal income taxes are as follows:
Years Ended December 31,
1999 1998 1997
------- ------- -------
(In Thousands)
Current $ 1,577 $ 76 $ (117)
Deferred (63) 1,317 1,184
------- ------- -------
$ 1,514 $ 1,393 $ 1,067
======= ======= =======
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,
------------------------
1999 1998 1997
---- ---- ----
Tax at statutory rates 34.0 % 34.0 % 34.0 %
Tax exempt interest income, net of interest expense disallowance (4.0) (3.6) (5.4)
Low-income housing tax credit (1.2) (1.3) (1.5)
Other 1.3 1.0 1.2
---- ---- ----
30.1 % 30.1 % 28.3 %
==== ==== ====
The income tax provision includes $ 20,000, $ 16,000 and $ 24,000 of income
taxes relating to realized securities gains for the years ended December 31,
1999, 1998 and 1997, respectively.
- -------------------------------------------------Norwood Financial Corp-------43
[GRAPHICS OMITTED] 99 ANNUAL REPORT
The net deferred tax liability included in other liabilities in the accompanying
balance sheets includes the following amounts of deferred tax assets and
liabilities:
1999 1998
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 786 $ 782
Deferred loan origination fees 90 29
Allowance for other real estate losses 38 66
Net unrealized loss on securities 680 --
Deferred compensation 31 41
Core deposit intangible 136 94
Partnership credit carryforward -- 116
Minimum tax credit carryforward 834 950
Net operating loss carryforward -- 550
Other 20 102
------- -------
Total Deferred tax assets 2,615 2,730
------- -------
Deferred tax liabilities:
Net unrealized gain on securities -- 853
Premises and equipment 107 241
Lease financing 4,211 4,939
Other 5 1
------- -------
Total deferred tax liabilities 4,323 6,034
------- -------
Net deferred tax liability $(1,708) $(3,304)
======= =======
Net operating loss carry forwards of approximately $ 1,570,000 were utilized in
1999.
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, 1999 and 1998, such loans amounted to $ 3,339,000 and $ 1,516,000,
respectively. During 1999, new loans to such related parties totaled $ 2,391,000
and repayments aggregated $ 568,000.
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.
44
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
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, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, 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 Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. 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 Amount Ratio
------ ----- ------ ----- ------ -----
(In Thousands)
As of December 31, 1999:
Total capital (to risk weighted assets) $29,691 13.47% $> 17,632 >8.00% $>20,040 >10.00%
- - - -
Tier 1 capital (to risk weighted assets) 26,384 11.97% > 8,816 >4.00% >13,224 > 6.00%
- - - -
Tier 1 capital (to average assets) 26,384 8.97% > 11,767 >4.00% >14,709 > 5.00%
- - - -
As of December 31, 1998:
Total capital (to risk weighted assets) $27,058 13.51% $>16,022 >8.00% $>20,028 >10.00%
- - - -
Tier 1 capital (to risk weighted assets) 23,731 11.85% > 8,010 >4.00% >12,015 > 6.00%
- - - -
Tier 1 capital (to average assets) 23,731 8.73% =10,873 >4.00% >13,591 > 5.00%
- - - -
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, 1999 and 1998 was approximately $ 1,888,000 and
$ 1,260,000, respectively.
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, 1999, $ 22,910,000 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 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.
- -------------------------------------------------Norwood Financial Corp-------45
[GRAPHICS OMITTED] 99 ANNUAL REPORT
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
1999 1998 1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding, beginning of year 67,450 $ 18.40 55,570 $ 16.72 41,620 $ 16.54
Granted 16,500 22.24 15,500 24.00 18,000 17.13
Exercised (3,620) 16.52 (2,232) 16.46 -- --
Forfeited -- -- (1,388) 16.63 (4,050) 16.63
------ --------- ------ --------- ------ ---------
Outstanding, end of year 80,330 $ 19.28 67,450 $ 18.40 55,570 $ 16.72
====== ========= ====== ========= ====== =========
Exercisable at end of year 63,830 $ 18.51
====== =========
Exercise prices for options outstanding as of December 31, 1999 ranged
from $ 16.44 to $ 24.00 per share. The weighted average remaining contractual
life is 8.0 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the Company's
net income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
Years Ended December 31,
1999 1998 1997
(In Thousands)
---------------------------------------------
Net income:
As reported $ 3,508 $ 3,236 $ 2,706
Pro forma 3,375 3,154 2,640
Earnings per share:
As reported 2.09 1.93 1.63
Pro forma 2.02 1.88 1.59
Earnings per share (assuming dilution):
As reported 2.08 1.91 1.63
Pro forma 2.00 1.86 1.59
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended December 31,
1999 1998 1997
----------------------------------
(In Thousands)
Dividend yield 2.46% 2.46% 2.40%
Expected life 8 years 8 years 8 years
Expected volatility 16.40% 39.80% 21.00%
Risk-free interest rate 4.65% 4.65% 5.75%
46
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Years Ended December 31,
1999 1998 1997
------------------------------------
Numerator, net income $3,508,000 $3,236,000 $2,706,000
========== ========== ==========
Denominator:
Denominator for basic earnings per share, weighted average shares 1,674,653 1,679,411 1,660,998
Effect of dilutive securities, employee stock options 11,690 16,674 3,474
---------- ---------- ----------
Denominator for diluted earnings per share, adjusted
weighted average shares and assumed conversions 1,686,343 1,696,085 1,664,472
========== ========== ==========
Basic earnings per common share $ 2.09 $ 1.93 $ 1.63
========== ========== ==========
Diluted earnings per common share $ 2.08 $ 1.91 $ 1.63
========== ========== ==========
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 instruments.
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,
1999 1998
---- ----
(In Thousands)
Commitments to extend credit $21,324 $13,788
Standby letters of credit 868 520
------- -------
$22,192 $14,308
======= =======
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.
- -------------------------------------------------Norwood Financial Corp-------47
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike and Monroe 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 and liabilities. 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, 1999 and 1998:
o 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.
o 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.
o 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.
o The fair value of accrued interest receivable and accrued interest
payable is the carrying amount.
o 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.
48
--------------1999 Annual Report
....ANNUAL REPORT 99 Box Graphics
o The fair value of short-term borrowings approximate their carrying
amount.
o The fair value of long-term debt is estimated using discounted cash
flow analyses based upon the Company's current borrowing rates for
similar types of borrowing arrangements.
o 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, 1999 December 31, 1998
--------------------- --------------------
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 $ 10,798 $ 10,798 $ 12,598 $ 12,598
Securities 86,352 86,286 69,915 70,421
Loans receivable, net 177,842 176,555 149,726 150,798
Accrued interest receivable 1,646 1,646 1,441 1,441
Financial liabilities:
Deposits 243,507 244,033 233,767 234,318
Short-term borrowings 8,600 8,600 7,776 7,776
Long-term debt 30,000 29,693 2,000 2,016
Accrued interest payable 2,385 2,385 2,283 2,283
Off-balance sheet financial instruments:
Commitments to extend credit and outstanding
letters of credit -- -- -- --
Norwood Financial Corp. (Parent Company Only) Financial Inforation
Balance Sheets December 31,
1999 1998
---- ----
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary $ 510 $ 382
Interest bearing deposit with another institution -- 900
Securities available for sale 531 307
Investment in bank subsidiary 25,978 26,438
Other assets 37 51
------- -------
$27,056 $28,078
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 402 $ 350
Stockholders equity 26,654 27,728
------- -------
$27,056 $28,078
======= =======
- -------------------------------------------------Norwood Financial Corp-------49
[GRAPHICS OMITTED] 99 ANNUAL REPORT
Statements of Income
Year Ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands)
Income:
Dividends from bank subsidiary $ 983 $ 839 $ 723
Interest income from bank subsidiary 119 139 162
Other interest income 32 37 14
------ ------ ------
1,134 1,015 899
Expenses 65 75 54
------ ------ ------
Income before income taxes 1,069 940 845
Income tax expense 29 40 41
------ ------ ------
1,040 900 804
Equity in undistributed earnings of subsidiary 2,468 2,336 1,902
------ ------ ------
Net income $3,508 $3,236 $2,706
====== ====== ======
Statements of Cash Flows
Year Ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,508 $ 3,236 $ 2,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of bank subsidiary (2,468) (2,336) (1,902)
Other, net 112 155 86
------- ------- -------
Net cash provided by operating activities 1,152 1,055 890
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of securities available for sale (292) -- --
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised 61 37 --
Acquisition of treasury stock (941) -- --
Proceeds from issuance of treasury stock -- 1 1
Release of ESOP shares 187 204 200
Cash dividends paid (939) (805) (696)
------- ------- -------
Net cash used in financing activities (1,632) (563) (495)
------- ------- -------
Increase in cash and cash equivalents (772) 492 395
Cash and cash equivalents:
Beginning 1,282 790 395
------- ------- -------
Ending $ 510 $ 1,282 $ 790
======= ======= =======
50