EXHIBIT 13
Summary of Selected Financial Data
Dollars in thousands except per share data For the years ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Summary of Operations
Net interest income $10,189 $8,827 $7,651 $7,097 $7,515
Provision for loan losses 1,710 619 1,070 915 1,650
Gains on sale of securities 787 146 268 853 291
Non-interest income 1,055 948 829 690 473
Non-interest expense 7,981 6,852 5,935 5,450 4,139
------ ------ ------ ------ ------
Income before income taxes 2,340 2,450 1,743 2,275 2,490
Federal income tax 468 648 391 573 546
------ ------ ------ ------ ------
NET INCOME $1,872 $1,802 $1,352 $1,702 $1,944
====== ====== ====== ====== ======
Net income per share $2.19 $2.03 $1.50 $1.89 $2.16
Cash dividends declared 0.84 0.78 0.76 0.75 0.67
Return on average assets 0.78% 0.88% 0.69% 0.90% 1.06%
Return on average equity 8.44% 8.17% 6.25% 8.55% 10.32%
Balances at Year-End
- --------------------
Total assets $260,085 $217,899 $196,108 $193,607 $186,476
Total loans 174,554 152,094 140,701 135,995 135,911
Allowance for loan losses 2,615 2,125 1,893 1,864 2,342
Total deposits 229,329 187,299 168,487 166,053 162,300
Shareholders' equity 21,519 22,681 21,642 20,395 19,368
Book value per share $24.20 $25.77 $24.05 $22.65 $21.51
Shareholders' equity to total assets 8.27% 10.49% 11.04% 10.53% 10.39%
Tier 1 Capital to risk-adjusted assets 10.26% 13.93% 14.58% 14.06% 13.27%
Total Capital to risk-adjusted assets 11.51% 15.18% 15.83% 15.31% 14.52%
Allowance for loan losses to total loans 1.50% 1.40% 1.35% 1.37% 1.72%
1
MANAGEMENT DISCUSSION AND ANALYSIS
Introduction
This management 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, 1996,
1995 and 1994. This section should be used in conjunction with the consolidated
financial statements and related foot notes.
The Company is a Pennsylvania corporation organized in November 1995 at
the direction of the Bank to facilitate the reorganization of the Bank into the
holding company form of organization. On March 29, 1996, the Bank completed the
reorganization and became a wholly owned subsidiary of the Company.
On March 23, 1996 the Bank completed an assumption of liabilities and
purchase of selected assets of three branches of Meridian Bank. Pursuant to the
transaction the Bank assumed $20,200,000 of deposits; acquired real estate and
an immaterial amount of loans. Management initially reinvested a substantial
portion of the $17.3 million of cash received in investment and mortgage-backed
securities with short to medium terms.
The Bank assumed deposits with an average cost of 3.68%.
Results of Operation - Summary
Net income for the Company for the year 1996 was $1,872,000 compared to
$1,802,000 for the year 1995. This represents an increase of $70,000 or 3.9%. On
an earnings per share basis, 1996 was $2.19 increasing from $2.03 earned in
1995. Return on average assets and return on average equity were .78% and 8.44%,
respectively for 1996 compared to .88% and 8.17%, respectively, in 1995.
Earnings for the year were favorably impacted by increase in net interest
income, higher levels of fee income and gains on investment securities. During
the year 1996 the Bank did incur higher provision for loan losses, expenses
associated with other real estate and costs of three branch offices acquired
from Meridian Bank. Net interest income of $10,189,000 for the year 1996 showed
an increase of $1,262,000 or 14.1% principally due to higher level of loans.
During the year, the Bank took aggressive action to bolster its allowance for
loan losses and reduce its level of non-performing loans and assets. This
resulted in a provision for loan losses of $1,710,000 in 1996 compared to
$619,000 in 1995. Fee income improved in 1996 with higher levels of service
charges on deposits and trust fees. Operating expenses of $7,981,000 increased
$1,100,000, or 16.0%. Increases were principally attributable to three new
branch offices, implementation of auto leasing product and costs associated with
resolving non-performing assets. Operating expenses were favorably impacted by
lower Federal Deposit Insurance Corporation (FDIC) assessment factor in 1996,
which was $218,000 less than 1995. During the year, the Company took advantage
of current stock market conditions to sell a portion of its portfolio of stock
holdings in other financial institutions at a gain on sale of $828,000. Total
net gains on investment securities sales were $787,000 in 1996 compared to
$146,000 in 1995.
Net income for the year 1995 was $1,802,000 compared to $1,352,000 for the
year 1994. This represents an increase of $450,000 or a 33.3% earnings growth in
1995. On an earnings per share basis, 1995 was $2.03, up from $1.50 per share
earnings in 1994. Return on average assets showed similar improvement in the
year 1995 with .88% compared to .69% in the prior year with a return on average
equity of 8.17% in 1995, compared to 6.25% in 1994.
Improved earnings in the year 1995, were principally due to growth in net
interest income and a lower provision for loan losses. Net interest income
increased $1,276,000 over the prior year, or 16.7% due to an increase in earning
assets, primarily loans. Improvement in asset quality , evidenced by a continued
decline in non-performing loans through 1995, and significant recoveries of
loans charged-off in prior periods, allowed a reduction in the loan loss
provision expense for 1995. The provision for loan losses at $619,000 was
$451,000 lower than 1994. Favorable net interest income and provision for loan
losses was partially offset during the year by lower non-recurring security
gains taken in 1995 and an increase in operating expenses of $946,000, or 15.9%.
Operating expenses increased principally due to higher salary and benefit costs,
expenses related to investment in technology and staff training, and costs
related to work-out of delinquent loans and other real estate. Operating
expenses were favorably impacted by a lower FDIC assessment factor in 1995,
which was $154,000 lower than 1994.
Financial Condition
Total Assets
Total assets at December 31, 1996 were $260.1 million compared to $217.3
million at year-end 1995, an increase of $42.8 million or 19.7%. The increase
was attributable to acquisition of offices from Meridian and a continued
increase in core deposit. For the year 1995, total assets increased $21.2
million or $10.8 to $217.3 million at year-end 1995 compared to $196.1 million
at year-end 1994.
6
Loans and Leases
Loans and leases are the most significant component of the Company's
earning assets. At December 31, 1996 total loans and leases outstanding were
$174.6 million, an increase of $22.5 million or 14.8% over 1995. The Bank
initiated an auto leasing product in 1996 and at December 31, the portfolio
totaled $17.1 million. Significant loan volume was also generated by the Bank's
indirect lending program, with total indirect financing at $24.7 million
compared to $12.8 million at December 31, 1995. The mix of loans shifted to
higher percentage of consumer credits which represented 61.9% of total loans and
commercial and commercial real estate at 38.1% at December 31, 1996 compared to
51.7% and 48.3%, respectively at December 31, 1995. Commercial loans consist
principally of loans made to small businesses within the Company's market area
and are generally secured by real estate and other assets of the borrower.
For the year 1996, total loans averaged $160.5 million with a yield of
9.10% compared to $146.0 million and 9.18% during 1995. The yield on loans
decreased due to lower prime rate environment, and change in mix of loans. Total
interest income on loans on a fully taxable equivalent basis was $14,611,000 an
increase of 9.1% over 1995.
Non-Performing Assets and Allowance for Loan Losses
The Bank took aggressive action during 1996 to reduce its level of
non-performing loans. At December 31, 1996 non-performing loans totaled
$3,493,000 and represented 1.98% of loans and leases compared to $3,880,000, and
2.55% of loans at year-end 1995, and $8,205,000, or 5.83% of loans in 1994.
Total non-performing assets which include other real estate owned were
$5,776,000 at December 31 or 2.22% of total assets down from $5,824,000 and
2.68% in 1995.
The allowance for loan losses totaled $2,615,000 at year-end 1996 or 1.50%
of loans and leases compared to 1.40% in 1995 and 1.35% in 1994. Total loans
charged-off in 1996 were $1,366,000 compared to $925,000 in 1995. For 1996
recoveries of loans previously charged-off were $147,000, down significantly
from $537,000 recovered 1995. The year 1995 recoveries was principally
attributable to $420,000 recovered on two credits. The provision for loan and
lease losses was $1,710,000 in 1996 compared to $619,000 in 1995 and $1,070,000
in 1994. With the lower level of non-performing loans and higher allowance for
loan losses, the coverage ratio of allowance for loans losses to non-performing
loans improved to 74.9% in 1996 from 54.7% in 1995 and 23.1% at year-end 1994.
The Bank's Loan Review Function 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, economic and
industry conditions, trends in delinquencies, collections and collateral value
coverage. General reserve percentages are identified by loan type and credit
grading and allocated accordingly. Larger credit exposures are analyzed
individually. The allowance at December 31, 1996 is considered adequate for the
loan mix and classifications. While the allowance for loan losses as a
percentage of total loans is in line with the Bank's peer group and considered
adequate by management, prudence dictates it should be increased going forward
given the current level of non-performing loans. As a result the Bank may
continue to incur provisions to obtain the appropriate level. The following
table sets forth information with respect to the Bank's allowance for loan
losses at the dates indicated:
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance balances at beginning of period $ 2,125 $1,893 $ 1,864 $ 2,342 $ 2,000
Charge-offs:
Commercial and all other (820) (448) (709) (767) (1,112)
Real estate (226) (353) (306) (587) (130)
Consumer (320) (123) (82) (79) (89)
------ ------- ------ ------ ------
Total (1,366) (924) (1,097) (1,433) (1,331)
Recoveries:
Commercial and all other 70 513 31 24 12
Real estate 16 3 3 - -
Consumer 60 21 22 16 11
------ ------- ------ ------ ------
Total 146 537 56 40 23
Provisions charged to expense 1,710 619 1,070 915 1,650
------ ------- ------ ------ ------
Allowance balance at end of period $2,615 $2,125 $1,893 $ 1,864 $ 2,342
------ ------- ------ ------ ------
Allowance for loan losses as a percent
of total loans outstanding 1.50% 1.40% 1.35% 1.37% 1.72%
Net loans charged off as a percent of
average loans outstanding 0.76% 0.27% 0.76% 1.03% 0.97%
Allowance for loan losses as a
percent of non-performing loans 74.9% 54.7% 23.1% 21.7% 34.8%
7
Other real estate owned (OREO) which represents foreclosed assets amounted
to $2,283,000 at December 31, 1996 compared to $1,944,000 in 1995. The increase
reflects the process of resolving non-performing loans through foreclosure and
the eventual sale of the assets. Expenses associated with OREO totaled $436,000
in 1996 which includes maintenance, taxes, legal fees, net losses on sale as
well as any adjustments to reflect carry values at the realizable market rates.
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, 1996, there were no loans not previously discussed where
known information about possible credit problems of borrowers cause management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Commercial and all other $ 1,633 $1,572 $ 2,754 $ 3,276 $ 611
Real estate 1,790 2,205 2,175 2,631 2,078
Consumer 28 48 - - 1
------ ------- ------ ------ ------
Total $ 3,451 $3,825 $ 4,929 $ 5,907 $ 2,690
======= ====== ======= ======= =======
Accruing loans which are contractually
past due 90 days or more:
Commercial and all other $ 38 55 $ 553 $ 609 $ 2,444
Real estate - - 2,716 2,061 1,450
Consumer 4 - 7 5 141
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Total $ 42 $ 55 $ 3,276 $ 2,675 $ 4,035
------- ------ ------- ------- -------
Total non-performing loans $ 3,493 $ 3,880 $ 8,205 $ 8,582 $ 6,725
Other real estate owned 2,283 1,944 1,377 1,715 1,520
------- ------- ------- ------- -------
Total non-performing assets $ 5,776 $ 5,824 $ 9,582 $10,297 $ 8,245
======= ======= ======= ======= =======
Total non-performing loans to total loans 1.98% 2.55% 5.83% 6.31% 4.95%
Total non-performing loans to total assets 1.34% 1.79% 4.18% 4.43% 3.61%
Total non-performing assets to total assets 2.22% 2.62% 4.89% 5.32% 4.42%
Investment Securities
The investment portfolio consists principally of obligations of United
States Government agencies, including mortgage backed securities, U.S. Treasury
Securities and obligations of state and political subdivisions. In accordance
with Statement of Financial Accounting Standards #115 "Accounting for Certain
Investments in Debit and Equity Securities" the Company classifies its
investments into two categories - held-to- maturity and available-for-sale. The
Company does not have a trading account. Investments classified as
held-to-maturity are those in which the Bank has the ability and the intent to
hold until contractual maturity. At December 31, 1996 this account totaled
$8,805,000 and consisted of longer term municipal obligations. Investments
classified as available-for-sale are eligible to be sold at some point due to
liquidity needs or changes in interest rates. These securities are adjusted to
and carried at their market value with any unrealized gains or losses recorded
as an adjustment to capital. At December 31, 1996, $48,906,000 in securities
were so classified and carried at their market value.
At December 31, 1996, the Company's investment portfolio totaled
$57,711,000 with the percentage of obligations of U.S. Government agencies and
corporations 44.8%, mortgage-backed securities, 19.7%, municipal obligations,
24.2%, U.S. Treasuries 6.9% and others of 4.4%. At December 31, 1996, the
portfolio contained no collateralized mortgage obligations, structured notes,
step-up bonds and no off-balance sheet derivatives were in use.
The investment portfolio is used as a source of liquidity, tool for
interest-rate risk management and for interest income. During 1996, investments
averaged $54.6 million with a fully taxable equivalent yield of 7.06% compared
to average of $34 million in 1995 with yield of 6.09%. During 1996, a portion of
the funds generated from the acquisition of deposits associated from the
Meridian branches were invested in mortgage-backed securities, other U.S.
Government agency
8
securities and municipals. The increase in the yield on the portfolio during
1996 was a result of lower yielding investments maturing invested at higher
rates as well as investments in longer term maturities.
Deposits
Total deposits at December 31, 1996 were $229.3 million an increase of $42
million or 22.4% over 1995. This growth in deposits includes $20.2 million in
deposits acquired from Meridian Bank in March 1996. Non-interest bearing demand
deposits represented 11.1% of total deposits compared to 10.5% at year-end 1995.
All categories of deposits experienced increases in 1996 with the most
significant in time deposits of 30.0%. Time deposits over $100,000 were $28.9
million in 1996 compared to $18.3 million in 1995 and principally related to
school district deposits and other public funds with maturities generally less
than one year.
The cost of interest-bearing deposits was 4.16% for the year a decrease of
5 basis points from 4.21% in 1995. The decrease was principally due to higher
costing time deposits maturing and repricing at lower rates and lower costing
transaction accounts. However, as time deposits increased faster than the less
expensive transaction accounts, the mix of deposits was correspondingly more
expensive than in 1995 and this partially offset the impact of the lower rate
environment.
At December 31, 1995 total deposits were $187,299,000 which was an increase
of $18,812,000 or 11.2% over year-end 1994. All categories showed increases with
most significant of 19.5% in time deposits. This was the result of several
promotions conducted by the Bank in 1995.
Interest-Sensitivity
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by the Bank's 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 managed by using financial modeling techniques to measure the impact of
changes in interest rates.
Net interest income, which is a primary source of the Bank's earnings, is
affected by interest rate movements. To manage the impact of the rate changes
the balance sheet must be structured so that repricing opportunities exist for
both assets and liabilities at approximately the same time intervals. ALCO
monitors these repricing characteristics and identifies strategies, including
management of liability costs and maturities, structure of the investment
portfolio, and various lending activities to insulate net interest income from
the effects of changes in interest rates. The Bank employs net interest
simulation modeling 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, 1996, 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 reflect
interest- sensitivity gaps - the difference between interest-sensitive assets
and interest-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, 1996, the Bank had a positive 90 day gap position of
$13,784,000. A positive gap means our interest-sensitive assets are higher than
our interest-sensitive liabilities at the time interval. This would indicate
that in a declining rate environment, the yield on earning assets would decrease
faster than the cost of interest-bearing liabilities in the 90 day time frame.
This risk is managed by ALCO strategies, including investment portfolio
structure, pricing of deposit liabilities, loan pricing and structure of fixed
and variable rate products.
The Bank analyzes and measures the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. Management believes that the assumptions used to
evaluate the vulnerability of the Bank's operations to changes in interest rates
are reasonable. The interest rate sensitivity of the Bank's assets and
liabilities 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.
Liquidity
Maintenance of liquidity is coordinated by ALCO. Bank liquidity can be
viewed as the ability to fund customers borrowing needs and their deposit
withdrawal requests while supporting asset growth. The Bank's primary sources of
liquidity include deposit generation, asset maturities and cash flow from loan
repayments and investments.
At December 31, 1996, the Company had cash and cash equivalents of $15.1
million in form of cash, due from banks and federal funds sold. The Company had
total securities available for sale of $48.9 million. This totals $64 million
and represents 24.5% of total assets compared
9
to 19.8% at year-end 1995. The Company also monitors other liquidity measures
all of which were within policy guidelines at December 31, 1996. The Company
believes its liquidity position is adequate.
The Bank's primary source of liquidity is its ability to generate core
deposits. This has been a consistent source of funding and has been enhanced by
the acquisition and the opening of four new offices since 1994. Deposits,
excluding time deposits greater than $100,000, increased $31.2 million during
1996, which was more than adequate to fund loan growth of $22.5 million. Funds
from deposit growth in excess of loan needs are invested in shorter term
investment securities which provide cash flow through pre- payments and
scheduled maturities in future periods.
The Bank also maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The short-term borrowing capacity from FHLB was in excess of
$50 million. There were no balances outstanding on these lines as of year-end
1996.
Results of Operation
Net Interest Income
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest-bearing liabilities and is the most
significant source of revenue for the Bank. For the year-ended December 31,
1996, net interest income, on a fully taxable equivalent basis was $10,615,000,
an increase of $1,491,000, or 16.3% over 1995. The resultant tax equivalent net
interest spread and net interest margin for the year 1996 were 4.26% and 4.82%,
respectively, compared to 4.15% and 4.82%, respectively in 1995.
Interest income earned on loans and investments on a tax equivalent basis
for the year was $18,734,000 an increase of $2,715,000 or 16.7% over 1995. The
increase was principally due to growth in earning assets of $30.8 million or
16.3% with a yield of 8.50% in 1996 compared to 8.46% in 1995. A decrease in
yield on loans to 9.10% from 9.18% was offset by higher yielding investment
portfolio. The yield on loans declined due to lower prime rate environment and
change in mix of the loan portfolio. On average, loans and leases increased
$14.5 million or 10%. The increase consisted principally of growth in lower
yielding indirect automobile lending, $13.9 million and auto leasing, $5.4
million partially offset by lower levels of higher yielding real estate and
commercial lending. The Bank anticipates this trend to continue during 1997.
The total investment portfolio averaged $54.6 million in 1996 compared to
$34.0 million in 1995. The increase reflects the deployment of the deposits
acquired from the Meridian branches into the investment portfolio. The yield on
the portfolio improved to 7.06% from 6.09% principally due to an increase in
higher yielding municipal bonds and lengthening of maturities.
The mix in earning assets changed during 1996 reflecting the increase in
the investment portfolio. For 1996 loans comprised 72.8% of earning assets
compared to 77.1% during 1995. This change in mix lowered the over-all yield on
earning assets.
The Company funds its growth in earning assets principally from growth in
core deposits. Interest-bearing deposits increased $29.1 million on average in
1996. The costs of these deposits decreased to 4.16% in 1996 from 4.21% in 1995.
All categories of deposits decreased in cost. Savings deposits were 2.79% down
from 3.00% and time deposits declined to 5.43% from 5.51%. This decrease in cost
was partially offset by change in deposit mix as higher costing time deposits
represented 52% in 1996 compared to 50.1% in 1995. Other borrowed funds, which
includes federal funds purchased and securities sold under agreement to
repurchase averaged $4.9 million in 1996 at a rate of 5.03% compared to $2.6
million and 5.49% in 1995. Total interest expense for 1996 was $8,119,000 an
increase of $1,224,000 or 17.8% with cost of 4.24% in 1996 and 4.30% in 1995.
For the year ended December 31, 1995, net interest income was $9,124,000
compared to $7,859,000 in 1994, an increase of $1,265,000, or 16.1%. Interest
income earned on loans and investments for the year was $16,019,000, an increase
of $2,786,000, or 21.1%. The interest expense paid on deposits and other
borrowings for the year increased $1,521,000 in 1995 compared to 1994. The fully
taxable yield for earning assets for 1995 was 8.46% compared to 7.32% in 1994.
This increase in asset yield was a function of increasing yields on both the
loan portfolio and investment securities. In addition, the mix of earning assets
improved to sustain a higher yield as average loans increased $9.7 million, or
7.1% over prior year and represented a higher percentage of earning assets in
1995 than in 1994. In addition, improvements in credit quality evidenced by a
reduction in those loans in which the accrual of interest had stopped were
significantly lower in 1995 than in 1994. The cost of interest bearing
liabilities was 4.30% for the year, an increase of 81 basis points over the
3.49% paid in 1994. Cost of interest bearing deposits was more expensive in 1995
due to higher rates paid on interest bearing demand deposits and savings
deposits as well as a change in the mix of deposits. For the year, the more
expensive time deposits, principally certificates of deposit, increased $9.4
million, while the lower costing demand deposits decreased slightly on average
during 1995.
For 1995 the yield on earning assets increased more rapidly than the cost
of interest bearing liabilities, producing a tax equivalent net interest spread
of 4.15% compared to 3.82% in 1994. The net interest margin which factors in
non-interest bearing fund sources also improved at 4.82% for 1995 compared to
4.35% in 1994.
Non-Interest Income
Non-interest income excluding gains on investment sales was $1,055,000 for
1996, an increase of $174,000 or 19.7% over 1995. All categories of fee-based
income reflected improvement over 1995. Service charges on deposits of $511,000
increased $105,000 due to increase in certain fees in 1996 and volume. The Bank
periodically reviews all its fees and makes changes taking into account market
conditions, competition, level of service and operating costs. Trust fees
likewise were increased in 1996 and totaled $169,000 compared to $124,000 in
1995. The Bank, through Norwood Investment Corp., offers sales of mutual funds,
fixed and variable rate annuities. These products are not insured by the Federal
Deposit Insurance Corporation, not guaranteed by any government agency and may
include loss of principle. For 1996 income for sale of these products totaled
$32,000 compared to $14,000 in 1995. The company would anticipate an increase in
income related to these products in 1997.
Non-interest income excluding gains on investment sales was $881,000 for
1995 compared to $828,000 in 1994, an increase of $53,000, or 6.4%. The year
1995 reflected higher service charges on deposits due to increases in deposit
volumes and increases in fees on loans. Fees on loans increased due to new
Business Manager product
10
as well as increases in other volumes. Trust income for the year was $124,000
compared to $148,000 in 1994 with total assets under Trust Administration of
approximately $33,000,000. Income related to the sale of annuity products was
significantly lower in 1995 at $14,000 compared to $112,000 in 1994.
Operating Expenses
Total operating expenses for the year were $7,981,000 compared to
$6,881,000 an increase of $1,100,000 or 16.0%. Expenses for 1996 were impacted
by the acquisition of the Meridian Offices which accounted for $475,000 of the
increase. Costs associated with non-performing assets increased in 1996 as OREO
costs totaled $436,000 compared to $374,000 in 1995. In addition the Bank
incurred legal fees of $173,000 related to problem loans compared to $144,000.
The Bank also had start-up expenses associated with its auto leasing product and
full year of staffing its indirect lending center of $175,000. There were
additional legal and consulting fees related to formation of the holding
company, initial registration to become a public company and changes to its
employee benefit plans.
FDIC insurance premiums decreased $218,000 for the year due to rate
reduction as a result of the Bank Insurance Fund (BIF) reaching its required
level of capitalization, thereby reducing deposit insurance premiums. On
September 30, 1996, the president signed into law the Deposit Insurance Funds
Act of 1996 (DIFA). DIFA includes provisions fully capitalizing the Savings
Association Insurance Fund (SAIF) and providing for the eventual merger of
thrift fund, SAIF, with BIF. The Bank is a member of BIF. DIFA requires
depository institutions to pay a one-time special assessment on their
SAIF-assessable deposits held as of March 31, 1995, neither the company nor its
banking subsidiary have any SAIF-assessable deposits. DIFA also requires that
all insured depository institutions share pro rata beginning in the year 2000,
the Financing Corp. (FICO) bond obligation. For the transition period from
January 1, 1997 until December 31, 1999 banks will pay semiannually on their BIF
deposit base 20% of the assessment rate imposed upon thrifts. According to
current FDIC estimates the FICO assessment will run 1.3 basis points for banks,
subject to change. On the Bank's deposit base as of December 1996, 1.3 basis
points equates to an assessment of $29,800. It should be noted that FICO
assessment is distinct from the insurance premium, (if any) paid by banks for
FDIC coverage.
Salary and employee benefit expense totaled $3,782,000 and represented
47.5% of non-interest expense compared to $3,288,000 and 47.8% in 1995. At
December 31, 1996, the company had total full-time equivalent staff of 124
compared to 113 in 1995, with the increase principally due to additional
branches. In February 1997 the Company has filed with the Pension Benefit
Guaranty Corporation to terminate its defined benefit plan. The Company plans to
settle the obligations under the defined benefit plan in 1997. The effects of
the settlement can not be determined at this time. In addition the bank has
amended its deferred profit sharing plan to allow eligible employees to make
401(K) contributions. The bank will match 100% of the first 2% of annual salary
contributed by the employee. The bank will continue its practice of making
discretionary year end contributions to the plan. The Bank also adopted an
Employee Stock Ownership Plan in 1996.
Total operating expenses for the year 1995 were $6,881,000 compared to
$5,935,000 in 1994, an increase of $946,000, or 15.9%. Staffing costs, which
consist of salary and benefits, are the largest percentage of operating expenses
for the Bank representing 48% of total expenses. For 1995, staffing costs were
$3,288,000, an increase of $383,000 or 13.2% over prior year. This was due to
increasing in staffing levels with total full-time equivalent employees of 113
in 1995 up from 100 in 1994. Increase in staff was principally in customer
service and sales including lending, branch and trust department staff. The FDIC
insurance assessment was $220,000 for 1995, reflecting a decrease of $154,000
from prior year due to a significant reduction in the rate assessment. Occupancy
and equipment costs increased $55,000 during 1995, principally due to the
opening of the Hamlin office in late 1994 and our continued investment in
customer service related technology, including new account and loan automation
systems. Expense for Other Real Estate Owned was $373,000 for 1995, an increase
of $45,000 over the prior year. This reflects expenses to maintain these
properties, as well as costs to write properties down to their realizable values
in order to facilitate a sale. Significant costs were also incurred during the
year to resolve the Bank's loan workout situations which required legal and
other professional fees. These fees are incurred up front in order to quickly
resolve problem loan situations.
Income Taxes
Income tax expense for the year 1996 was $468,000 for an effective tax
rate of 20.2% compared to an expense of $653,000 and an effective rate of 26.6%
in 1995. The lower level of taxes was principally due to a decrease in pre-tax
income of $114,000 and a higher level of obligations of state and political
subdivisions in 1996 which provide income which is partially exempt from federal
income taxes.
Stockholders' Equity and Dividends
A strong capital position is essential to support continued balance sheet
and earnings growth, to serve the needs of the Bank's depositors and borrowers
and to yield an attractive return to stockholders. In addition a strong capital
base provides added protection against unexpected losses.
Total stockholder equity for the company at December 31, 1996 was
$21,519,000 for a Tier 1 leverage ratio of 7.7%, Tier 1 capital 10.3% and total
risk- based capital 11.5%. The current minimum regulatory guidelines for Tier 1
leverage capital is 4% and minimums for Tier 1 and total risk-based capital
ratios are 4% and 8% respectively. At December 31, 1996 and 1995 the company and
the Bank exceeded the minimum ratios.
Common stock dividends declared in 1996 were $.84 per share compared to
$.76 per share in 1995, an increase of 10.5%. The following table sets forth the
price range and cash dividends paid per share regarding common stock for the
periods indicated:
Price Range
------------ Cash dividend
High Low paid per share
---- --- --------------
Year 1995
- ---------
First Quarter $24.00 $23.50 $ .19
Second Quarter 31.00 26.75 .19
Third Quarter 30.50 28.50 .19
Fourth Quarter 33.25 30.75 .21
Year 1996
- ---------
First Quarter $34.75 $33.25 $ .21
Second Quarter 34.00 32.50 .21
Third Quarter 33.50 32.25 .21
Fourth Quarter 33.50 32.25 .21
11
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ -----------------------------
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 $ 4,585 $ 239 5.21% $ 8,252 $ 483 5.85 % $ 4,833 $ 197 4.08 %
Interest bearing deposits
with banks 532 29 5.45 1,152 70 0 0
Investment securities
available for sale 44,307 2,991 6.75 15,397 794 5.16 16,268 898
Investment securities:
Taxable investments 95 5 5.26 10,905 700 6.42 11,535 579 5.02
Tax-exempt securities 10,236 859 8.39 7,709 576 7.47 11,923 612 5.13
-------- ----- ---- -------- ----- ---- -------- --- -----
Total investment
securitis 10,331 864 8.36 18,614 1,276 6.85 23,458 1,191 5.08
Loans (3) (4) 160,517 14,611 9.10 145,990 13,396 9.18 136,314 10,947 8.03
-------- ------ ---- -------- ------ ---- ------- ------ -----
Total interest
earning assets 220,272 18,734 8.50 189,405 16,019 8.46 180,873 13,233 7.32
Non-interest earning assets:
Cash and due from banks 6,343 5,534 5,330
Allowance for loan losses (2,243) (2,118) (1,805)
Other assets 15,392 11,886 11,660
-------- -------- --------
Total non-interest
earning assets 19,492 15,302 15,185
-------- -------- --------
TOTAL ASSETS $239,764 204,707 196,058
======== ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing liablities:
Interest bearing demand
deposits $ 44,889 1,244 2.77 $ 39,056 1,101 2.82 $ 41,012 960 2.34
Savings deposits 43,402 1,213 2.79 38,296 1,148 3.00 39,815 1,069 2.68
Time deposits 95,679 5,197 5.43 77,535 4,274 5.51 68,142 3,046 4.47
-------- ----- ---- -------- ----- ---- -------- --- ----
Total interest
bearing deposits 183,970 7,654 4.16 154,887 6,523 4.21 148,969 5,075 3.41
Other borrowed funds 4,907 247 5.03 2,639 145 5.49 2,131 75 3.52
Long-term debt 2,581 218 8.45 2,706 227 8.39 2,795 224 8.01
-------- ----- ---- -------- ----- ---- -------- --- ----
Total interest bearing
liabilities 191,458 8,119 4.24 160,232 6,895 4.30 153,895 5,374 3.49
Non-interest bearing liabilities
Demand deposits 22,874 19,728 18,739
Other liabilities 3,282 2,635 1,388
-------- -------- --------
Total non-interest
bearing liabilities 26,156 22,363 20,127
Shareholders' equity 22,150 22,112 22,036
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $239,764 $204,707 $196,058
======== ======== ========
Net interest income(tax-equivalent
basis) 10,615 4.26 % 9,124 4.15 % 7,859 3.82 %
==== ==== ====
Tax-equivalent basis adjustment (427) (197) (208)
------ -------- -----
Net Interest Income 10,188 $ 8,927 7,651
====== ======== =====
Net Interest margin(tax-equivalent
basis) 4.82 % 4.82 % 4.35 %
==== ==== ====
(1) Interest and yields are presented on a tax-equivalent basis using a marginal
tax rate of 34%.
(2) Average balances have been calculated based on daily balances.
(3) Loan balances include non-accrual loans and are net of unearned income.
(4) Loan yields include the effect of amortization of deferred fees, net of
costs.
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and inteerst expense.
(dollars in thousands) Increase/(Decrease)
---------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
------------------------------ ------------------------
Variance due to Variance due to
------------------------------ ------------------------
Volume Rate Net Volume Rate Net
------ ---- ------ ---- ---- ------
ASSETS
Interest Earning Assets:
Federal funds sold ($196) ($48) ($244) $177 $109 $286
Interest bearing deposits with banks (34) (7) (41) 35 35 70
Investment securities available for sale 1,886 311 2,197 (47) (57) (104)
Investment securities:
Taxable investments (588) (107) (695) (33) 154 121
Tax-exempt securities 206 78 283 (259) 223 (36)
------ ---- ------ ---- ---- ------
Total investment securities (382) (29) (412) (292) 377 85
Loans 1,323 (108) 1,215 814 1,635 2,449
------ ---- ------ ---- ---- ------
Total interest earning assets 2,597 118 2,715 687 2,099 2,786
Interest bearing liablities:
Interest bearing demand deposits 162 (19) 143 (48) 189 141
Savings deposits 151 (79) 73 (43) 117 74
Time deposits 1,000 (63) 938 420 710 1,130
------ ---- ------ ---- ---- ------
Total interest bearing deposits 1,313 (160) 1,153 329 1,016 1,345
Other borrowed funds 115 (13) 102 21 49 70
Long-term debt (11) 2 (9) (7) 10 3
Total interest bearing liabilities 1,320 (102) 1,218 230 1,297 1,527
------ ---- ------ ---- ---- ------
Net interest income (tax-equivalent basis) $1,277 $220 $1,497 $457 $805 $1,262
====== ==== ====== ==== ==== ======
(1) Changes in net interest income that could not be specifically identified as
either rate or volume change were allocated proportionately to changes in volume
and changes in rate.
12
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Norwood Financial Corp.
We have audited the accompanying consolidated balance sheet of Norwood
Financial Corp. and its subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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 at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As explained in the notes to the consolidated financial statements, the
Company changed its method of accounting for the impairment of loans and related
allowance for loan losses effective January 1, 1995, and accounting for
investment securities, effective January 1, 1994.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 14, 1997
13
NORWOOD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
December 31,
1996 1995
-------------- ---------------
ASSETS
Cash and due from banks $ 7,071,642 $ 5,597,861
Interest bearing deposits with other institutions 1,187,206 -
Federal funds sold 6,850,000 850,000
Investment securities available for sale 48,905,515 36,671,320
Investment securities (estimated market value of $9,040,338
and $12,362,652) 8,804,889 12,210,582
Loans (net of unearned income of $6,011,164 and $1,798,108) 174,553,734 152,094,620
Less allowance for loan losses 2,615,864 2,125,489
-------------- ---------------
Net loans 171,937,870 149,969,131
Bank premises and equipment, net 7,779,389 7,016,648
Other real estate 2,282,661 1,944,417
Accrued interest receivable 1,557,843 1,504,737
Other assets 3,707,599 1,497,779
-------------- ---------------
TOTAL ASSETS $ 260,084,614 $ 217,262,475
============== ===============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 25,255,685 $ 19,655,970
Interest-bearing demand 20,201,610 16,783,462
Savings 43,815,551 39,394,067
Money market deposit accounts 26,681,690 24,244,298
Time 113,374,257 87,221,310
-------------- ---------------
Total deposits 229,328,793 187,299,107
Short-term borrowings 3,227,041 2,031,432
Other borrowings 2,441,707 2,581,707
Accrued interest payable 2,223,909 1,831,496
Other liabilities 1,343,848 736,275
-------------- ---------------
TOTAL LIABILITIES 238,565,298 194,480,017
-------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value in 1996 and $1.00 par
value in 1995; authorized 10,000,000 shares in 1996
and 1,800,000 shares in 1995; issued 900,346 shares
in 1996 and 900,296 shares in 1995 90,346 900,296
Surplus 4,443,614 3,568,434
Retained earnings 18,861,363 17,704,192
Treasury stock, at cost (11,230 and 19,754 shares) (344,570) (561,410)
Net unrealized gain on securities 418,563 1,170,946
Unearned Employee Stock Ownership Plan (ESOP) shares (1,950,000) -
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 21,519,316 22,782,458
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 260,084,614 $ 217,262,475
============== ===============
See accompanying notes to the consolidated financial statements.
14
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1996 1995 1994
------------- -------------- ----------------
INTEREST INCOME
Interest and fees on loans $ 14,611,078 $ 13,395,892 $ 10,947,397
Investment securities:
Taxable 2,617,801 1,508,372 1,479,704
Exempt from federal income tax 810,990 366,121 403,925
Interest-bearing deposits with other institutions 28,890 69,617 -
Federal funds sold 239,177 482,886 194,492
------------- -------------- ---------------
Total interest income 18,307,936 15,822,888 13,025,518
------------- -------------- ---------------
INTEREST EXPENSE
Deposits 7,654,402 6,523,179 5,074,652
Short-term borrowings 247,256 145,443 75,336
Other borrowings 217,464 226,885 224,330
------------- -------------- ---------------
Total interest expense 8,119,122 6,895,507 5,374,318
------------- -------------- ---------------
NET INTEREST INCOME 10,188,814 8,927,381 7,651,200
PROVISION FOR LOAN LOSSES 1,710,000 619,400 1,070,000
------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,478,814 8,307,981 6,581,200
------------- -------------- ---------------
OTHER INCOME
Service charges and fees 709,253 500,664 420,456
Trust department income 169,277 124,090 148,233
Investment securities gains, net 787,185 145,934 267,620
Other 176,629 256,382 261,028
------------- -------------- ---------------
Total other income 1,842,344 1,027,070 1,097,337
------------- -------------- ---------------
OTHER EXPENSES
Salaries and benefits 3,781,690 3,287,999 2,905,012
Occupancy expense, net 392,616 311,077 271,468
Equipment expense 716,914 528,538 545,381
Deposit insurance premiums 2,000 219,946 374,260
Other real estate owned operations 435,768 373,945 327,977
Advertising expense 205,089 181,137 204,501
Professional fees 444,737 335,436 182,166
Shares tax expense 221,241 200,480 560,200
Other 1,780,982 1,442,575 564,486
------------- -------------- ---------------
Total other expenses 7,981,037 6,881,133 5,935,451
------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 2,340,121 2,453,918 1,743,086
INCOME TAXES 468,389 652,266 391,271
------------- -------------- ---------------
NET INCOME $ 1,871,732 $ 1,801,652 $ 1,351,815
============= ============== ===============
EARNINGS PER SHARE $ 2.19 $ 2.03 $ 1.50
See accompanying notes to the consolidated financial statements.
15
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Unrealized Unearned
Common Retained Treasury Gain (Loss) ESOP
Stock Surplus Earnings Stock on Securities Shares Total
---------- ---------- ----------- ----------- ------------- ----------- ------------
Balance, December 31, 1993 $ 900,296 $3,568,434 $15,926,049 $ - $ - $ - $ 20,394,779
---------- ---------- ----------- ----------- ----------- ----------- ------------
Initial net unrealized
gain on securities 1,446,695 1,446,695
Net income 1,351,815 1,351,815
Cash dividends declared
($.76 per share) (684,226) (684,226)
Net unrealized gain on securities (866,885) (866,885)
---------- ---------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1994 900,296 3,568,434 16,593,638 - 579,810 - 21,642,178
Net income 1,801,652 1,801,652
Cash dividends declared
($.78 per share) (691,098) (691,098)
Acquisition of treasury stock (561,410) (561,410)
Net unrealized gain on securities 591,136 591,136
---------- ---------- ----------- ---------- ---------- ---------- ------------
Balance, December 31, 1995 900,296 3,568,434 17,704,192 (561,410) 1,170,946 - 22,782,458
Transfer in connection
with holding company
formation (810,000) 810,000 -
Net income 1,871,732 1,871,732
Cash dividends declared
($.84 per share) (714,561) (714,561)
Purchase of treasury stock (1,733,383) (1,733,383)
Sale of shares of common
stock to ESOP 52,123 1,947,877 (2,000,000) -
Reissuance of treasury shares 857 2,346 3,203
Stock options exercised 50 12,200 12,250
Release of earned ESOP shares 50,000 50,000
Net unrealized loss on securities (752,383) (752,383)
---------- ---------- ----------- ---------- ---------- ---------- ------------
Balance, December 31, 1996 $ 90,346 $4,443,614 $18,861,363 $ (344,570) $ 418,563 $(1,950,000) $ 21,519,316
========== ========== =========== =========== =========== =========== ============
16
NORWOOD FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 1,871,732 $ 1,801,652 $ 1,351,815
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,710,000 619,400 1,070,000
Depreciation and amortization 522,078 640,131 863,424
Deferred income taxes 770,904 (218,926) 136,745
Investment securities gains, net (787,185) (145,934) (267,620)
Loss on sale of other real estate, net 163,703 217,674 219,744
Proceeds from sale of loans 5,114,774 3,362,900 --
Decrease (increase) in accrued interest receivable (53,106) 236,117 (373,138)
Increase in accrued interest payable 392,413 582,016 77,404
Increase (decrease) of income taxes payable (736,963) 526,641 (96,735)
Other, net 391,168 201,562 355,942
------------ ------------ ------------
Net cash provided by operating activities 9,359,518 7,823,233 3,337,581
------------ ------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 3,081,158 5,086,046 350,001
Proceeds from maturities 11,376,177 5,173,000 2,250,000
Purchases (27,022,574) (4,865,909) (9,553,459)
Investment securities:
Proceeds from maturities 3,665,000 20,695,000 22,269,687
Purchases (250,000) (35,440,621) (19,926,288)
Net increase in loans (30,582,046) (17,450,096) (6,744,742)
Purchase of bank premises and equipment, net (1,362,700) (586,973) (515,835)
Proceeds from sales of other real estate 1,475,500 1,208,949 873,962
Proceeds received from branch acquisition 17,715,680 -- --
------------ ------------ ------------
Net cash used for investing activities (21,903,805) (26,180,604) (10,996,674)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposit 22,584,070 18,812,475 2,433,799
Net decrease (increase) in short-term borrowings 1,195,609 441,970 (1,307,621)
Repayments of other borrowings (140,000) (130,000) (115,283)
Stock options exercised 12,250 -- --
Acquisition of treasury stock (1,733,383) (561,410) --
Sale of treasury stock 3,203 -- --
Cash dividends paid (716,475) (677,241) (684,226)
------------ ------------ ------------
Net cash provided by financing activities 21,205,274 17,885,794 326,669
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 8,660,987 (471,577) (7,332,424)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,447,861 6,919,438 14,251,862
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,108,848 $ 6,447,861 $ 6,919,438
============ ============ ============
See accompanying notes to the consolidated financial statements.
17
NORWOOD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 12, 1995, the stockholders of the Wayne Bank (Bank) approved the
reorganization of the Bank into a bank holding company structure. After
approval by regulatory authorities, the reorganization was completed on March
29, 1996. Each issued and outstanding share of the common stock, par value
$1.00, of the Bank immediately prior to the reorganization was converted into
and exchanged for one share of common stock, par value $.10, of Norwood
Financial Corp. (Company). As a result of this transaction, the Bank and its
wholly-owned real estate subsidiary, WCB Realty Corp., became a wholly-owned
subsidiary of the Company. The Bank is a state-chartered bank located in
Honesdale, Pennsylvania. The Company derives substantially all of its income
from the banking and bank related services which include interest earnings on
commercial mortgage, residential real estate, commercial, and consumer loan
financings, as well as interest earnings on investment securities and deposit
services to its customers. The Company is subject to regulation and
supervision by the Federal Reserve Board while the Bank is subject to
regulation and supervision by the Federal Deposit Insurance Corporation and
Pennsylvania Department of Banking.
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Basis of Presentation
---------------------
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., and Norwood Investment Corp. All intercompany
transactions have been eliminated in consolidation. The investments in
subsidiaries on the Company's financial statements are carried at the
Company's equity in the underlying net assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment Securities
---------------------
The Company has classified investment securities into two categories: Held to
maturity and Available for Sale. Debt securities acquired with the intent and
ability to hold to maturity are stated at cost adjusted for amortization of
premium and accretion of discount which are computed using the interest
method and recognized as adjustments of interest income. Certain other debt
securities have been classified as available for sale to serve principally
for liquidity purposes. Unrealized holding gains and losses for available for
sale securities are reported as a separate component of stockholders' equity,
net of tax, until realized. Realized securities gains and losses are computed
using the specific identification method. Interest and dividends on
securities are recognized as income when earned.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
-----
Loans are stated at their principal amount, net of unearned discount,
unamortized loan fees and costs and the allowance for loan losses. Unearned
discount on consumer loans is recognized as income over the term of the loans
using a method of amortization which approximates a level yield. Interest on
real estate mortgages and commercial loans is recognized as income when
earned on the accrual method.
Loans are placed on nonaccrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of
interest is doubtful. Loans are returned to accrual status when past due
interest is collected and the collection of principal is probable.
Nonrefundable loan origination fees and certain direct loan origination costs
are being deferred and the net amounts are being amortized as an adjustment
to the related loan's yield. These amounts are being amortized over the
contractual life of the related loans.
The Company provides automobile financing to its customers through a variety
of lease arrangements. Direct financing leases are carried at the aggregate
of lease payments receivable plus estimated residual value less unearned
income. Unearned income on direct financing leases is amortized over the
terms by methods that approximate the interest method.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Company
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Company's financial position
or results of operation.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for
18
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
-------------------------------------
impairment and does not aggregate loans by major risk classifications. The
definition of "impaired loans" is not the same as the definition of
"nonaccrual loans," although the two categories overlap. The Company may
choose to place a loan on nonaccrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired if the
loan is not a commercial or commercial real estate loan. Factors considered
by management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount
of the loans. When foreclosure is probable, impairment is measured based on
the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan portfolio.
The allowance method is used in providing for loan losses. Accordingly, all
loan losses are charged to the allowance and all recoveries are credit to it.
The allowance for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is based on
management's periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the portfolio,
and other relevant factors. The estimates used in determining the adequacy of
the allowance for loan losses, including the amounts and timing of future
cash flows expected on impaired loans, are particularly susceptible to
changes in the near term.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on both the straight-line and declining balance
methods over the estimated useful lives of the assets. Expenditures for
maintenance and repairs are charged against income as incurred. Costs of
major additions and improvements are capitalized.
Trust Department
----------------
Trust Department assets held by the Bank in fiduciary or agency capacities
for its customers are not included in the accompanying balance sheet since
such items are not assets of the Bank. Commissions and fees for services
performed by the Trust Department in a fiduciary capacity are reported on a
cash basis. The annual results would not be materially different if such
income were accrued.
Other Real Estate
-----------------
Real estate acquired by foreclosure is classified separately on the balance
sheet at the lower of the recorded investment in the property or its fair
value minus estimated costs of sale. Prior to foreclosure, the value of the
underlying collateral is written down by a charge to the allowance for loan
losses if necessary. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income and
losses on their disposition, are included in other expenses.
Intangible Assets
-----------------
As of December 31, 1996, intangible assets are comprised of goodwill and core
deposit acquisition premiums. Goodwill is amortized using the straight-line
method over a fifteen year period. Core deposit acquisition premiums, which
were developed by specific core deposit life studies, are amortized using the
straight-line method over seven to nine years. The amortization of these
premiums approximated $116,000 in 1996. 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.
Pension Plan
------------
Salaries and employee benefits include contributions, determined actuarially,
to a retirement plan covering all eligible employees of the Bank.
Income Taxes
------------
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Earnings Per Share
------------------
Earnings per share computations are based on the weighted average number of
shares outstanding which was 853,045 889,570, and 900,296 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Cash Flow Information
---------------------
For the purposes of reporting cash flows, Cash and cash equivalents include
Cash and due from banks and Federal funds sold.
Cash payments for interest in 1996, 1995, and 1994 were $7,726,709,
$6,313,491, and $5,296,914, respectively. Cash payments for income taxes for
1996, 1995, and 1994 were $786,495, $620,000, and $627,000, respectively.
Noncash investing activity for 1996, 1995, and 1994 include foreclosed
mortgage loans transferred to real estate owned of $2,073,743, $2,043,038,
and $998,021, respectively.
19
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for prior years have been reclassified to conform
to current year presentation. Such reclassifications did not affect net
income.
Pending Accounting Pronouncement
--------------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
The provisions of Statement No. 125 are effective for transactions occurring
after December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and pledged
collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, an amendment of FASB Statement No. 125." The adoption
of these statements is not expected to have a material impact on financial
position or results of operations.
BRANCH ACQUISITIONS
On March 25, 1996, the Bank acquired certain assets and all the deposit
liabilities of the Lakewood, Shohola, and Thompson branch offices of Meridian
Bank. The transaction was accounted for as a purchase. The Bank assumed
deposit liabilities of $20,169,279, and acquired cash funds and premises and
equipment totaling $1,007,890.
The premium paid to acquire these offices amounted to $1,790,023. This amount
is shown in other assets and is amortized over seven to nine years for the
identifiable and fifteen years for the unidentifiable amounts.
INVESTMENT SECURITIES
Upon the adoption of Statement 115, the Bank initially transferred from the
investment securities portfolio to the available for sale account
classification investment securities with an amortized cost of $9,256,202 and
an estimated market value of $11,448,164. The net appreciation of these
securities, at adoption, was recorded net of federal income taxes to an
unrealized securities gain (loss) account which is a component of
stockholders' equity. During 1995, in accordance with the Financial
Accounting Standards Board Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Bank was permitted an additional one time reclassification
of investment securities. Accordingly, the Bank transferred from the held to
maturity classification to the available for sale classification securities
with an amortized cost of $23,825,388 and an estimated market value of
$24,227,864.
The amortized cost and estimated market values of investment securities are
as follows:
1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------- ------------ --------------
AVAILABLE FOR SALE
U. S. Treasury securities $ 4,001,012 $ 3,778 $ (11,330) $ 3,993,460
Obligations of U.S. Government
agencies and corporations 25,995,691 51,622 (189,733) 25,857,580
Obligations of state and political
subdivisions 5,218,846 18,306 (63,236) 5,173,916
Corporate obligations 499,480 3,435 -- 502,915
Mortgage-backed securities 11,476,914 1,509 (119,357) 11,359,066
----------- ----------- ---------- -------------
Total debt securities 47,191,943 78,650 (383,656) 46,886,937
Equity securities 1,050,629 967,949 -- 2,018,578
----------- ----------- ---------- -------------
Total $48,242,572 $ 1,046,599 $ (383,656) $ 48,905,515
=========== =========== ========== =============
1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- ------------
AVAILABLE FOR SALE
U. S. Treasury securities $ 5,507,882 $ 16,846 $(3,168) $ 5,521,560
Obligations of U.S. Government
agencies and corporations 18,507,862 209,635 -- 18,717,497
Obligations of state and political
subdivisions 250,000 2,770 -- 252,770
Corporate obligations 498,489 13,386 -- 511,875
Mortgage-backed securities 8,982,019 45,759 -- 9,027,778
----------- ---------- ------- -----------
Total debt securities 33,746,252 288,396 (3,168) 34,031,480
Equity securities 1,150,907 1,488,933 -- 2,639,840
----------- ---------- ------- -----------
Total $34,897,159 $1,777,329 $(3,168) $36,671,320
=========== ========== ======= ===========
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------------- ---------- -----------
HELD TO MATURITY
Obligations of state and political
subdivisions $ 8,804,889 $ 242,759 $ (7,310) $9,040,338
----------- --------- -------- ----------
Total $ 8,804,889 $ 242,759 $ (7,310) $9,040,338
=========== ========= ======== ==========
1995
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ----------- ------------
HELD TO MATURITY
Obligations of state and political
subdivisions $ 11,750,853 $182,415 $ (30,759) $ 1,902,509
Corporate obligations 459,729 414 - 460,143
------------ -------- --------- -----------
Total $ 12,210,582 $182,829 $ (30,759) $12,362,652
============ ======== ========== ===========
20
INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------ ------------- ------------
Due in one year or less $ 999,362 $ 1,003,895 $ 500,000 $ 499,455
Due after one year through five years 17,994,121 18,007,615 500,000 494,820
Due after five years through ten years 11,190,999 11,044,128 -- --
Due after ten years 5,530,547 5,472,233 7,804,889 8,046,063
----------- ----------- ----------- -----------
35,715,029 35,527,871 8,804,889 9,040,338
Mortgage-backed securities 11,476,914 11,359,066 -- --
----------- ----------- ----------- -----------
Total $47,191,943 $46,886,937 $ 8,804,889 $ 9,040,338
=========== =========== =========== ===========
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities:
For the Year Ended
1996 1995 1994
------------ ----------- -----------
Proceeds from sales $3,081,158 $5,086,146 $ 350,001
Gross gains 830,315 318,934 267,620
Gross losses 43,130 173,000 -
Investment securities with amortized costs and market value of approximately
$27,994,898 and $28,096,760 at December 31, 1996, and $21,020,969 and
$21,326,542 at December 31, 1995, were pledged as collateral to secure U.S.
Treasury demand notes, public deposits, securities sold under agreements to
repurchase, and certain other deposits as required by law.
LOANS
Major classifications of loans are summarized as follows:
1996 1995
-------------- ---------------
Real estate:
Residential $ 54,547,014 $ 55,560,062
Commercial 36,851,822 39,261,588
Construction 1,602,349 1,380,070
Commercial, financial, and agricultural 29,679,553 33,890,672
Consumer loans to individuals 37,502,691 23,800,336
Lease financing 16,981,082 -
-------------- ---------------
177,164,511 153,892,728
Less:
Unearned income 2,610,777 1,798,108
Allowance for loan losses 2,615,864 2,125,489
-------------- ---------------
Net loans $ 171,937,870 $ 149,969,131
============== ===============
In the normal course of business, loans are extended to directors and executive
officers and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness. A summary of loan activity for those
directors, executive officers, and their associates with loan balances in excess
of $60,000 for the year ended December 31, 1996, is as follows:
December 31, Amounts December 31,
1995 Additions Collected 1996
------------ --------- --------- ------------
$4,536,067 $832,015 $ 907,503 $ 4,460,579
The Company's primary activity is with customers located within its local trade
area of Wayne and Pike counties. Commercial, residential, consumer, and
agricultural loans are granted. Although the Bank has a diversified loan
portfolio at December 31, 1996 and 1995, loans outstanding to individuals and
businesses are dependent upon the local economic conditions in its immediate
area.
At December 31, 1996 and 1995, the recorded investment in loans which are
considered to be impaired in accordance with Statement Nos. 114 and 118 was
$2,877,248 and $3,713,104, respectively. Included in this amount is $439,964 and
$611,107 of impaired loans for which the related allowance for loan losses is
$51,899 and $34,432 at December 31, 1996 and 1995, respectively. Impaired loans
for which no allowance for loan losses has been allocated due to the loans being
collateral dependent and the fair value of the collateral exceeding the recorded
investment in the related loans amounted to $2,437,284 and $3,101,997,
respectively, at December 31, 1996 and 1995.
The average recorded investment in impaired loans during the year ended December
31, 1996 and 1995 were $3,228,069 and $3,378,316. For the years ended December
31, 1996 and 1995, interest income totaling $11,918 and $116,913, was recognized
on impaired loans.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1996 and 1995, are as follows:
1996 1995 1994
---------- ---------- ----------
Balance, January 1 $2,125,489 $1,893,440 $1,863,690
Add:
Provision 1,710,000 619,400 1,070,000
Recoveries 146,975 537,362 56,853
Less loans charged off 1,366,600 924,713 1,097,103
---------- ---------- ----------
Balance, December 31 $2,615,864 $2,125,489 $1,893,440
========== ========== ==========
21
PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
1996 1995
-------------- ----------------
Land $ 1,004,227 $ 942,085
Buildings 7,579,125 6,725,218
Furniture and fixtures 3,887,005 3,448,378
-------------- ---------------
12,470,357 11,115,681
Less accumulated depreciation 4,690,968 4,099,033
-------------- ---------------
Total $ 7,779,389 $ 7,016,648
============== ===============
Depreciation expense amounted to $601,204, $469,058, and $434,279 for the
years ended December 31, 1996, 1995, and 1994, respectively.
DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $28,890,000 and $18,337,000 at December 31,
1996 and 1995, respectively.
SHORT-TERM BORROWINGS
The outstanding balances and related information of other borrowings which
includes securities sold under agreements to repurchase, federal funds
purchased, and U.S. Treasury demand notes are summarized as follows:
1996 1995
Amount Rate Amount Rate
----------- ------ ------------ ------
Balance at year end $ 3,227,041 4.62% $ 2,031,432 4.64%
Average balances outstanding during
the year 4,901,934 5.0 2,630,878 5.53
Maximum amount outstanding at any
month end 11,968,856 9,277,000
Average amounts outstanding during the year represent daily average balances
and average interest rates represent interest expense divided by the related
average balance.
Investment securities with amortized costs and market values of $5,047,476
and $5,124,295 at December 31, 1996, and $3,258,924 and $3,338,582 at
December 31, 1995, were pledged as collateral for these agreements.
The Bank maintains a revolving line of credit with a borrowing limit of
approximately $5.3 million with the Federal Home Loan Bank of Pittsburgh.
This credit line is subject to annual renewal, incurs no service charges, and
is secured by a blanket security agreement on outstanding residential
mortgage loans. At December 31, 1996, there were no outstanding borrowings on
this line of credit.
OTHER BORROWINGS
The Company's long-term debt consists of a mortgage bond with the Wayne
County Development Authority at an average interest rate of 7.79% over the
life of the bond issue. These bonds were issued to finance the Company's main
office headquarters facility which is security for the bonds and requires
annual debt service payments through the year 2007. At December 31, 1996, the
book value of the assets securing the bonds was approximately $3,794,000.
Scheduled maturities for long-term debt of each of the five years subsequent
to December 31, 1996, are $150,000 in 1997, $160,000 in 1998, $175,000 in
1999, $190,000 in 2000, and $200,000 in 2001. The Company has the option to
redeem the debt, at par value, after December 15, 1997.
INCOME TAXES
The provision for federal income taxes consists of:
1996 1995 1994
----------- ----------- ----------
Currently payable (refundable) $ (302,515) $ 871,192 $ 254,526
Deferred 770,904 (218,926) 136,745
---------- ----------- ----------
Total provision for income taxes $ 468,389 $ 652,266 $ 391,271
========== =========== ==========
The components of the net deferred tax assets (liabilities) at December 31,
1996 and 1995, are as follows:
1996 1995
---------- --------
Deferred Tax Assets:
Allowance for loan losses $ 488,401 $420,115
Deferred loan origination fees 84,708 175,402
Allowance for other real estate losses 104,074 112,442
Accrued pension 134,199 100,664
Allowance for loss on other assets 85,000 85,000
Deferred compensation/incentives 109,835 51,524
Core deposit intangible 43,430 25,574
Partnership credit carryforward 58,000 -
Minimum tax credit carryforward 74,428 -
---------- --------
Total gross deferred tax assets 1,182,075 970,721
---------- --------
Deferred Tax Liabilities:
Net unrealized gain on securities 244,380 603,215
Premises and equipment 222,412 206,646
Lease financings 966,781 -
Other 2,605 2,894
---------- --------
Total gross deferred tax liabilities 1,436,178 812,755
---------- --------
Net deferred tax assets (liabilities) $ (254,103) $157,966
========== ========
22
INCOME TAXES (Continued)
A reconciliation between the expected statutory income tax rate and the
effective income tax rate on income before income taxes follows:
1996 1995 1994
-------------------------- ---------------------- ------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
----------- --------- --------- -------- -------- --------
Computed at statutory rate $ 795,641 34.0 % 834,332 34.0 % 592,649 34.0 %
Effect of tax-free income (276,355) (11.8) (129,384) (5.3) (140,916) (8.1)
Non-deductible interest to
carry tax-exempt assets 32,420 1.4 17,748 0.7 20,096 1.2
Low-income housing tax credit (58,000) (2.5) (58,043) (2.4) (56,200) (3.2)
Other, net (25,317) (1.1) (12,387) (.4) (24,358) (1.4)
---------- ---- ------- ---- ------- ----
Income tax expense and
effective rate $ 468,389 10.0 % 652,266 26.6 % 391,271 22.5 %
========== ==== ======= ==== ======= ====
COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, there are various outstanding commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. 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. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of
a customer to a third party. These commitments were comprised of the
following:
1996 1995
------------ -----------
Commitments to extend credit $ 25,346,000 $16,821,000
Commercial letters of credit and financial guarantees 1,144,000 1,215,000
------------ -----------
Total $ 26,490,000 $18,036,000
============ ===========
Such commitments and standby letters of credit involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized
in the consolidated financial statements.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. Substantially all of the
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for loan losses. Since many of the
commitments are expected to expire without without being drawn upon, the
total contractual amounts do not necessarily represent future funding
requirements.
Contingent Liabilities
----------------------
The Company is involved in various legal actions from normal business
activities. Management believes that the liability, if if any, arising from
such actions will not have a material adverse effect on the Company's
financial position.
EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
----------------------------
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be
paid to eligible employees at retirement based primarily upon years of
service with the subsidiary bank and compensation during the last five years
of employment. The Bank's funding policy is to make annual contributions as
needed based upon the funding formula developed by the plan's actuary.
Pension expense includes the following:
1996 1995 1994
------------- ------------- -------------
Service cost $ 170,345 $ 139,615 $ 165,306
Interest cost on projected benefit obligation 183,003 170,358 163,519
Return on plan assets (211,468) (182,645) (182,855)
Net amortization (5,485) (5,485) (6,602)
------------ ----------- -----------
Net periodic pension costs $ 136,395 $ 121,843 $ 139,368
============ =========== ===========
The actuarial present value of accumulated benefit obligations at December
31, 1996 and 1995, was $2,151,919 and $1,977,567 including vested benefit
obligations of $2,111,999 and $1,950,957. The following table sets forth the
funded status and amounts recognized in the balance sheet at:
1996 1995
------------ ------------
Projected benefit obligation $ 2,900,868 $ 2,706,520
Plan assets at fair value (2,761,574) (2,493,331)
----------- -----------
Projected benefit obligation in excess of plan assets 139,294 213,189
Unrecognized prior service costs (21,190) (22,307)
Unrecognized transition amounts 112,818 119,420
Unrecognized net gain from past experience different from that as 89,828 (22,397)
----------- -----------
Accrued pension costs $ 320,750 $ 287,905
=========== ===========
The weighted discount rate used to measure the projected obligation is 7.00%
for December 31, 1996 and 7.50% for December 31, 1995 and 1994 and the rate
of future increase in future compensation levels is 6.00%, and the long-term
rate of return on assets is 8.00% as of December 31, 1996 and 8.50% as of
December 31, 1995 and 1994.
On February 11, 1997, the Company decided to discontinue to provide the
benefits under the defined benefit plan. The Company plans to settle the
obligations under the defined benefit plan during 1997. The effects of the
settlement cannot be determined at this time.
23
Profit Sharing Plan
-------------------
The Company maintains a deferred profit sharing plan for all eligible
employees. Contributions to the plan are made at the discretion of the Board
of Directors. Contributions to the plan were $170,061, $139,901, and $155,887
for 1996, 1995, and 1994, respectively.
Effective November 1, 1996, the Company amended the profit sharing plan to
include the adoption of an integrated 401(k) plan. The plan permits employees
to make pre-tax contributions up to 15% of the employee's compensation. The
Company may make matching contributions as approved 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.
Employee Stock Ownership Plan (ESOP)
------------------------------------
On August 27, 1996, the Board of Directors approved the creation of a
leveraged employee stock ownership plan ("ESOP") for the benefit of employees
who meet the eligibility requirements which include having completed one year
of service with the Company and having attained age twenty-one. The ESOP
Trust purchased shares of the Company's common stock with proceeds from a
loan from the Company. The Company 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 is payable in equal annual
installments over ten years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The Company accounts for its leveraged ESOP in accordance with Statement of
Position 93-6. Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in the consolidated balance sheet. 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; dividends on unallocated ESOP
shares are recorded as a reduction of debt.
Compensation expense for the ESOP is $50,758 for the year ended December 31,
1996.
1996
------------
Allocated shares $ 1,515
Shares released for allocation -
Unreleased shares 59,091
------------
Total ESOP shares 60,606
============
Fair value of unreleased shares $ 1,905,685
============
REGULATORY RESTRICTIONS
Cash Requirements
-----------------
Included in cash and due from banks are required federal reserves of
$1,116,000 and $852,000 and at December 31, 1996 and 1995, respectively, for
facilitating the implementation of monetary policy by the Federal Reserve
System. The required reserves are computed by applying prescribed ratios to
the classes of average deposit balances. These are held in the form of cash
on hand and/or balances maintained directly with the Federal Reserve Bank.
Dividends
---------
The Pennsylvania Banking Code restricts the availability of surplus for
dividend purposes. At December 31, 1996, surplus funds of $3,568,434 were not
available for dividends.
Capital Requirements
--------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Company and the Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1996, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the federal
regulators has categorized the Company and the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Company and the Bank must maintain minimum Total
risk-based, Tier I risk-based and Tier I leverage ratios at least 100 to 200
basis points above those ratios set forth in the table. There have been no
conditions or events since that notification that management believes have
changed the Bank's category.
24
CAPITAL REQUIREMENTS (Continued)
The following table reflects the Company's ratios at December 31 (the Bank's
ratios do not significantly differ from the Company):
1996 1995
------------------------- -------------------------
Total Capital (to Risk
Weighted Assets)
- -------------------------------
Actual $ 21,784,370 11.5% $ 23,445,111 15.2%
For Capital Adequacy
Purposes 15,144,038 8.0 12,353,938 8.0
Tier I Capital (to Risk
Weighted Assets)
- -------------------------------
Actual $ 19,415,032 10.3% $ 21,512,398 13.9%
For Capital Adequacy
Purposes 7,572,019 4.0 6,176,969 4.0
Tier I Capital (to Average
Assets)
- -------------------------------
Actual $ 19,415,032 7.7% 21,512,398 10.5%
For Capital Adequacy
Purposes 10,098,012 4.0 8,177,522 4.0
STOCK OPTION PLAN
In December, 1994, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees of the Company which was approved by
stockholders at the annual meeting held on April 25, 1995. An aggregate of
250,000 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. Proceeds from the exercise of the
stock options are credited to common stock for the aggregate par value and
the excess is credited to additional paid in capital.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the Company to
recognize compensation expense for all awards of equity instruments issued
after December 31, 1995. The statement establishes a fair value based method
of accounting for stock-based compensation plans. The standard applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities in amounts based on the price of the
entity's common stock or other equity instruments. Statement No. 123 permits
companies to continue to account for such transactions under Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees", but
requires disclosure in a note to the financial statements pro forma net
income and earnings per share as if the Company had applied the new method of
accounting.
Under APB Opinion 25, no compensation expense has been recognized with
respect to the options granted under the stock option plan. Had compensation
expense been determined on the basis of fair value pursuant to Statement No.
123, net income and earnings per share would have been reduced as follows:
1996 1995
-------------- -------------
Net Income:
As reported $ 1,871,732 $ 1,801,652
============== =============
Pro forma $ 1,796,041 $ 1,731,327
============== =============
Earnings Per Share:
As reported $ 2.19 $ 2.03
============== =============
Pro forma $ 2.11 $ 1.95
============== =============
The following table presents share data related to the stock option plan:
Shares Under Option
-----------------------
1996 1995
------ ------
Outstanding, January 1 14,985 -
Granted 9,875 14,985
Exercised (500) -
Forfeited (3,550) -
Outstanding, December 31 (at prices ranging from $32.25 to $33.25 20,810 14,985
FAIR VALUE DISCLOSURE
The estimated fair values of the Bank's financial instruments are as follows:
1996 1995
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 7,071,642 $ 7,071,642 $ 5,597,861 $ 5,597,861
Interest-bearing deposits with other
institutions 1,187,206 1,187,206 -- --
Federal funds sold 6,850,000 6,850,000 850,000 850,000
Investment securities available for 48,905,515 48,905,515 36,671,320 36,671,320
Investment securities 8,804,889 9,040,338 12,210,582 12,362,652
Net loans 154,956,789 161,795,000 149,969,131 155,343,000
Accrued interest receivable 1,557,843 1,557,843 1,504,737 1,504,737
------------ ------------ ------------ ------------
Total $229,333,884 $236,407,544 $206,803,631 $212,329,570
============ ============ ============ ============
Financial liabilities:
Deposits $229,328,793 $229,347,000 $187,299,107 $187,603,000
Short-term borrowings 3,227,041 3,227,041 2,031,432 2,031,432
Other borrowings 2,441,707 2,632,000 2,581,707 2,962,000
Accrued interest payable 2,223,909 2,223,909 1,831,496 1,831,496
------------ ------------ ------------ ------------
Total $237,221,450 $237,429,950 $193,743,742 $194,427,928
============ ============ ============ ============
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future
estimated losses and other factors as determined through various option
pricing formulas or simulation modeling.
25
FAIR VALUE DISCLOSURE (Continued)
As many of these assumptions result from judgments made by management based
upon estimates which are inherently uncertain, the resulting estimated fair
values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on
the resulting estimated fair values.
As certain assets and liabilities such as lease receivables, deferred tax
assets, and premises and equipment are not considered financial instruments,
the estimated fair value of financial instruments would not represent the
full value of the Bank.
The Bank employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available
based upon the following assumptions:
Cash and Due From Banks, Interest-Bearing Deposits With Other Institutions,
-----------------------------------------------------------------------------
Federal Funds Sold, Accrued Interest Receivable, Short-Term Borrowings, and
-----------------------------------------------------------------------------
Accrued Interest Payable.
------------------------
The fair value is equal to the current book value.
Investment Securities
---------------------
The fair value of investment securities available for sale and held to
maturity is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price for
similar securities.
Loans, Deposits, and Other Borrowings
-------------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality, and prepayment risk. Demand, savings,
and money market deposit accounts are valued at the amount payable on demand
as of year end. Fair values for time deposits and other borrowings are
estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market
rates being offered for deposits and borrowings of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently charged
to enter into similar agreements with similar credit risk, are not considered
material for disclosure. The contractual amounts of unfunded commitments and
letters of credit are presented at Commitments and Contingent Liabilities.
PARENT COMPANY
On March 29, 1996, the reorganization of the Bank into a holding company
structure was completed. Each outstanding share of the common stock of the
Bank, with a par value of $1.00 was converted into and exchanged for one
common share of common stock of Norwood Financial Corp., with a par value of
$.10. As a result of this transaction the Bank became a wholly-owned
subsidiary of the Company.
CONDENSED BALANCE SHEET
December 31,
1996
-----------------
ASSETS
Cash on deposit in subsidiary bank $ 395,426
Investment securities available for sale 207,175
Investment in subsidiary 21,050,547
Other assets 61,332
---------------
Total assets $ 21,714,480
===============
LIABILITIES $ 195,164
STOCKHOLDERS' EQUITY 21,519,316
---------------
Total liabilities and stockholders' equity $ 21,714,480
===============
For the Period
March 29 to
December 31,
1996
-----------------
INCOME
Dividends from subsidiary bank $ 2,549,096
Interest income 41,250
Gain on sale of investment securities 1,862
---------------
Total income 2,592,208
---------------
EXPENSES 14,603
---------------
Income before income taxes 2,577,605
Income tax benefit (3,049)
---------------
Income before equity in undistributed earnings of subsidiary 2,580,654
Equity in undistributed earnings of subsidiary (1,189,908)
---------------
NET INCOME $ 1,390,746
===============
CONDENSED STATEMENT OF CASH FLOWS
For the Period
March 29 to
December 31,
1996
-----------------
OPERATING ACTIVITIES
Net income $ 1,390,746
Adjustment to reconcile net income to net cash provided:
Undistributed earnings of subsidiary 1,189,908
Other, net (13,194)
---------------
Net cash provided by operating activities 2,567,460
---------------
INVESTING ACTIVITIES
Sale of investment securities available for sale 81,960
Purchase of investment securities available for sale (282,023)
Net cash used for investing activities (200,063)
FINANCING ACTIVITIES
Proceeds from sale of treasury stock 3,203
Acquisition of treasury stock (1,447,263)
Stock options exercised 12,250
Cash dividends paid (540,161)
---------------
Net cash used for financing activities (1,971,971)
---------------
Increase in cash and cash equivalents 395,426
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -
---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 395,426
===============
26
Investor Information
Stock ListinNorwood Financial Corp. stock is traded under the symbol NWFL.
The following firms are known to make a market in the Company's stock:
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
717-560-3015
Legg Mason Wood Walker, Inc.
The Stadium Office Park
330 Montage Mountain Road
Suite 201
Scranton, PA 18507
717-346-9300
Sandler O'Neill & Partners, LP
2 World Trade Center, 104th Floor
New York, NY 10048
212-466-7800
Janney Montgomery Scott, Inc.
1801 Market Street
Philadelphia, PA 19103
215-665-6000
F.J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103
215-563-8500
Transfer Agent: Wayne Bank acts as the transfer agent for the company stock.
Stock holders who may have questions regarding their stock ownership should
contact the Bank at (717)253-1455.
Dividend Calendar: Dividends on Norwood Financial Corp. common stock, if
approved by the Board of Directors are customarily paid on February 1, May 1,
August 1 and November 1.
SEC Reports and additional information upon written request of any
stockholder, investor or analyst, a copy of the Company's report on Form 10-K
for its fiscal year ended December 31, 1995 including financial statements and
schedules thereto, required to be filed with the Securities and Exchange
Commission may be obtained by contacting Lewis J. Critelli, Senior Vice
President and Chief Financial Officer, Norwood Financial Corp. 717 Main Street,
P.O. Box 269, Honesdale, PA 18431, (717)253-8512.
29