-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MnKRwWO6DdN5E/WNJdhg9tUuIJnVM5lOFe4D/4Qup45P9So1JXd+cFEbHMPizfCy dg5fd7rZqXOB5Rk9pF2feA== 0000946275-99-000218.txt : 19990402 0000946275-99-000218.hdr.sgml : 19990402 ACCESSION NUMBER: 0000946275-99-000218 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28364 FILM NUMBER: 99579399 BUSINESS ADDRESS: STREET 1: 717 MAIN ST STREET 2: PO BOX 269 CITY: HONESDALE STATE: PA ZIP: 18431 BUSINESS PHONE: 7172531455 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1998, ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . -------------- --------------- Commission File No. 0-28366 Norwood Financial Corp. - -------------------------------------------------------------------------------- ( Exact Name of Registrant as specified in Its Charter) Pennsylvania 23-2828306 - --------------------------------------------- ------------------- (State or Other Jurisdiction of Incorporation I.R.S. Employer or Organization) Identification No. 717 Main Street, Honesdale, Pennsylvania 18431 - ---------------------------------------- -------------- (Address of Principal Executive Offices (Zip Code) Issuer's Telephone Number, Including Area Code: (570) 253-1455 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 16, 1999, there were 1,803,824 issued and 1,781,477 shares outstanding of the registrant's Common Stock. The Registrant's voting stock trades on the NASDAQ National Market under the symbol "NWFL." The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant's Common Stock was sold on March 15, 1999, was $30,942,362 ($22 per share based on 1,406,471 shares of Common Stock outstanding). DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year ended December 31, 1998. (Parts I, II, and IV) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders. (Part III) PART I Item 1. Business. General Norwood Financial Corp. (the "Company") is a Pennsylvania corporation organized in November 1995 at the direction of Wayne Bank ("Wayne Bank" or the "Bank") to facilitate the reorganization of the Bank into the holding company form of organization ("Reorganization"). On March 29, 1996, the Bank completed the Reorganization and became a wholly owned subsidiary of the Company. Prior to such date, the description of all financial information herein is that of the Bank. Wayne Bank is a Pennsylvania chartered commercial bank located in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne County Savings Bank. Wayne County Savings Bank changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank's deposits are currently insured by the Bank Insurance Fund ("BIF") as administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the Pennsylvania Department of Banking ("PDB") and the FDIC. The Bank is an independent community-oriented bank with six offices in Wayne County and two offices in Pike County. The Bank primarily serves the Pennsylvania counties of Wayne and Pike and to a much lesser extent, the counties of Lackawanna, Monroe and Susquehanna. These offices include two offices acquired from Meridian Bank as of March 23, 1996, one each in the counties of Wayne and Pike In addition, the Bank operates ten automated teller machines with seven in branch locations and three remote service facilities. The Bank offers a wide variety of personal, business credit services and trust and investment products to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves. At December 31, 1998, the Bank had total assets, deposits, and stockholders equity of $277.8 million, $234.1 million, and $26.4 million, respectively. Competition The Company's primary market area of Wayne and Pike Counties, Pennsylvania, is rural and derives a significant portion of its economic base from businesses which serve the leisure time and youth camp markets. The market place has a large amount of seasonal dwellings, marina and lake activity, hunting, fishing, skiing and camping - tourism related activity. Wayne County has become more accessible to the western areas of Scranton and Wilkes-Barre with the completion of the Lackawanna Industrial Highway. The County was recently selected as a site for a new Federal Prison, which should have an economic benefit. Pike County continues to experience growth above the state average through migration of residents from neighboring New York and New Jersey. The retail and services industries are growing accordingly. Pike County is within daily driving distance of the New York/Northern New Jersey Metropolitan area. The Company also does business in Monroe County, which is one of the fastest growing counties in Pennsylvania, with an influx of population from neighboring New Jersey. The Bank is one of a number of financial institutions serving its immediate market area. The competition for deposit products comes from commercial banks in the market area, savings association and credit unions. Deposit competition also includes a variety of insurance products sold by local agents and investment products such as mutual funds, annuity products and other securities sold by local and regional brokers. The Bank prices its deposit products, both rates paid and service charges to be competitive in its market area. The Bank is in a competitive environment for loan products. Competition for loans comes not only from banks, but also from mortgage brokers, auto dealer financing companies and other non-bank lenders. Also, certain loans were refinanced elsewhere based on interest rate changes. The Bank prices its loans to be competitive with local and regional competition, while remaining aware of risk elements. Lending Activities The Bank's loan products include loans for personal and business use. This includes mortgage lending to finance principal residence as well as "seasonal" or second home dwellings. The products include adjustable rate mortgages up to 30 years which are retained and serviced through the Bank, longer term fixed rate mortgage products which may be sold, servicing retained, in the secondary market through the Federal National Mortgage Association (Fannie Mae) or held in the Bank's portfolio subject to certain internal guidelines. Fixed rate home equity loans are originated on terms up to 180 months, as well as offering a home equity line of credit tied to the prime rate. The Bank does a significant level of indirect dealer financing of automobiles, boats, and recreational vehicles through a network of over 60 dealers in Northeast Pennsylvania. In addition to automobile lending, the Bank operates an auto leasing program through its dealer network. Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structures. Commercial lending activities include lines of credit, revolving credit, term loans, mortgages, various forms of secured lending and a limited amount of letter of credit facilities. The structure may be fixed, immediately repricing tied to the prime rate or adjustable at set intervals. During 1998, the majority of the Bank's mortgage origination was in fixed rate product, due to the lower interest rate environment. Adjustable-rate mortgage loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic interest rate adjustment permitted by the adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank. Consumer lending, including indirect and leasing provide benefits to the Bank's asset/liability management program by reducing the Bank's exposure to interest rate changes, due to their generally shorter terms, and higher yields. Such loans may entail additional credit risks compared to owner-occupied residential mortgage lending. However, the Bank believes that the higher yields and shorter terms compensate the Bank for the increased credit risk associated with such loans. Commercial lending including real-estate related loans entail significant additional risks when compared with residential real estate and consumer lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and market conditions for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit 2 a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. The liquidation of commercial property is often more costly and may involve more time to sell than residential real estate. Due to the type and nature of the collateral, and, in some cases the absence of collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent on the borrower's continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency. Leasing entails residual value risk in addition to credit risk. The residual value is the pre-determined value of the vehicle at the end of the lease term established at the inception of the lease. The Bank sets the residual value based on the Automotive Leasing Guide (ALG). At the end of the lease a customer may buy the vehicle at the residual value, use as a trade-in for another vehicle or return it to the Bank. The Bank disposes of returned vehicles through various dealer and automobile auctions. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 3 Types of Loans. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the dates indicated.
At December 31, --------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------- --------------- --------------- --------------- -------------- $ % $ % $ % $ % $ % ------ ------ ------- ----- ------- ------ ------- ------ ------- ----- (Dollars in Thousands) Type of Loans: Commercial, Financial and Agricultural $25,539 13.6 $26,589 14.2 $29,680 16.7 $33,891 22.0 $31,378 22.2 Real Estate-construction 3,046 1.6 2,046 1.1 1,602 0.9 1,380 0.9 3,480 2.5 residential.................. 52,038 27.8 54,227 29.0 54,547 30.8 55,718 36.2 53,810 38.1 commercial................... 30,555 16.3 32,986 17.7 36,852 20.8 39,103 25.4 37,098 26.2 Leases to Individuals................. 33,860 18.1 33,877 18.1 17,048 9.6 --- -- -- -- Installment Loans to Individuals...... 42,266 22.6 37,082 19.9 37,503 21.2 23,800 15.5 15,543 11.0 ------ ---- ------ ---- ------ ---- ------ ---- -------- Total Loans 187,304 100.0 186,807 100.0 177,232 100.0 153,892 100.0 141,309 100.0 Less unearned income.................. 385 1,167 2,611 1,798 608 Allowance for loan losses..... 3,333 3,250 2,616 2,125 1,893 ------ -------- ------ ------- ------- Total loans,net....................... $183,586 $182,390 $172,005 $149,969 $138,808 ======== ======== ======= ======= ========
4 Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for all categories of loans as of December 31, 1998. Scheduled repayments are reported in the maturity category in which payment is due. Less than One to Over One Year Five Years Five Years Total -------- ---------- ---------- ----- Commercial, Financial and Agricultural $ 8,715 $ 9,449 $ 7,375 $25,539 Real Estate- 3,046 -- -- 3,046 Construction Residential 5,948 12,128 33,962 52,038 Commercial 2,642 9,623 18,290 30,555 Leases (net) 9,077 24,783 -- 33,860 Installment loans to individuals 10,931 31,335 -- 42,266 ------ ------- ------ ------- Total $40,359 $87,318 $59,627 $187,304 ====== ====== ====== ======= Loans with fixed-rate $31,391 $68,569 $19,365 $119,325 Loans with floating rates 8,968 18,749 40,262 67,979 ----- ------ ------ ------ Total $40,359 $87,318 $59,627 $187,304 ====== ====== ====== ======= 5 Nonaccrual, Past Due and Restructured Loans. The following table sets forth information regarding non-accrual loans, other real estate owned ("OREO"), and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated and restructured loans. The Bank had no troubled debt restructurings as defined in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan."
At December 31, ---------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (In Thousands) Loans accounted for on a non-accrual basis: Commercial and all other $ 65 $ 963 $1,633 $1,572 $2,754 Real estate 503 1,112 1,790 2,205 2,175 Consumer 20 33 28 48 -- ------ ------ ------ ------ ------ Total $ 588 $2,108 $3,451 $3,825 $4,929 ====== ====== ====== ====== ====== Accruing loans which are contractually past- due 90 days or more: Commercial and all other $ -- $ 44 $ 38 $ 55 $ 553 Real estate -- -- -- -- 2,716 Consumer 34 23 4 -- 7 ------ ------ ------ ------ ------ Total $ 34 $ 67 $ 42 $ 55 $3,276 ====== ====== ====== ====== ====== Total non-performing loans $ 622 $2,175 3,493 $3,880 $8,205 Other real estate owned 204 537 2,283 $1,944 $1,377 ------ ------ ------ ------ ------ Total non-performing assets $ 826 $2,712 $5,776 $5,824 $9,582 ====== ====== ====== ====== ====== Total non-performing loans to total loans .33% 1.17% 2.00% 2.55% 5.83% Total non-performing loans to total assets .22% .83% 1.34% 1.79% 4.18% Total non-performing assets to total assets .30% 1.03% 2.22% 2.68% 4.89%
Potential Problem Loans. As of December 31, 1998, there were no loans not previously disclosed, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Impaired Loans. At December 31, 1998 and 1997 the recorded investment in loans considered impaired in accordance with Statement No. 114 and 118 were $642,000 and $2,334,000 respectively. 6 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated:
At December 31, ----------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ---------- ---------- --------- ---------- (Dollars in Thousands) Total loans receivable........................... $ 186,919 $ 185,640 $ 174,621 $ 152,094 $ 140,701 Average loans receivable......................... 186,877 183,625 160,517 145,990 136,314 Allowance balance at beginning of period......... $ 3,250 $ 2,616 $ 2,125 $ 1,893 $ 1,864 Charge-offs: Commercial and all other...................... (294) (380) (820) (448) (709) Real estate................................... (14) (119) (226) (353) (306) Consumer...................................... (366) (264) (320) (123) (82) Leases........................................ (115) (67) -- -- -- --------- --------- --------- --------- --------- Total (789) (830) (1,366) (924) (1,097) Recoveries: Commercial and all other....................... 89 72 71 513 31 Real estate.................................... 7 3 16 3 3 Consumer....................................... 50 34 60 21 22 Leasing........................................ 6 -- -- -- -- --------- --------- --------- --------- --------- Total......................................... 152 109 147 537 56 --------- --------- --------- --------- --------- Provision expense................................ 720 1,355 1,710 619 1,070 --------- --------- --------- --------- --------- Allowance balance at end of period............... $ 3,333 $ 3,250 $ 2,616 $ 2,125 $ 1,893 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding..................... 1.78% 1.75% 1.50% 1.40% 1.35% Net loans charged off as a percent of average loans outstanding...................... .34% .39% .76% .27% .76%
7 Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated.
At December 31, ----------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ---------------- ---------------- ---------------- ----------------- (Dollars in thousands) % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial, financial and $ 427 13.6% $ 610 14.2% $ 871 16.7% $ 927 22.0% $ 793 22.2% agricultural Real estate - construction 53 1.6 15 1.1 38 0.9 14 0.9 29 2.5 Real estate - mortgage 765 44.1 641 46.7 727 51.6 909 61.6 759 64.3 Installment loans to individuals 589 22.6 276 19.9 260 21.2 155 15.5 87 11.0 Leases 339 18.1 169 18.1 85 9.6 -- -- -- -- Unallocated 1,160 -- 1.539 -- 635 -- 120 -- 225 -- Total $3,333 100.0% $3,250 100.0% $2,616 100.0% $2,125 100.0% $1,893 100.0%
- -------------------------------- (1) Includes specific reserves for assets classified as loss. 8 Investment Activities General. The Company maintains a portfolio of investment securities consisting principally of obligations of the U.S. Government and its agencies and obligations of state, counties and municipalities including school districts. The Company considers its investment portfolio a source of earnings and liquidity. Securities Portfolio. Carrying values of securities at the dates indicated are as follows: At December 31 --------------------------------- (Dollars in thousands) 1998 1997 1996 Securities: ------ ------ ------- (carrying value) U.S. Treasury Securities.......... $5,581 $ 8,034 $3,994 U.S. Government Agencies.......................... 19,628 18,024 25,857 State and political subdivisions..................... 11,456 9,621 13,979 Corporate Notes and bonds......... 1,789 --- 503 Mortgage-backed Securities........ 28,326 18,961 11,359 Equity Securities................. 3,135 2,891 2,019 ------ ------ ------ Total Securities $69,915 $57,531 $57,711 ====== ====== ====== Fair value of Securities........................ $70,421 $57,888 $57,946 ====== ====== ====== 9 Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company's securities portfolio at December 31, 1998. All yields are stated on a fully taxable equivalent basis using a Federal tax rate of 34%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations.
After One through After Five through One Year or Less Five Years Ten Years After Ten Years Total Securities ------------------- ---------------- ----------------- ----------------- ----------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Value Yield % Value Yield % Value Yield % Value Yield % Value Yield % ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- (Dollars in thousands) U.S. Government Securities $1,513 6.04 $ 4,068 5.50 $ -- -- $ -- -- $ 5,581 5.65 U.S. Government Agencies -- -- 11,075 5.80 6,561 6.62 1,992 6.35 19,628 6.13 State and political -- -- 1,085 6.17 525 7.40 9,846 8.68 11,456 8.38 subdivisions(3) Mortgage-backed Securities(1) 2,805 6.39 11,220 6.39 9,854 6.44 4,447 6.53 28,326 6.43 Corporate Securities -- -- -- -- -- -- 1,789 6.38 1,789 6.38 Equity Securities(2) 3,135 4.72 -- -- -- -- -- -- 3,135 4.72 ------ ----- ------- ---- ------- ----- ------ ---- ------- ----- Total Investment Securities $7,453 5.62% $27,448 6.01% $16,940 6.54% $18,074 7.67% $69,915 6.53%
(1) Maturity is based upon expected average lives rather than contractual terms. (2) Equity securities with no stated maturity are classified as "one year or less". (3) Includes $7,645 in securities classified as held-to-maturity with a market value of $8,151 10 Deposit Activities. General. The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to 5 years for retail and IRA instruments. The Bank participates in Jumbo CD ($100,000 and over) markets with local municipalities and school districts which are typically on a competitive bid basis. Other services the Bank offers it's customers on a limited basis include cash management, direct deposit and ACH activity. The Bank operates ten automated teller machines and is affiliated with MAC, PLUS and CIRRUS networks. Maturities of Time Deposits. The following table indicates the amount of the Bank's certificates of deposit in amounts of $100,000 or more and other time deposits of $100,000 or more by time remaining until maturity as of December 31, 1998. (Dollars in thousands) Certificates of Deposit ---------- Maturity Period - --------------- Within three months..................... $11,810 Over three through six months........... 10,851 Over six through twelve months.......... 2,633 Over twelve months...................... 2,241 ------ $27,535 ====== Short-Term Borrowings The following table sets forth information concerning short-term borrowings (those maturing within one year) which consist principally of federal funds purchased, securities sold under agreements to repurchase,Federal Home Loan Bank advances and U.S. Treasury demand notes, that the Company had during the periods indicated. (Dollars in thousands) Year ended December 31, ----------------------- 1998 1997 1996 ------ ------ ------ Short-term borrowings: Average balance outstanding................ $7,648 $7,892 $4,907 Maximum amount outstanding at any month-end during the period.............. 14,284 13,456 11,967 Weighted average interest rate during the period................................. 4.63% 4.84% 5.03% Total short-term borrowings at end of period. $7,776 $4,990 $3,227 11 Trust Activities The Bank operates a Trust Department which provides estate planning, investment management and financial planning to customers. At December 31, 1998, the Bank acted as trustee for $52.5 million of assets of which $29.5 million is non-discretionary with no investment authority. Subsidiary Activities The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. ("NIC"), incorporated in 1996, a Pennsylvania licensed insurance agency, is a wholly-owned subsidiary of the Bank. NIC's business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. The securities are offered through BISYS Brokerage a registered broker/dealer. NIC had sales volume of $5.2 million in 1998, generating revenues of $134,000. WCB Realty Corp. is a wholly-owned real estate subsidiary of the Bank whose principal asset is the administrative offices of the Company. WTRO Properties Inc. is a wholly-owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank through WTRO foreclosed upon in 1998. The majority of the foreclosed real estate was sold in the third quarter of 1998. Personnel As of December 31, 1998, the Company and the Bank had 106 full-time and 17 part-time employees. None of the Company employees are represented by a collective bargaining group. The Company believes that its relationship with its employees is good. Regulation Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Regulation of the Company General. The Company is a bank holding company within the meaning of Pennsylvania Banking Code of 1965 and the Bank Holding Company Act of 1956 (the "Act"). As such, the Company is subject to regulation by the PDB and the Board of Governors of the Federal Reserve System ("FRB"). In addition, the FRB has enforcement authority over the Company and its non-bank subsidiaries which also permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for stockholders of the Company. A bank holding company is prohibited under the Act from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the FRB considers whether the performance of these activities by a bank holding company would offer benefits to the public 12 that outweigh the possible adverse effects. As a bank holding company, the Company is required to file with the FRB an annual report and any additional information as the FRB may require pursuant to the Act. The FRB also examines the Company and its subsidiaries. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower. Furthermore, under amendments to the Act and regulations of the FRB, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or providing any property or services. Generally, this provision provides that a bank may not extend credit, lease or sell property, or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to the bank holding company, or to any other subsidiary of the bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, the bank holding company, or any subsidiary of the bank. Permitted Non-Banking Activities. The FRB permits bank holding companies to engage in non-banking activities or businesses so closely related to banking or to managing or controlling banks so as to be a proper incident thereto. FRB approval notice is required before the Company or a non-bank subsidiary of the Company may engage in any such activities or before such a business may be acquired. The FRB is authorized to differentiate between activities that are initiated by a bank holding company or a subsidiary and activities commenced by acquisition of a going concern. Regulatory Capital Requirements. The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The FRB capital adequacy guidelines are similar to those imposed on the Bank by the FDIC. See "Regulation of the Bank - Regulatory Capital Requirements." Commitments to Affiliated Depository Institutions. Under FRB policy, the Company will be expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy. The enforceability and precise scope of this policy is unclear, however, in light of recent judicial precedent; however, should the Bank require the support of additional capital resources, it should be anticipated that Company will be required to respond with any such resources available to it. Pennsylvania Regulation of Acquisition of the Company. The Company is organized under Pennsylvania law. Because the Company will not be a "registered company" under Pennsylvania law, the Company included in its Articles of Incorporation certain provisions governing mergers, takeovers, business combinations, and other similar transactions applicable to registered companies in Pennsylvania. Federal Securities Law. The Company Common Stock is registered under the 1934 Act and therefore, the Company is subject to the information, reporting, proxy solicitation, and insider trading restrictions and requirements under the 1934 Act. Regulation of the Bank General. As a Pennsylvania chartered, BIF-insured bank, the bank is subject to extensive regulation and examination by the PDB, the FDIC, which insures its deposits to the maximum extent permitted by law, 13 and to a much lesser extent, by the FRB. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the PDB, the FDIC or the United States Congress could have a material adverse impact on the Company, the Bank and their operations. Pennsylvania Banking Law. The Pennsylvania Banking Code ("Banking Code") contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the PDB so that the supervision and regulation of state chartered bank may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. The PDB generally examines each bank not less frequently than once every two years. The Banking Code permits the PDB to accept the examinations and reports of the FDIC in lieu of the PDB's examination. The present practice is for the PDB to conduct individual examinations. The PDB may order any bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, trustee, officer, attorney or employee of a bank engaged in an objectionable activity, after the PDB has ordered the activity to be terminated, to show cause at a hearing before the PDB why such person should not be removed. Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted legislation regarding the acquisition of commercial banks, bank holding companies, savings banks and savings and loan associations located in Pennsylvania by institutions located outside of Pennsylvania. The statute dealing with commercial banks authorizes (I) a bank or holding company thereof located in another state (a "foreign institution") to acquire the voting stock of, merge or consolidate with, or purchase assets and assume liabilities of, a Pennsylvania-chartered bank and (ii) the establishment of branches in Pennsylvania by foreign institutions, in each case subject to certain conditions including (A) reciprocal legislation in the state in which the foreign institution seeking entry into Pennsylvania is located permitting comparable entry by Pennsylvania savings institutions and (B) approval by the PDB. Pennsylvania law also provides for nationwide branching by Pennsylvania-chartered banks, subject to the PDB's approval and certain other conditions. On September 29, 1994, the United States Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Law"), which amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The Interstate Banking Law will allow, effective September 29, 1995, the acquisition by a bank holding company of a bank located in another state. Interstate bank mergers and branch purchase and assumption transactions were allowed effective June 1, 1997; however, states may "opt-out" of the merger and purchase and assumption provisions by enacting laws that specifically prohibit such interstate transactions. States may, in the alternative, enact legislation to allow interstate merger and purchase and assumption transactions prior to June 1, 1997. Pursuant to the Interstate Banking Law, states may also enact legislation to allow for de novo interstate branching by out of state banks. 14 Pennsylvania has enacted "opt-in" legislation authorizing full interstate branching for state- chartered financial institutions prior to June 1, 1997. This legislation allows out-of-state banks to branch into Pennsylvania either by buying an existing bank or converting it into a branch or by setting up a de novo branch. The law requires reciprocity from the other state until June 1, 1997. The legislation also allows state-chartered banks the same rights as federally chartered banks to branch into other states that allow interstate branching. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the BIF to a maximum of $100,000 for each insured account (as defined by law and regulation). Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The management of the Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance. The Bank pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all insured institutions. Under applicable regulations, institutions are assigned to one of three capital groups based on the level of an institution's capital (i.e., "well capitalized," "adequately capitalized" and "undercapitalized"). These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. Because the BIF exceeded its statutory required ratio of reserves to insured deposits, the Bank paid approximately $2,000 in federal deposit insurance premiums for year ended December 31, 1998. Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the Bank will pay, in addition to its normal deposit insurance premium as a member of the BIF, an amount equal to approximately 1.3 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery of the savings and loan industry. The Bank paid $25,133 in Fico Bond assessments in 1998. Regulatory Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy prescribing the capital adequacy requirements for state-chartered banks, some of which, like the Bank, are not members of the Federal Reserve System. At December 31, 1998, the Bank exceeded all regulatory capital requirements and is classified as "well capitalized." The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill, and certain purchased mortgage servicing rights and purchased credit and relationships. The FDIC also requires that state-chartered banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier I capital and supplementary 15 (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage standard. The components of supplementary (Tier 2) capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. A bank which has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC's regulation also provides that any insured depository institution with a ratio of Tier I capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could be subject to potential termination of deposit insurance. The following table sets forth the Company's regulatory capital position as of December 31, 1998 as compared to the minimum capital requirements imposed by the FDIC. The Bank's ratios do not differ significantly from the Company's ratios presented below. Percent of Amount Adjusted Assets (Dollars in Thousands) Leverage Capital.................. $ 24,893 9.09% Required........................ 10,724 4.00% ------ ----- Excess.......................... $ 14,169 5.09% ======== ===== Tier 1 Capital.................... $ 24,893 12.30% Required........................ 8,096 4.00% ------- ----- Excess.......................... $ 16,797 8.30% ======= ===== Total Capital..................... $ 28,333 14.00% Required........................ 16,192 8.00% ------- ----- Excess.......................... $ 12,141 6.00% ======= ===== The Bank is also subject to more stringent PDB guidelines. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC. The Bank was in compliance with both the FDIC and Pennsylvania capital requirements at December 31, 1998. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a commercial bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income 16 neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, and to provide a written evaluation of an institution's CRA performance utilizing a four tiered descriptive rating system in lieu. The Bank received a "satisfactory" rating in its last CRA examination in May, 1998. Transactions With Affiliates. Generally, restrictions on transactions with affiliates require that transactions between a bank or its subsidiaries and its affiliates be on terms as favorable to the Bank as transactions with non-affiliates. In addition, certain of these transactions are restricted to a percentage of the Bank's capital. Affiliates of the Bank include the Company and any company which would be under common control with the Bank. The Bank's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities such persons control are currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board. Among other things, these regulations require such loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans the Bank may make to such persons based, in part, on the Bank's capital position, and require certain approval procedures to be followed. Federal Reserve System. The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily non-interest and interest bearing checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy the liquidity requirements that are imposed by the PDB. At December 31, 1998, the Bank met its reserve requirements. Item 2. Description of Properties - ----------------------------------- The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and seven additional branch offices. The Bank's total investment in office property and equipment is $10.3 million with a net book value of $7.1 million at December 31, 1998. The Bank currently operates automated teller machines at seven of its branch offices and three automated teller machine only facilities. The Bank leases one branch office inside a Weis supermarket. The lease expires in 1999 and it has two five year options. Item 3. Legal Proceedings - -------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ None. 17 PART II Item 5. Market for Common Equity and Related Stockholder Matters - ----------------------------------------------------------------- Information relating to the market for Registrant's common equity and related stockholder matters appears under "Market and Dividend Information" in the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1998("Annual Report") on page 20 and page 40 is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The above-captioned information appears under "Selected Financial and Other Data" in the Annual Report on page 2, and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Conditions and Results - -------------------------------------------------------------------------------- of Operations - ------------- The above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on pages 9 through 22 and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on pages 14 through 15 and is incorporated herein by reference. 18 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Consolidated Financial Statements of Norwood Financial Corp. and its subsidiaries, together with the report thereon by Beard & Company, Inc. appears in the Annual Report on pages 23 through 46 and are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- None PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the section captioned "Information with Respect to Nominees for Director, Directors Continuing in Office and Executive Officers" at pages 3 to 6 of the Registrant's definitive proxy statement for the Registrant's Annual Meeting of Stockholders to be held on April 27, 1999 (the "Proxy Statement"), which was filed with the Commission on March 31, 1999 is incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement at pages 7 through 11. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement at pages 2 through 4. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement at page 12 and 13. 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements of the Company are incorporated by reference to the following indicated pages of the Annual Report to shareholders. PAGE ---- Independent Auditor's Report.......................................... 23 Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 24 Consolidated Statements of Income For the Years Ended December 31, 1998, 1997 and 1996.................................... 25 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996................ 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................................... 27 Notes to Consolidated Financial Statements............................ 28-46 The remaining information appearing in the Annual Report is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Articles of Incorporation of Norwood Financial Corp.* 3.2 Bylaws of Norwood Financial Corp.* 4.0 Specimen Stock Certificate of Norwood Financial Corp.* 10.1 Employment Agreement with William W. Davis, Jr., President and Chief Executive Officer ** 10.2 Employment Agreement with Lewis J. Critelli, Chief Financial Officer ** 10.3 Form of Change-in-Control Severance Agreement with ten key employees of the Bank* 10.4 Consulting Agreement with Russell L. Ridd ** 10.5 Wayne Bank Stock Option Plan* 11.0 Statement regarding computation of earnings per share (see Note 1 to the Notes to Consolidated Financial Statements in the Annual Report) 13.0 Annual Report to Stockholders for the fiscal year ended December 31, 1998 13.0 Annual Report to Stockholders 21.0 Subsidiary of the Registrant (see "Item 1. Business - General" and "-Subsidiary Activity" herein) 23.1 Consent of Beard & Company, Inc., Independent Auditors 23.2 Consent of S.R. Snodgrass, Independent Auditors 20 27.0 Financial Data Schedule*** (b) Reports on Form 8-K. None. * Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No. 28366. ** Incorporated herein by reference into this document from the Exhibits to the Registrant's Form 10-K for the year ended December 31,1996 filed with the Commission on March 31, 1997, File No. 0-28366. *** Only in electronic filing. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. NORWOOD FINANCIAL CORP Dated: March 16, 1999 By: /s/ William W. Davis, Jr. ------------------------------- William W. Davis, Jr. President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ William W. Davis, Jr. By: /s/ Lewis J. Critelli ---------------------------------- ------------------------------- William W. Davis, Jr. Lewis J. Critelli President, Chief Executive Officer Executive Vice President and and Director Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: March 16, 1999 Date: March 16, 1999 By: By: /s/ John E. Marshall -------------------------------- ------------------------------ Charles E. Case John E. Marshall Director Director Date: March ____, 1999 Date: March 16, 1999 By: By: /s/ Dr. Kenneth A. Phillips -------------------------------- ------------------------------ Daniel J. O'Neill Dr. Kenneth A. Phillips Director Director Date: March ____, 1999 Date: March 16, 1999 By: By: /s/ Russell L. Ridd -------------------------------- ------------------------------ Gary P. Rickard Russell L. Ridd Director Director Date: March ____, 1999 Date: March 16, 1999 By: /s/ Harold A. Shook By: -------------------------------- ------------------------------ Harold A. Shook John J. Weidner Director Director Date: March 16, 1999 Date: March ____, 1999 EX-13 2 EXHIBIT 13 Norwood Financial Corp Five Year Financial Summary
Summary of Selected Financial Data (Dollars in thousands, except per share data) For the years ended December 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- -------- ------- -------- Summary of Operations - --------------------- Net interest income $ 11,741 $ 11,064 $ 10,142 $ 8,927 $ 7,651 Provision for loan losses 720 1,355 1,710 619 1,070 Net realized gain on sale of securities 48 70 787 146 268 Gain on termination of pension plan -- 597 -- -- -- Other income 1,591 1,258 1,044 819 829 Other expense 8,031 7,861 7,923 6,819 5,935 ------- ------- ------- ------- ------- Income before income taxes 4,629 3,773 2,340 2,454 1,743 Income tax expense 1,393 1,067 468 652 391 ------- ------- ------- ------- ------- NET INCOME $ 3,236 $ 2,706 $ 1,872 $ 1,802 $ 1,352 ======= ======= ======= ======= ======= Earnings per share-Basic $ 1.93 $ 1.63 $ 1.10 $ 1.01 $ 0.75 Diluted $ 1.91 $ 1.63 $ 1.10 $ 1.01 $ 0.75 Cash dividends declared per share 0.50 0.44 0.42 0.39 0.38 Return on average assets 1.21% 1.04% 0.78% 0.88% 0.69% Return on average equity 12.38% 11.92% 8.45% 8.17% 6.25% Balances at Year-End - -------------------- Total assets $279,017 $263,149 $260,572 $217,262 $196,108 Loans receivable 186,919 185,640 174,621 152,094 140,701 Allowance for loan losses 3,333 3,250 2,616 2,125 1,893 Total deposits 233,767 226,754 229,462 187,299 168,487 Stockholders' equity 27,728 24,594 21,519 22,782 21,642 Book value per share $ 15.56 $ 13.82 $ 12.10 $ 12.94 $ 12.02 Stockholders' equity to total assets 9.94% 9.34% 8.26% 10.49% 11.04% Tier 1 Capital to risk weighted assets 12.30% 11.27% 10.26% 13.93% 14.58% Total Capital to risk weighted assets 14.00% 12.53% 11.51% 15.18% 15.83% Allowance for loan losses to total loans 1.78% 1.75% 1.50% 1.40% 1.35% Non-performing assets to total assets 0.30% 1.03% 2.22% 2.68% 4.89%
2 To Our Shareholders We are extremely pleased to report that record earnings were attained in 1998 and, equally as important, a major conversion of all our operating systems was successfully completed, which not only addressed issues related to processing in the Year 2000, but also established the foundation for expanded product lines and improved customer service as we progress into the next millennium. Net income for 1998 reached $3,236,000 compared to $2,706,000 in 1997, an increase of $530,000 or 19.6%. Diluted earnings per share showed similar improvement at $1.91 per share in 1998 compared to $1.63 per share in 1997. Earnings per share are adjusted for the 2 for 1 stock split, which was paid in the form of a 100% stock dividend on February 2, 1998. Key measures of profitability strengthened with return on equity (ROE) of 12.38% and return on assets (ROA) of 1.21% for the current year compared to ROE of 11.92% and ROA of 1.04% in 1997. Total assets at December 31, 1998 were a record $279 million, an increase of $15.9 million over 1997. Loans totaled $186.9 million at year-end. Asset quality continued to improve with total non-performing loans representing .33% of portfolio as of December 31, 1998 declining from 1.17% in 1997. As a result of improvements in loan quality, the Company reduced the loan loss provision in 1998 to $720,000, down from $1,355,000 in 1997. Deposits grew $7 million to $233.7 million at December 31, 1998. Our First Place Plus and new Our Crowd 50 Plus Accounts continue to offer great value. Net interest income for the year 1998 totaled $11,741,000, an increase of $677,000 or 6.1% over 1997. A higher percentage of earning assets and lower cost of funds helped offset a steady decline in earning asset yields during the year. For 1998, fee income, excluding non-recurring gains, reached $1,591,000 compared to $1,258,000 in 1997. The increase was due to new products and services including First Place Checking Products, sales of annuities and mutual funds, Visa Check Card and loan and leasing related income. The Company's efficiency ratio, which measures how effectively income is generated, improved to 59% in 1998, from 62% in 1997. Total operating expenses for 1998 were $8,031,000 compared to $7,861,000 in the prior year. Expenses have been favorably impacted in 1998 by lower costs related to resolving non-performing assets. Overall, we are very pleased with our operating results for 1998. We strengthened the balance sheet with higher levels of capital, lowered significantly the amounts of non-performing assets and diversified our loan portfolio. Earnings are at record levels, having grown almost 20%, and all key measures of profitability have improved from 1997. As the result of our improving performance, the Board voted to increase our quarterly dividend 16.7% from $.12 to $.14 per share. In addition, an automatic dividend reinvestment plan for shareholders was implemented, in which we encourage all shareholders to participate. All these accomplishments are the direct result of the combined efforts of our 120 employees working together to accomplish goals and objectives set by our Board of Directors. Many of our employees were recognized through promotions during 1998. Leading the way was Lewis J. Critelli who was promoted to Executive Vice President and Chief Financial Officer. Joseph A. Kneller was promoted to Senior Vice President and Information Systems Manager. The following individuals were promoted to Vice President: Peter Bochnovich, Anthony Torquato and Lynne Wetzel. Newly named Assistant Vice Presidents were: Barbara Ridd, Carolyn Gwozdziewycz, Ronald Ferrance and Kelley Lalley, who joined the Bank as Community Office Manager of our Main Office. In addition, Nancy LaTournous was named Assistant Community Office Manager of our Waymart Office, Robert Dugan was promoted to Marketing Director and William Doney to Data Processing Manager. The Year 1999 will be challenging for the entire financial services industry. Global financial concerns and domestic issues will continue to cause uncertainty in the financial markets. We enter the year in a very strong financial position. The Board and Management are dedicated to serving our communities and enhancing shareholder value by building an exceptional community banking franchise. We sincerely appreciate your confidence and support. /s/ Russell L. Ridd ---------------------------------------- Russell L. Ridd Chairman of the Board /s/ William W. Davis, Jr. ---------------------------------------- William W. Davis, Jr. President and Chief Executive Officer 3 Our History Leading the way into the 21st century, Wayne Bank prides itself on never having lost the friendly personal touch that was our hallmark when we began as a simple storefront operation over a century ago. Today, our tellers still know most of their customers on a first name basis, and the bank is stronger and more secure than ever, having become a premier financial institution in Northeast Pennsylvania. Currently, the Company's assets total nearly $280 million. Staff includes 120 employees throughout eight community offices. That's quite a journey for a little storefront operation that got its start more than a hundred years ago with a mere $25,000. The Bank began on November 4, 1871 as the Wayne County Savings Bank, located on Main Street in the heart of Honesdale, a burgeoning canal town at the terminus of the Delaware and Hudson Canal. Early financing included everything from boat building and harness manufacturing to tanneries and farming. With the shutdown of the Canal at the end of the 19th century, the Bank changed with the times by financing the expansion of the county into other industries such as glassworks, textile factories and logging. In 1924, the Bank's roots grew even deeper with the move to the present location between 7th and 8th Streets on Main Street, Honesdale. The majesty of the building's limestone facade continues to represent the image of stateliness and security favored by banks in those days. The Bank's heart remains the massive 12-foot high, polished steel vault, which when opened looks like a giant complex timepiece, a must-see on any visitor's itinerary. By 1971, assets had grown to about $18.5 million, with 18 employees on staff. In 1993, with branches established throughout Wayne and neighboring Pike County, the name was changed to Wayne Bank. Norwood Financial Corp., a bank holding company, was created in 1996, with Wayne Bank a subsidiary. Stock is traded on the Nasdaq National Market under the symbol NWFL. In a world of sudden start-up financial institutions, and just as sudden disappearances, Wayne Bank possesses an impressive longevity that will provide security for our customers well into the 21st century. 4 Corporate Banking Wayne Bank has grown with the community while playing an integral part in helping our community to grow. From the beginning, we have dedicated ourselves to promoting the economic health of our region, and we continue to adapt to the growth and diversity of area business. Nurturing local business is the major focus of our Corporate Banking Division. Wayne Bank's commercial lenders are experts in recognizing and responding to the changing needs and specific character of local business - from Main Street retail stores, construction firms, resorts and summer camps, to machine shops, private communities and public municipalities. Working side by side with clients, our lenders enable entrepreneurs to realize their visions and maximize their potential. The outstanding success of Wayne Bank's Business Equity Line of Credit, a recognition of the need for simple convenient credit, is just one of the latest innovations in products designed to support our regional economy. Additionally, our deposit accounts for small business and cash management services have proven to be highly effective tools to help businesses manage funds. In recognition of Wayne Bank's tradition of economic support to area companies, the United States Small Business Administration has commended Wayne Bank as a leader in small business lending in Pennsylvania. Trust Services Wayne Bank's Trust Department is a key component in our ability to offer a complete line of financial services. Trust professionals perform as Executor, Trustee, Investment Manager, Estate Planner or Tax Advisor. The goal of each of these services is to help clients accumulate and preserve wealth during their lifetimes and provide for future generations. Trust accounts are structured to meet each client's unique circumstances and objectives. 5 Retail Banking Wayne Bank has built its reputation on one-on-one customer service. With eight community offices and ten automated teller machines, our branch network affords us the daily opportunity to know our customers better and to react to their constantly-evolving financial needs. The success of our recently introduced First Place Checking Plus Account and the Wayne Bank Visa Check Card are just two indicators of how we structure our products to meet customer demands. During 1998, our new "Loan By Mail" program made the loan application process more convenient than ever. We also introduced the new "Our Crowd 50 Plus," an enhanced version of the Bank's popular 50 and better club. And 1998 saw the Bank continue to refine a variety of retail loan products, including a home equity line of credit at prime, mortgage programs, and an unsecured installment loan holiday cash offer. Wayne Bank's Investor Account has proven to be extremely popular with those who have a need for liquidity but who are looking for higher yields and the flexibility of a savings account. Our indirect automobile lending and leasing program offers a choice of financing in five counties through 65 automobile dealers. In addition to automobiles, Wayne Bank is one of the area's leading marine and recreational lenders. Norwood Investment Corp In keeping with our philosophy of providing complete financial services under one roof, Wayne Bank formed Norwood Investment Corp in 1996. Customers now have the ability to choose from a full range of prominent mutual funds, previously attainable only through brokerages, in addition to fixed and variable rate annuities. In 1999, Norwood Investment Corp will also feature a variety of life insurance products. 6 Better Customer Service Through Technology Wayne Bank is moving into the 21st Century with expanded technological capabilities designed to offer customers more personalized choices on how and when to do their banking. In 1998 we undertook a major information processing upgrade to allow us to feature even more extensive online retail financial services, telephone banking and other electronic conveniences that will define banking in the future. By entering into a technology partnership with FiServ, a leading information service provider, Wayne Bank is now able to offer customers a wider array of products and to access a more sophisticated menu of financial and informational management tools and expertise. The Communities We Serve Wayne Bank is proud of the role we have played for well over a century in contributing to the success of the communities we serve. One simple equation, which worked for the Bank's founders, still applies today: deposits are reinvested back into the community as loans. This makes for a sound, healthy economy, and in turn, generates more deposits - and the cycle goes on. During 1998, Wayne Bank contributed financial support to numerous worthwhile causes including education, arts and environmental programs, little leagues, volunteer fire departments, pancake suppers, boy scouts and girl scouts, and various agricultural events. Our community involvement is evident not only through donations and working relationships with the business and retail sectors, but also at the individual level. As business and civic leaders, Wayne Bank directors and employees hold positions in such diverse groups as the Chamber of Commerce, Jaycees, Rotary Clubs and numerous advisory boards and volunteer groups and organizations. Wayne Bankers not only wholeheartedly support the community, but in many ways, we are an integral part of the community. 7 Our Board of Directors
Administrative Offices: Automated Teller Machine Only: Russell L. Ridd Chairman of the Board 717 Main Street Grand Union P.O. Box 269 Matamoras/Westfall William W. Davis, Jr. Honesdale, PA 18431 President & Chief Executive Officer Mr. B's Minit Mart Community Offices: Greeley John E. Marshall Secretary of the Board 717 Main Street The Hideout President, Marshall Machinery, Inc. Honesdale, PA 18431 Lake Ariel Dr. Kenneth A. Phillips 254 Willow Avenue Optometrist Honesdale, PA 18431 Gary P. Rickard Belmont & Water Streets Partner, Clearfield Farms Waymart, PA 18472 Daniel J. O'Neill Route 6 East Superintendent, Wayne Highlands School District Hawley, PA 18428 John J. Weidner 111 West Harford Street President, Weidner Companies Milford, PA 18337 Harold A. Shook Weis Market, Route 590 President, Shooky's Distributor Hamlin, PA 18427 Charles E. Case Richardson Avenue Vice President, C.R. Case & Sons, Inc. Shohola, PA 18458 Route 370 & Lake Como Road Lakewood, PA 18439 [MAP]
MANAGEMENT'S DISCUSSION & ANALYSIS Introduction This management's discussion and analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations for Norwood Financial Corp (The Company) and its subsidiary Wayne Bank (The Bank) for the years ended December 31, 1998, 1997 and 1996. This section should be read in conjunction with the consolidated financial statements and related footnotes. Certain amounts have been adjusted to reflect two-for-one stock split in the form of a 100% stock dividend declared on December 9, 1997 and payable February 2, 1998. [GRAPHIC OMITTED] Forward Looking Statements The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operation - Summary Net income for the Company for the year 1998 was $3,236,000 compared to $2,706,000 for the year 1997. This represents an increase of $530,000 or 19.6% over prior year. Basic and diluted earnings per share for 1998 were $1.93 and $1.91, respectively, increasing from $1.63 in 1997. Return on average assets and return on average equity showed similar improvement at 1.21% and 12.38%, respectively, in 1998 compared to 1.04% and 11.92% respectively in 1997. The increase in earnings was principally attributable to growth in net interest income, reduction in the provision for loan losses and higher levels of fee income. Net interest income on a fully taxable equivalent basis (fte) totaled $12,021,000 for 1998, an increase of $602,000 or 5.3% from 1997. The improvement in net interest income was due to $10.0 million growth in average earning assets during 1998, an increase in the earning asset ratio and lower costs of funds which offset a decline in asset yields. The Company made continued progress in reducing its level of non-performing loans during 1998, which totaled $622,000 at December 31, 1998, or .33% of total loans, compared to $2,175,000 and 1.17% at year-end 1997. As a result, the Company reduced its provision for loan losses to $720,000 in 1998 compared to $1,355,000 in 1997. [GRAPHIC OMITTED] Other income excluding securities and non-recurring gains for 1998 was $1,591,000 an increase of $333,000 or 26.5% over 1997. During 1997, the Company recorded a non-recurring gain on the termination of pension plan of $597,000 which was $343,000 after related taxes 9 with no such gains in 1998. Gains on sales of securities were $48,000 in 1998 compared to $70,000 in 1997. During 1998 other expenses increased 2.2% over 1997 to $8,031,000. The Company incurred additional costs related to the data processing system conversion. See also "Year 2000". Expenses were favorably impacted by lower levels of other real estate costs and less legal fees related to non-performing assets. Net income for the Company for the year 1997 was $2,706,000 compared to $1,872,000 for the year 1996. This represents an increase of $834,000 or 44.6% over prior year. Basic and diluted earnings per share for 1997 were $1.63 increasing from $1.10 in 1996. Return on average assets and return on average equity showed similar improvement at 1.04% and 11.92% respectively in 1997 compared to .78% and 8.45% respectively in 1996. The increase in earnings was principally attributable to growth in net interest income, reduction in the provision for loan losses and higher levels of fee income. Net interest income on a fully taxable equivalent basis (fte) totaled $11,419,000 for 1997, an increase of $841,000 or 8.0% from 1996. The improvement in net interest income was due to the $22.5 million growth in average earning assets during 1997. Net charge-offs for 1997 totaled $721,000 down sharply from $1,219,000 in 1996. As a result, the Company reduced its provision for loan losses to $1,355,000 in 1997 compared to $1,710,000 in 1996. Other income excluding securities and non-recurring gains for 1997 was $1,258,000 an increase of $214,000 or 20.5% over 1996. During 1997, the Company recorded a non-recurring gain on the termination of the defined benefit pension plan of $597,000, which was $343,000 after related taxes. Gains on sales of securities were down significantly in 1997 at $70,000 compared to $787,000 in 1996. [GRAPHIC OMITTED] Operating expenses decreased $62,000 from 1996 and totaled $7,861,000. Operating expenses were favorably impacted by the lower level of other real estate costs and losses, less legal and other professional fees. Financial Condition Total Assets Total assets at December 31, 1998 were $279.0 million compared to $263.1 million at year-end 1997, an increase of $15.9 million or 6.0%. The growth in assets was due to a higher level of securities funded by growth in deposits and shareholders' equity. Loans Receivable Loans receivable, which includes automobile leases, represent the largest percentage of the Company's earning assets. At December 31, 1998 total loans receivable were $186.9 million compared to $185.6 million in 1997, an increase of $1.3 million. Loan growth in retail lending, which was centered in home equity financings, and indirect automobile lending was partially offset by lower levels of commercial and commercial real estate lending. Residential mortgages totaled $36.1 million at year-end which is a decrease of $3.9 million from prior year. This decrease represents pre-payments and refinancings in the adjustable rate mortgage portfolio as fixed rate products have become more favorable during 1998 due to lower interest rate environment. The 10 Company sells a portion of its longer term fixed rate residential loan production for interest rate risk management, and had total fixed rate mortgages of $9.3 million at year-end compared to $3.1 million at year-end 1997 with an additional $7.2 million sold in the secondary market during the year. The Company services $16.6 million of mortgage loans that it has sold into the secondary market. The Company's indirect portfolio increased $6.4 million to total $34.4 million at year-end, with growth principally in used automobiles. The weighted average maturity of the portfolio is 49 months with an average life of 26 months. The automobile leasing portfolio reflected no net growth at $33.9 million after $16.8 million growth in 1997. The Company slowed down the volume of originations in late 1997 to monitor its experience in early terminations and residual values of the vehicles. Total residual value at December 31, 1998 was $24.1 million compared to $22.5 million in 1997. The Company recorded residual provision expense of $120,000 in 1998 for a total lease residual reserve of $307,000 at year-end. There were $34,000 of residual losses in 1998. Commercial loans consist principally of loans made to small businesses within the Company's market and are usually secured by real estate and other assets of the borrower. Commercial and commercial real estate loans totaled $56.1 million at year-end 1998 compared to $59.6 million in 1997. This reduction is due in part to $1.4 million decrease in non-performing loans. During 1998, the Company experienced increased competition on commercial loans based on interest rates. As a result, certain loans have been renegotiated at lower rates or have refinanced elsewhere. [GRAPHIC OMITTED] For the year 1998, total loans averaged $186.9 million with an fte yield of 8.73% compared to $183.6 million and 8.83% during 1997. The yield on loans decreased principally due to change in mix to consumer credits which generally have yields less than commercial loans and reduction in the prime from 8.50% in 1997 to 7.75% by November of 1998. Total interest income on loans was $16,316,000 on an fte basis compared to $16,205,000 in 1997. Non-Performing Assets and Allowance for Loan Losses Non-performing assets consist of non-performing loans and real estate acquired through foreclosure which is held for sale. Loans are placed on non-accrual status when management believes that a borrower's financial condition is such that collection of interest is doubtful. Commercial and real estate related loans are generally placed on non-accrual when interest is 90 days delinquent. When loans are placed on non-accrual, accrued interest income is reversed from current earnings. At December 31, 1998, non-performing loans totaled $622,000 and represented .33% of total loans receivable compared to $2,175,000 and 1.17% at year-end 1997. Total non-performing assets which includes other real estate totaled $826,000 and represented .30% of total assets, down significantly from $2,712,000 and 1.03% at December 31, 1997. At year-end 1998, non-performing assets consisted principally of residential real estate. The allowance for loan losses totaled $3,333,000 at year-end 1998 and represented 1.78% of total loans receivable compared to $3,250,000 or 1.75% at year-end 1997. Net charge-offs for 1998 were $637,000 decreasing from $721,000 in 1997. With a lower level of non-performing 11 loans and less charge-offs, the Company reduced its provision for loan losses to $720,000 from $1,355,000 in 1997. The coverage ratio of allowance for loan losses to non-performing loans improved to 535.8% in 1998 from 149.5% in 1997. The Company's loan review process assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes a review of the risks inherent in the loan portfolio. It includes a credit review and gives consideration to areas of exposure such as concentration of credit in specific industries, economic and industry conditions, trends in delinquencies, collections and collateral value coverage. General reserve percentages are identified by loan type and credit grading and allocated accordingly. Larger credit exposures are analyzed individually. During 1998 the Company also performed a review of Year 2000 preparedness of its larger borrowers. See also "Year 2000". Management considers the allowance at December 31,1998 adequate for the loan mix and classifications. The following table sets forth information with respect to the Company's allowance for loan losses at the dates indicated:
At December 31, --------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Allowance balance at beginning of period $ 3,250 $ 2,616 $ 2,125 $ 1,893 $ 1,864 Charge-Offs: Commercial and all other (294) (380) (820) (448) (709) Real Estate (14) (119) (226) (353) (306) Instalment (366) (264) (320) (123) (82) Lease Financing (115) (67) -- -- -- ------ ---- ------ ------ ------ Total (789) (830) (1,366) (924) (1,097) Recoveries: Commercial and all other 89 72 71 513 31 Real Estate 7 3 16 3 3 Instalment 50 34 60 21 22 Lease Financing 6 -- -- -- -- ------ ------ ------ ------ ------ Total 152 109 147 537 56 Provision expense 720 1,355 1,710 619 1,070 ------ ------ ------ ------ ------ Allowance balance at end of period $ 3,333 $ 3,250 $ 2,616 $ 2,125 $ 1,893 ====== ====== ====== ====== ====== Allowance for loan losses as a percent of total loans outstanding 1.78% 1.75% 1.50% 1.40% 1.35% Net loans charged off as a percent of average loans outstanding .34% 0.39% 0.76% 0.27% 0.76% Allowance for loan losses as a percent of non-performing loans 535.8% 149.5% 74.9% 54.7% 23.1%
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, 1998, 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. 12
At December 31, --------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Loans accounted for on a non-accrual basis: Commercial and all other $ 65 $ 963 $1,633 $1,572 $2,754 Real estate 503 1,112 1,790 2,205 2,175 Instalment 20 33 28 48 -- ----- ----- ----- ----- ----- Total $ 588 $2,108 $3,451 $3,825 $4,929 ===== ===== ===== ===== ===== Accruing loans which are contractually past due 90 days or more: Commercial and all other $ -- $ 44 $ 38 $ 55 $ 553 Real estate -- -- -- -- 2,716 Instalment 34 23 4 -- 7 ----- ----- ----- ----- ----- Total $ 34 $ 67 $ 42 $ 55 $3,276 ===== ===== ===== ===== ===== Total non-performing loans $ 622 $2,175 $3,493 $3,880 $8,205 Other real estate owned 204 537 2,283 1,944 1,377 ----- ----- ----- ----- ----- Total non-performing assets $ 826 $2,712 $5,776 $5,824 $9,582 ===== ===== ===== ===== ===== Non-performing loans to total loans .33% 1.17% 2.00% 2.55% 5.83% Non-performing loans to total assets .22% .83% 1.34% 1.79% 4.18% Non-performing assets to total assets .30% 1.03% 2.22% 2.68% 4.89%
Securities The securities portfolio consists principally of United States Government agencies issues, including mortgage-backed securities; U.S. Treasury securities and municipal obligations. In accordance with SFAS#115 "Accounting for Certain Investments in Debt and Equity Securities" the Company classifies its investments into two categories: held-to-maturity (HTM) and available for sale (AFS). The Company does not have a trading account. Securities classified as HTM are those in which the Company has the ability and the intent to hold until contractual maturity. At December 31, 1998, this account totaled $7,645,000 and consisted of longer term municipal obligations. Securities classified as AFS are eligible to be sold due to liquidity needs or changes in interest rates. These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded as an adjustment to capital. At December 31, 1998, $62,270,000 in securities were so classified and carried at their fair value. At December 31, 1998, the Company's securities portfolio (HTM and AFS) totaled $69,915,000 with the percentage of obligations of U.S. Government agencies 28.1%; mortgage-backed securities, 40.5%; municipal obligations, 16.4%; U.S. Treasuries, 8.0% and others of 7.0%. At December 31, 1998, the portfolio contained no collateralized mortgage obligations, structured notes, step-up bonds and no off-balance sheet derivatives were in use. The portfolio totaled $57,531,000 at year-end 1997. The Company took actions to shorten the average repricing term of the portfolio during 1998. To offset an increase in fixed rate loans, the investment portfolio was restructured to reprice in a shorter time interval. The average repricing term was 4.2 years at December 31, 1998, down from 5.4 years in 1997. The Company sold $5 million of longer term, higher coupon, mortgage-backed securities and redeployed the proceeds into shorter-term, lower coupon 13 mortgage-backed securities. With a shorter repricing term and the lower rate interest environment, the fte yield on the portfolio decreased to 6.43% from 6.85% in 1997. At December 31, 1998, the Company had $900,000 of short-term CDs with another financial institution-all of which mature prior to March 31, 1999. In addition, federal funds sold totaled $3,360,000 at December 31, 1998. Deposits Total deposits at December 31, 1998 were $233.8 million compared to $226.8 million at year-end 1997, an increase of $7 million or 3.1%. The increase was principally in core transactions accounts and time deposits over $100,000. Interest-bearing demand deposits increased $2.5 million or 11.5% reflecting growth in new retail checking account products. The tiered rate Investor Account for high-balance accounts totaled $9.3 million compared to $5.8 million at year-end 1997, with over $2.2 million of new money. Time deposits over $100,000, which consist principally of school district and other public funds with maturities generally less than one year, were $27.5 million at December 31, 1998, increasing from $23.3 million at year-end 1997. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand and investment portfolio structure. In addition to demand deposits of $27.3 million the Company had $5.6 million of cash management accounts which represent commercial customers excess funds invested in over-night securities. Market Risk Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates. Net interest income, which is the primary source of the Company's earnings, is impacted by changes in interest rates and relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. At December 31, 1998, 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 measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals. At December 31, 1998, the Bank had a positive 90 day interest sensitivity gap of $8,384,000. A positive gap means that rate-sensitive assets are higher than rate-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 14 time frame. This risk is managed by ALCO strategies; including investment portfolio structure, pricing of deposit liabilities, loan pricing, structure of fixed and variable rate products and evaluation of loan sales. The Company analyzes and measures the time periods in which rate sensitive assets (RSA) and rate sensitive liabilities (RSL) will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. The operating results of the Company are not subject to Foreign Currency exchange or commodity price risk. The following table displays interest-sensitivity as of December 31, 1998:
3 Months 3 Through 1 Through Over Or Less 12 Months 3 Years 3 Years Total ------- --------- ------- ------- ----- (In Thousands) Federal funds sold and int bearing deposits $ 4,644 $ -- $ -- $ -- $ 4,644 Securities (1) 8,730 11,916 19,146 26,988 66,780 Loans receivable (1) 40,543 53,316 54,288 38,772 186,919 -------- -------- -------- -------- -------- Total rate sensitive assets (RSA) $ 53,917 $ 65,232 $ 73,434 $ 65,760 $ 258,343 ======== ======== ======== ======== ======== Non-interest bearing demand (2) $ 3,408 $ 10,224 $ 13,632 $ -- $ 27,264 Interest bearing demand (2) 1,196 3,588 9,570 9,572 23,926 Money Market deposit accounts (2) 4,548 13,644 12,132 -- 30,324 Savings (2) 2,128 6,386 17,031 17,034 42,579 Time deposits 28,477 58,716 17,464 5,017 109,674 Other borrowings 5,776 4,000 -- -- 9,776 -------- -------- -------- -------- -------- Total rate sensitive liabilities (RSL) $ 45,533 $ 96,558 $ 69,829 $ 31,623 $ 243,543 ======== ======== ======== ======== ======== Interest sensitivity gap $ 8,384 ($ 31,326) $ 3,605 $ 34,137 Cumulative gap $ 8,384 ($ 22,942) ($ 19,337) $ 14,800 Cumulative gap to total assets 3.0% (8.2%) (6.9%) 5.3%
(1) Included in the period in which interest rates were next scheduled to adjust or the period in which they were due. Annual prepayments were assumed based on historical experience and management judgement. (2) These are non-maturity deposits generally subject to immediate withdrawal. However, management considers a certain amount to be core deposits with longer effective maturities. This is based on retention experience in changing interest rate environment. 15 Liquidity Maintenance of liquidity is coordinated by ALCO. Liquidity can be viewed as the ability to fund customer's borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company's primary sources of liquidity include deposit generation, asset maturities and cash flow from loan repayments and securities. At December 31, 1998, the Company had cash and cash equivalents of $12.6 million in the form of cash, due from banks, Federal Funds sold and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $62.3 million which could be used for liquidity needs. This totals $74.9 million and represents 26.8% of total assets compared to $60.3 million and 22.9% at December 31, 1997. The Company also monitors other liquidity measures all of which were within policy guidelines at December 31, 1998. The Company believes its liquidity position is adequate. The Company's primary source of liquidity is its ability to generate core deposits. During 1998, growth in deposits of $7 million was in excess of the $1.3 million of loan growth. These excess deposit funds of $5.7 million, as well as $3.1 million increase in equity and $2.8 million growth in other borrowings were used to fund the $12.8 million growth in securities. The Company also maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support liquidity needs. The short-term borrowing capacity from FHLB was in excess of $55 million. At year-end 1998 the Company had $4 million borrowing from the FHLB with scheduled maturity in December 1999. [GRAPHIC OMITTED] Results of Operation Net Interest Income Net interest income is the difference between income earned on loans and securities and interest paid on deposits and other borrowings. For the year ended December 31, 1998 net interest income on a fully taxable basis (fte) was $12,021,000 an increase of $602,000 or 5.3% over 1997. The resultant fte net interest spread and net interest margin for the year 1998 were 4.08% and 4.76% respectively compared to 4.10% and 4.70% respectively in 1997. Total fte interest income for 1998 was $20,498,000, an increase of $286,000 or 1.4% from prior year. As the earning asset yield declined 22 basis points to 8.11% from 8.33% in 1997, this increase in interest income was the result of $10.0 million growth in average earning assets. Interest expense totaled $8,477,000 for 1998, a decrease of $316,000 or 3.6% from 1997. The Company was able to reduce its cost of interest bearing liabilities to 4.03% compared to 4.23% in the prior year. As a result of a 22 basis point decline in earning asset yields only partially offset by 20 basis point decline in cost of interest-bearing liabilities, net interest spread decreased to 4.08% from 4.10% in 1997. However, net interest margin, which is the measurement of net return on earning assets increased to 4.76% from 4.70%. This increase was caused by a higher earning asset ratio of 94.2% compared to 93.3% in 1997, and an increase in non-interest bearing liabilities of $2.0 million and equity of $3.4 million. The ratio of earning assets to interest-bearing liabilities improved to 120.1% in 1998 from 116.7% in 1997. Interest income earned on loans totaled $16,316,000 with a yield of 8.73% in 1998 compared to $16,205,000 with a yield of 8.83% in 1997. The decrease in yield was principally due to lower interest rate environment with an average prime rate of 8.36% in 1998 compared 16 to 8.44% in 1997. Prime rate at December 31, 1998 was 7.75%. During 1998 there continued a shift in loan mix with increases in lower yielding retail loans and decreases in higher yielding commercial loans. Average loans increased $3.3 million to $186.9 million. Loans and leases represented 74.0% of earning assets in 1998 decreasing from 75.6% in 1997. Total securities (HTM and AFS) averaged $63.0 million in 1998 with an fte interest income of $4,051,000 and yield of 6.43% compared to $55.9 million, $3,826,000 and 6.85% respectively in 1997. The decrease in yield was principally due to shortening of the average repricing term in 1998, lower interest rate environment, and purchases of lower coupon mortgage-backed securities. Interest-bearing deposits averaged $200.7 million increasing $3 million from average 1997. The average cost of deposits for 1998 was 3.99% compared to 4.14% in 1997. The Company decreased its costs of transaction and savings accounts by 15 basis points and 26 basis points respectively. Also, the percentage of time deposits decreased to 52.3% of total interest bearing deposits compared to 53.6% in 1997. Short-term borrowings averaged $7.6 million at a cost of 4.63% compared to $7.7 million at 4.84% in 1997. Total fte interest income for 1997 was $20,212,000, an increase of $1,522,000 or 8.1% from prior year. As the earning asset yield declined 15 basis points to 8.33% from 8.48% in 1996, this increase in interest income was the result of $22.5 million increase in average earning assets. Interest expense totaled $8,793,000 for 1997, an increase of $681,000 or 8.4% from 1996. The cost of interest bearing liabilities was 4.23% compared to 4.24% in the prior year. Net interest margin declined 10 basis points to 4.70% principally due to lower yields on earning assets. However, this was partially offset by a higher percentage of earning assets of 93.3% in 1997 compared to 91.9% for 1996. Interest income earned on loans and leases totaled $16,205,000 with a yield of 8.83% in 1997 compared to $14,567,000 with a yield of 9.08% in 1996. The decrease in yield was principally due to shift in loan mix with increases in lower yielding indirect and automobile leases and decreases in higher yielding commercial loans. Average loans increased $23.1 million to $183.6 million. Total investments averaged $55.9 million in 1997 and with an fte interest income of $3,826,000 and yield of 6.85% compared to $54.6 million, $3,855,000 and 7.06% respectively in 1996. The decrease in yield was principally due to shortening of the average repricing term in 1997 and lower interest rate environment. Interest-bearing deposits averaged $197.7 million increasing $13.8 million from average 1996. The average cost for 1997 was 4.14% compared to 4.16% in 1996. Decreases in costs of transaction accounts and savings were partially offset by increase in percentage of time deposits at 53.6% of total compared to 52% in 1996. Short-term borrowings averaged $7.7 million at cost of 4.84% compared to $4.9 million at 5.03% in 1996. Other Income Other income, excluding gains on sales of securities and non-recurring gain on termination of pension plan in 1997, totaled $1,591,000 in 1998, an increase of $333,000 or 26.5% over 1997. Other income represented 11.9% of total revenues increasing from 10.2% in 1997. Service charges and fees were $1,087,000 in 1998 compared to $859,000 in 1997, an increase of $228,000. The increase was principally due to growth in fee-based retail checking accounts of $44,000 and increase in overdraft fees of $107,000. The Company increased fees 17 on deposit products effective August 1, 1998. The Wayne Bank Visa Check Card, which was introduced in April 1997, generated $50,000 in revenues, increasing $33,000 from 1997. Fees from the sale of mutual funds and annuities through Norwood Investment Corp totaled $139,000 on sales of $5.3 million compared to $75,000 on sales of $2.2 million in 1997. During 1998, the Company sold $7.2 million in residential mortgages for a gain of $100,000 compared to $57,000 in gains for 1997. Other income excluding non-recurring gain on termination of the pension plan and gains on sales of investment securities totaled $1,258,000 for 1997, an increase of $214,000 or 20.5% over 1996. The increase was principally due to higher level of service charges and fees. In 1997, the Company instituted an ATM surcharge on non-bank customers which totaled $89,000. Sales of mutual funds and annuities through Norwood Investment Corp totaled $75,000 in 1997 on product sold of $2.2 million increasing from revenues of $32,000 in 1996. During 1997, the Company recognized a gain on termination of pension of $597,000 which was $343,000 after taxes. Securities gains totaled $70,000 down significantly from $787,000 in 1996. Other Income [GRAPHIC OMITTED] - ------------ (In Thousands) 1998 1997 1996 ---- ---- ---- Service charges on deposit accounts $ 193 $ 145 $ 130 ATM Fees 128 125 34 NSF Fees 440 333 336 Other service chgs. & fees 326 256 209 Trust income 173 165 169 Mutual funds & annuities 134 75 32 Gain on sales of loans 100 57 52 Other income 97 102 82 ----- ----- ----- 1,591 1,258 1,044 Net realized gains on sales of securities 48 70 787 Gain on termination of pension plan -- 597 -- ----- ----- ----- Total other income $1,639 $1,925 $1,831 ===== ===== ===== Other Expenses Other expenses totaled $8,031,000 for 1998 compared to $7,861,000 in 1997, an increase of 2.2%. Salaries and benefit cost which represents 48.4% of other expense was $3,886,000 for 1998, an increase of $247,000 or 6.8%. The increase was principally in the benefits area with higher costs related to Employee Stock Ownership Plan (ESOP) and 401(k) Plan. Other real estate owned costs decreased to $115,000 from $254,000 in 1997 due to lower net losses of $22,000 in 1998 compared to $111,000 in 1997. Legal expenses declined in 1998 to $74,000 from $189,000 in 1997 principally due to lower costs related to non-performing loans. 18 In the fourth quarter of 1998 the Bank converted its data processing core application systems from an in-house system to an outsourced environment. The new core application systems should provide opportunities for new products and services and address Year 2000 processing. See also "Year 2000". As a result of conversion related costs and processing, data processing expense increased to $290,000 in 1998 compared to $150,000 in 1997. The efficiency ratio for 1998 improved to 59% from 62% in 1997. Other expenses totaled $7,861,000 for 1997 a decrease of $62,000 from 1996. Salaries and benefits were $3,639,000, a decrease of $143,000 from 1996. This was principally due to lower level of full-time equivalent employees and lower costs related to 401k plan. Expenses associated with other real estate were $254,000 declining from $510,000 in 1996 due to less losses realized on property sales in 1997 and lower other expenses. Occupancy and equipment expenses increased $77,000 and $143,000 respectively due to full year impact of Meridian branches acquired in 1996 and computer equipment installed in 1996. Professional fees declined to $323,000 from $445,000 due to lower legal expenses related to problem loans of $23,000 and other legal fees decreased $35,000 due to expenses incurred in 1996 related to holding company formation and initial Securities and Exchange Commission registration. All other expenses increased $291,000 or 18% principally due to increased costs related to auto leasing volume of $103,000 and increased amortization of intangible assets incurred with Meridian branches of $212,000. Income Taxes Income tax expense for the year 1998 was $1,393,000 for an effective tax rate of 30.1% compared to an expense of $1,067,000 and an effective rate of 28.2% in 1997. The higher level of taxes was principally due to an increase in pre-tax income of $856,000 and a lower level of municipal obligations in 1998 which provide income which is partially exempt from federal income taxes. Income tax expense for 1997 was $1,067,000 for an effective tax rate of 28.2% compared to an expense of $468,000 and an effective rate of 20.0% in 1996. During 1997 the Company had a higher level of pre-tax income of $1,433,000 and lower levels of tax exempt income. Capital and Dividends The Company believes a strong capital position is essential to support balance sheet growth, increase the revenue stream, serve the needs of the Company's customers and yield an attractive return to stockholders. The capital base also provides added protection against losses. Total stockholders' equity at December 31, 1998 was $27.7 million, an increase of $3.1 million or 12.7% from 1997. The increase in equity was principally due to retention of earnings of $2,396,000 after dividends declared of $840,000, and $375,000 increase in net unrealized gain on the Company's AFS securities. At December 31, 1998, the Company had leverage capital ratio of 9.09%, Tier 1 risk-based capital of 12.30% and total risk-based capital of 14.00% compared to 8.34%, 11.27% and 12.53% respectively in 1997. The Company declared a two-for-one stock split in the form of 100% stock dividend on December 9, 1997 payable February 2, 1998. The following dividends, stock price and book value have been adjusted accordingly. Common stock dividend declared in 1998 were $.50 per share compared to $.435 per share in 1997. The quotations reflect inter-dealer prices, without 19 retail mark-up or commission, and may not represent actual transactions. The following table sets forth the price range and cash dividends declared per share regarding common stock for the period indicated: Price Range Cash dividend ------------------ -------------- High Low paid per share ---- --- -------------- Year 1997 - ---------------- First Quarter $ 17.25 $ 16.50 $ .105 Second Quarter 17.00 16.75 .105 Third Quarter 17.50 17.00 .105 Fourth Quarter 20.50 17.00 .120 Year 1998 - ---------------- First Quarter $ 34.00 $ 20.75 $ .12 Second Quarter 34.00 27.75 .12 Third Quarter 27.00 22.00 .12 Fourth Quarter 24.00 20.50 .14 The book value of the common stock was $15.56 at December 31, 1998 compared to $13.82 at prior year end. At year-end the stock price was $22.25 compared to $20.75 at December 31, 1997. Inflation The impact of inflation upon banks differs from the impact upon non-financial institutions. The majority of assets and liabilities of a bank are monetary in nature and therefore change with movements in interest rates. The exact impact of inflation on the Bank is difficult to measure. Inflation may cause operating expenses to increase at a rate not matched by increased earnings. Inflation may also affect the borrowing needs of consumers, thereby affecting growth of the Bank's assets. Inflation may also affect the general level of interest rates, which could have an effect on the Bank's profitability. However, as discussed previously, the Bank strives to manage its interest-sensitive assets and liabilities offsetting the effects of inflation. Year 2000 Disclosure The following discussion of the implications of the Year 2000 problem for the Bank contains forward-looking statements based on uncertain information. The cost of the project and the date on which the Bank plans to complete the internal Year 2000 modifications are based on management's estimates. The Company has implemented a Year 2000 project plan which is administered by an executive and is overseen by the Board of Directors. As a major component of its Year 2000 preparedness, during 1998, the Company entered into a seven year $2.2 million agreement with a data servicing provider, FiServ, for its core application systems. The conversion occurred on October 31, 1998. The software provided by FiServ is supported by a contractual agreement that states the software will be Year 2000 compliant prior to January 1, 2000. The Company is participating in testing with FiServ and its other bank clients. 20 In 1998, the Company also purchased $300,000 of personal computers to replace existing local area networks which may not have effectively handled the Year 2000. Additional communications and monitoring for the wide area network will be installed in the first quarter of 1999 at a cost of $48,000. The Company is also converting its ATM processing to the Mellon Network Services and its auto leasing operations to a new processor in the second quarter of 1999. Major commercial loan customer have been contacted in writing and interviewed to determine any potential exposure that might be present due to the customer's failure to prepare adequately for the Year 2000. Any potential risk exposure will be identified and adequate consideration given to adjusting the loan loss provision. Customer awareness is also a component of the Year 2000 plan, and the Company has distributed brochures in the third quarter of 1998. A second mailing of new material occurred in the first quarter of 1999, with additional communication scheduled throughout the year. The Company has contacted all other material technology vendors and suppliers, as well as all significant customers and non-information technology suppliers (i.e. utility systems, telephone systems, etc.), regarding their Year 2000 state of readiness. These third parties have delivered written or oral assurance to the Company that they expect to be Year 2000 compliant prior to the Year 2000. No contracts, excluding the FiServ agreement, include any type of remedy or penalty for breach of contract in the event that any of these parties are not Year 2000 compliant. Testing has been completed on the most significant vendor applications, except the utilities as noted above, however, final testing remains on a few critical applications. The Company has additional testing scheduled for the first quarter with IBM for certain operating systems, item processing software and the Federal Reserve for wire transfer. Testing has been performed on the Sungard System which processes the Company's trust accounts. This final testing and the development of contingency plans, is expected to be completed for all critical and important applications and services by June 30, 1999. The contingency plans address actions the Company may take as a result of failure in various systems. The plans include an evaluation of key services, prioritization of critical functions, re-deployment and additions to staff, offsite plans and alternative procedures for processing critical functions. The Company has also established liquidity contingency plans, including having additional cash available at its branch locations. We are unable to test the Year 2000 readiness of our significant suppliers of utilities. We are relying on the utility companies' internal testing and representations to provide the required services that drive our data systems. The following, among other things, could negatively affect the Bank: (a) utility companies may be unable to provide the necessary service to drive our data systems or provide workable conditions for our offices; (b) our primary software provider could have a major malfunction in its system or its' service could be disrupted due to its utility providers, or some combination of the two; or (c) the Bank may have to transact its business manually. The Bank will attempt to monitor these uncertainties by requesting updates throughout 1999. If the Bank identifies any concern related to any critical or important vendor, the contingency plans will be implemented immediately to assure continued service to the Bank's customers. Despite the best efforts of management to address this issue, the vast number of external entities that have direct and indirect business relationships with the Bank, such as utilities, customers, vendors, payment system providers and other financial institution, makes it impossible to assure that a failure to achieve compliance by one or more of these entities would not have material adverse impact on the operations of the Company. 21
Year Ended December 31 -------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ----------------------- ---------------------- Average Ave Average Ave Average Ave Balance Interest Rate Balance Interest Rate Balance Interest Rate (2) (1) (2) (1) (2) (1) -------- ------- ----- ------- ------ --- ------- ------ ---- ASSETS Interest Earning Assets: Federal funds sold $ 1,108 $ 55 5.05% $ 2,490 $ 141 5.66% $ 4,585 $ 239 5.21% Interest bearing deposits with banks 1,678 74 4.47 713 40 5.61 532 29 5.45 Securities held to maturity 8,014 676 8.44 8,745 742 8.48 10,331 864 8.36 Securities available for sale Taxable 53,116 3,248 6.11 43,525 2,803 6.44 39,703 2,618 6.59 Tax-exempt 1,883 127 6.74 3,624 281 7.75 4,604 373 8.10 -------- ------ ------- ------ ------- ------ Total securities available for sale 54,999 3,375 6.14 47,149 3,084 6.54 44,307 2,991 6.75 Loans receivable (3,4) 186,877 16,316 8.73 183,625 16,205 8.83 160,517 14,567 9.08 -------- ------ ------- ------ ------- ------ ---- Total interest earning assets 252,676 20,498 8.11 242,722 20,212 8.33 220,272 18,690 8.48 Non-interest earning assets: Cash and due from banks 6,451 6,440 6,343 Allowance for loan losses (3,277) (2,918) (2,243) Other assets 12,265 13,937 15,392 -------- ------- ------- Total non-interest earning assets 15,439 17,459 19,492 -------- ------- ------- TOTAL ASSETS $ 268,115 $260,181 $239,764 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest-bearing demand and money market $ 52,691 $ 1,306 2.48% $ 47,245 $ 1,241 2.63% $ 44,889 $ 1,244 2.77% Savings 43,068 1,049 2.44 44,570 1,203 2.70 43,402 1,213 2.79 Time 104,980 5,647 5.38 105,920 5,745 5.42 95,679 5,190 5.42 -------- ------ ------- ------ ------- ------ Total interest-bearing deposits 200,739 8,002 3.99 197,735 8,189 4.14 183,970 7,647 4.16 Short-term borrowings 7,648 354 4.63 7,726 374 4.84 4,907 247 5.03 Other borrowings 2,000 121 6.05 2,486 230 9.25 2,581 218 8.45 -------- ------ ------- ------ ------- ------ ---- Total interest bearing liabilities 210,387 8,477 4.03 207,947 8,793 4.23 191,458 8,112 4.24 Non-interest bearing liabilities Non-interest bearing demand deposits 25,490 25,584 22,874 Other liabilities 6,093 3,954 3,282 -------- ------- ------- Total non-interest bearing liabilities 31,583 29,538 26,156 Stockholders' equity 26,145 22,696 22,150 -------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 268,115 $260,181 $239,764 Net interest income (tax-equivalent basis) 12,021 4.08% 11,419 4.10% 10,578 4.25% ==== ==== ==== Tax equivalent basis adjustment (280) (355) (436) ------- ------ ------ Net Interest Income $ 11,741 $11,064 $10,142 ======= ====== ====== Net Interest margin (tax-equivalent basis) 4.76% 4.70% 4.80% ==== ==== ====
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. 2. Average balances have been calculated based on daily balances. 3. Loan balances include non-accrual loans and are net of unearned income. 4. Loan yields include the effect of amortization of deferred fees net of costs. 22 (continued on next page) RATE/VOLUME ANALYSIS The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/Decrease ------------------------------------------------ 1998 compared to 1997 1997 compared to 1996 Variance due to Variance due to --------------------- ---------------------- (Dollars in thousands) VOLUME RATE NET VOLUME RATE NET ------ ---- --- ------ ---- --- Interest Earning Assets: Federal funds sold ($ 71) ($ 14) ($ 85) ($ 117) $ 19 ($ 98) Interest bearing deposits with banks 45 (10) 35 10 1 11 Securities held to maturity (62) (4) (66) (134) 12 (122) Securities available for sale Taxable 592 (147) 445 247 (62) 185 Tax-exempt (121) (33) (154) (77) (15) (92) ------ ------ ------ ------ ----- ----- Total securities available for sale 471 (180) 291 170 (77) 93 Loans receivable (3,4) 285 (174) 111 2,049 (411) 1,638 ------ ------ ------ ------ ----- ----- Total interest earning assets 668 (382) 286 1,978 (456) 1,522 Interest bearing liabilities: Interest-bearing demand and money market 138 (73) 65 64 (67) (3) Savings (40) (114) (154) 32 (42) (10) Time (51) (47) (98) 555 -- 555 ------ ------ ------ ------ ----- ----- Total interest-bearing deposits 47 (234) (187) 651 (109) 542 Short-term borrowings (4) (16) (20) 137 (10) 127 Long term debt (39) (70) (109) (8) 20 12 ------ ------ ------ ------ ----- ----- Total interest bearing liabilities 4 (320) (316) 780 (99) 681 Net interest income (tax-equivalent basis) $ 664 ($ 62) $ 602 $ 1,198 ($ 357) $ 841 ====== ====== ====== ====== ===== ======
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate. 22 [BEARD & COMPANY LOGO] INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders Norwood Financial Corp Honesdale, Pennsylvania We have audited the accompanying consolidated balance sheets of Norwood Financial Corp and its subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of Norwood Financial Corp and its subsidiary for the year ended December 31, 1996 were audited by other auditors whose report, dated February 14, 1997, expressed an unqualified opinion on those statements. 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 1998 and 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norwood Financial Corp and its subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Beard & Company, Inc. ---------------------------------------- Harrisburg, Pennsylvania January 29, 1999 CONSOLIDATED BALANCE SHEETS December 31, 1998 1997 -------- --------- (In Thousands) ASSETS Cash and due from banks $ 7,954 $ 6,571 Interest-bearing deposits with banks 1,284 4,353 Federal funds sold 3,360 -- Securities available for sale 62,270 49,372 Securities held to maturity, fair value 1998 $8,151; 1997 $8,516 7,645 8,159 Loans receivable, net of allowance for loan losses 1998 $3,333; 1997 $3,250 183,586 182,390 Bank premises and equipment, net 7,077 7,300 Other real estate 204 537 Accrued interest receivable 1,441 1,358 Other assets 4,196 3,109 -------- -------- Total assets $ 279,017 $ 263,149 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 27,264 $ 24,065 Interest-bearing demand 23,926 21,451 Money market deposit accounts 30,324 28,812 Savings 42,579 43,406 Time 109,674 109,020 -------- -------- Total deposits 233,767 226,754 Short-term borrowings 7,776 4,990 Long-term debt 2,000 2,000 Accrued interest payable 2,283 2,365 Other liabilities 5,463 2,446 -------- -------- Total liabilities 251,289 238,555 -------- -------- STOCKHOLDERS' EQUITY Common stock, par value $ .10 per share; authorized 10,000,000 shares; issued 1998 1,803,824 shares; 1997 1,801,592 shares 180 180 Surplus 4,542 4,384 Retained earnings 23,240 20,844 Treasury stock, at cost 1998 22,347 shares; 1997 22,394 shares (343) (344) Accumulated other comprehensive income 1,655 1,280 Unearned Employee Stock Ownership Plan (ESOP) shares (1,546) (1,750) -------- -------- Total stockholders' equity 27,728 24,594 -------- -------- Total liabilities and stockholders' equity $ 279,017 $ 263,149 ======== ======== See Notes to Consolidated Financial Statements. 24
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ------------------------ 1998 1997 1996 --------- --------- --------- (In Thousands, Except Per Share Data) Interest income: Loans receivable, including fees $ 16,311 $ 16,198 $ 14,558 Securities: Taxable 3,248 2,807 2,627 Tax-exempt 530 671 802 Interest-bearing deposits with other institutions 74 40 28 Federal funds sold 55 141 239 -------- -------- -------- Total interest income 20,218 19,857 18,254 -------- -------- -------- Interest expense: Deposits 8,002 8,189 7,647 Short-term borrowings 354 374 247 Other 121 230 218 -------- -------- -------- Total interest expense 8,477 8,793 8,112 -------- -------- -------- Net interest income 11,741 11,064 10,142 Provision for loan losses 720 1,355 1,710 -------- -------- -------- Net interest income after provision for loan losses 11,021 9,709 8,432 -------- -------- -------- Other income: Service charges and fees 1,087 859 709 Income from fiduciary activities 173 165 169 Net realized gains on sales of securities 48 70 787 Gain on termination of pension plan -- 597 -- Other 331 234 166 -------- -------- -------- Total other income 1,639 1,925 1,831 -------- -------- -------- Other expenses: Salaries and employee benefits 3,886 3,639 3,782 Occupancy 708 693 616 Furniture and equipment 823 743 600 Other real estate owned operations 115 254 510 Advertising 120 163 210 Taxes, other than income 249 240 221 Professional fees 254 323 445 Amortization of intangible assets 214 291 116 Other 1,662 1,515 1,423 -------- -------- -------- Total other expenses 8,031 7,861 7,923 -------- -------- -------- Income before income taxes 4,629 3,773 2,340 Income tax expense 1,393 1,067 468 -------- -------- -------- Net income $ 3,236 $ 2,706 $ 1,872 ======== ======== ======== EARNINGS PER SHARE Basic $ 1.93 $ 1.63 $ 1.10 ======== ======== ======== Diluted $ 1.91 $ 1.63 $ 1.10 ======== ======== ========
See Notes to Consolidated Financial Statements. 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996 Accumulated Other Unearned Common Retained Treasury Comprehensive ESOP Stock Surplus Earnings Stock Income Shares Total ----- ------- -------- ----- ------ ------ ----- (In Thousands) Balance, December 31, 1995 $ 900 $ 3,568 $ 17,704 $ (561) $ 1,171 $ -- $ 22,782 ------- Transfer in connection with formation of holding company (810) 810 -- -- -- -- -- Comprehensive income: ------- Net income -- -- 1,872 -- -- -- 1,872 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- (752) -- (752) ------- Total comprehensive income 1,120 ------- Cash dividends declared, $.42 per share -- -- (715) -- -- -- (715) Purchase of treasury stock -- -- -- (1,733) -- -- (1,733) Sale of shares of common stock to ESOP -- 53 -- 1,947 -- (2,000) -- Issuance of treasury stock -- 1 -- 2 -- -- 3 Stock options exercised -- 12 -- -- -- -- 12 Release of earned ESOP shares -- -- -- -- -- 50 50 ------ ------ ------- ------ ------ ------ ------- Balance, December 31, 1996 90 4,444 18,861 (345) 419 (1,950) 21,519 Comprehensive income: ------- Net income -- -- 2,706 -- -- -- 2,706 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- 861 -- 861 ------ Total comprehensive income 3,567 ------- Cash dividends declared, $.435 per share -- -- (723) -- -- -- (723) Two-for-one stock split in the form of a 100% stock dividend 90 (90) -- -- -- -- -- Issuance of treasury stock -- -- -- 1 -- -- 1 Release of earned ESOP shares -- 30 -- -- -- 200 230 ------ ------ ------- ------ ------ ------ ------- Balance, December 31, 1997 180 4,384 20,844 (344) 1,280 (1,750) 24,594 ------- Comprehensive income: Net income -- -- 3,236 -- -- -- 3,236 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- 375 -- 375 ------- Total comprehensive income 3,611 ------- Cash dividends declared, $.50 per share -- -- (840) -- -- -- (840) Stock options exercised -- 37 -- -- -- -- 37 Issuance of treasury stock -- -- -- 1 -- -- 1 Release of earned ESOP shares -- 121 -- -- -- 204 325 ------ ------ ------- ------ ------ ------ ------- Balance, December 31, 1998 $ 180 $ 4,542 $ 23,240 $ (343) $ 1,655 $(1,546) $ 27,728 ====== ======= ======== ======= ====== ====== =======
See Notes to Consolidated Financial Statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996 -------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,236 $ 2,706 $ 1,872 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 720 1,355 1,710 Depreciation 670 709 600 Amortization of intangible assets 214 291 116 Deferred income taxes 1,317 1,184 771 Net realized gain on sales of securities (48) (70) (787) Losses on sale of other real estate, net 22 111 216 Net gain on sale of mortgage loans (100) (56) (52) Mortgage loans originated for sale (7,126) (4,210) (5,063) Proceeds from sale of mortgage loans 7,226 4,266 5,115 (Increase) decrease in accrued interest receivable (83) 200 (53) Increase (decrease) in accrued interest payable (82) 141 392 Other, net 980 (94) (723) ------- ------- ------- Net cash provided by operating activities 6,946 6,533 4,114 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 5,012 9,423 3,081 Proceeds from maturities and principal reductions on mortgage-backed securities 16,031 11,703 11,376 Purchases (33,417) (20,268) (27,023) Securities held to maturity: Proceeds from maturities 515 650 3,665 Purchases -- -- (250) Net increase in loans (3,203) (12,079) (25,519) Purchase of bank premises and equipment (446) (240) (1,363) Proceeds from sales of other real estate 1,000 1,975 1,475 Proceeds received from branch acquisition -- -- 17,716 ------- ------- ------- Net cash used in investing activities (14,508) (8,836) (16,842) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 7,013 (2,708) 22,717 Net increase in short-term borrowings 2,786 1,763 1,196 Repayments of long-term debt -- (2,442) (140) Proceeds from long term debt -- 2,000 -- Stock options exercised 37 -- 12 Acquisition of treasury stock -- -- (1,733) Proceeds from issuance of treasury stock 1 1 3 Release of ESOP shares 204 200 50 Cash dividends paid (805) (696) (716) ------- ------- ------- Net cash provided by (used in) financing activities 9,236 (1,882) 21,389 ------- ------- ------- Increase (decrease) in cash and cash equivalents 1,674 (4,185) 8,661 Cash and cash equivalents: Beginning of year 10,924 15,109 6,448 ------- ------- ------- End of year $ 12,598 $ 10,924 $ 15,109 ======= ======= =======
See Notes to Consolidated Financial Statements 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING POLICIES Reorganization and nature of operations: On December 12, 1995, the stockholders of the Wayne Bank (Bank) approved the reorganization of the Bank into a bank holding company structure. After approval by regulatory authorities, the reorganization was completed on March 29, 1996. Each issued and outstanding share of the common stock, par value $1.00, of the Bank immediately prior to the reorganization was converted into and exchanged for one share of common stock, par value $ .10, of Norwood Financial Corp (Company). As a result of this transaction, the Bank and its wholly-owned real estate subsidiary, WCB Realty Corp. became a wholly-owned subsidiary of the Company. The Bank is a state-chartered bank located in Honesdale, Pennsylvania. The Company derives substantially all of its income from the banking and bank related services which include interest earnings on commercial mortgage, residential real estate, commercial and consumer loan financings, as well as interest earnings on investment securities and deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries, WCB ealty Corp., Norwood Investment Corp and WTRO Properties. All intercompany accounts and transactions have been eliminated in consolidation. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized 28 in interest income using a method which approximates the interest method over the period to maturity. Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Loans receivable: Loans generally are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing those amounts over the contractual life of the loan. The Company provides automobile financing to its customers through direct financing leases. These direct financing leases are carried at the Company's net investment, which includes the sum of aggregate rentals receivable and the estimated residual value of the leased automobiles less unearned income. Unearned income is amortized over the leases terms by methods that approximate the interest method. A loan is generally considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The accrual of interest and amortization of fees is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Allowance for loan losses: The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses related to impaired loans that are identified for evaluation is based on discounted cash flows using the loan's initial effective interest rate or the fair value, less selling costs, of the collateral for certain collateral dependent loans. By the time a loan becomes probable of foreclosure, it has been charged down to fair value, less estimated costs to sell. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management's periodic evaluation of the adequacy of 29 the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives. Other real estate: Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the loss on foreclosed real estate. Branch acquisition and intangible assets: On March 25, 1996, the Company acquired certain assets and all the deposit liabilities of three branch offices of Meridian Bank. The transaction was accounted for as a purchase. The Company assumed deposit liabilities of $20,169,279 and acquired cash funds and premises and equipment totaling $1,008,000. The premium paid to acquire these offices amounted to $1,790,000. Intangible assets are comprised of goodwill and core deposit acquisition premiums and are included in other assets. Goodwill is amortized over a fifteen year period. Core deposit acquisition premiums, which were developed by specific core deposit life studies, are being amortized over seven to nine years. The amortization of intangible assets amounted to $214,000, $291,000 and $116,000 for the years ended December 31, 1998, 1997 and 1996 respectively. Annual assessments of the carrying values and remaining amortization periods of intangible assets are made to determine possible carrying value impairment and appropriate adjustments, as deemed necessary. Income taxes: Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiary file a consolidated federal income tax return. 30 Advertising costs: The Company follows the policy of charging the costs of advertising to expense as incurred. Stock dividend and per share data: Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. On December 9, 1997, the Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend on common stock outstanding, payable on February 1, 1998 to shareholders of record on January 15, 1998. The stock split resulted in the issuance of 900,796 additional common shares. The effect of this stock split has been recorded as of December 31, 1997. All per share data has been adjusted for the effect of the stock split. Cash flow information: For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the years ended December 31, 1998, 1997 and 1996, were $8,560,000, $8,652,000 and $7,719,000 respectively. Cash payments for income taxes for the years ended December 31, 1998, 1997 and 1996 were $29,000, $-0- and $787,000 respectively. Non-cash investing activities for 1998, 1997 and 1996 included foreclosed mortgage loans transferred to real estate owned and repossession of other assets of $1,579,000, $341,000 and $2,074,000 respectively. Off-balance sheet financial instruments: In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial instruments are recorded in the balance sheets when they become receivable or payable. Trust assets: Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements since such items are not assets of the Company. Trust income is reported on the accrual method. Comprehensive income: The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of January 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the 31 equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The adoption of SFAS No. 130 had no effect on the Company's net income or stockholders' equity. The components of other comprehensive income and related tax effects are as follows:
Years Ended December 31, 1998 1997 1996 --------------------------------- (In Thousands) Unrealized holding gains (losses) on available for sale securities $ 618 $ 1,346 $ (324) Less reclassification adjustment for gains realized in income 48 70 787 ----- ------ ----- Net unrealized gains (losses) 570 1,276 (1,111) Income tax (benefit) 195 415 (359) ----- ------ ----- Net of tax amount $ 375 $ 861 $ (752) ===== ====== =====
Segment reporting: The Company acts as an independent community financial service provider and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine network, the Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of safe deposit services. The Company also performs personal, corporate, pension and fiduciary services through its Trust Department. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, mortgage banking and trust operations of the Company. As such, discrete information is not available and segment reporting would not be meaningful. Recently issued accounting standards: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which becomes effective for the Company January 1, 2000. The adoption of the Statement is not expected to have a significant impact on the financial condition or results of operations of the Company. Reclassifications: Certain items in the 1997 and 1996 consolidated financial statements have been reclassified to conform with the 1998 consolidated financial statement presentation. These reclassifications had no effect on net income or stockholders' equity. 32 SECURITIES The amortized cost and fair value of securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Thousands) December 31, 1998: Available for sale: U.S. Treasury securities $ 5,511 $ 74 $ (4) $ 5,581 U.S. Government agencies 19,496 169 (37) 19,628 States and political subdivisions 3,703 125 (17) 3,811 Corporate obligations 1,704 85 -- 1,789 Mortgage-backed securities 28,211 180 (65) 28,326 ------- ------- ------- ------- 58,625 633 (123) 59,135 Equity securities 1,136 1,999 -- 3,135 ------- ------- ------- ------- $ 59,761 $ 2,632 $ (123) $ 62,270 ======= ======= ======= ======= Held to maturity: States and political subdivisions $ 7,645 $ 506 $ -- $ 8,151 ======= ======= ======= ======= December 31, 1997: Available for sale: U.S. Treasury securities $ 8,009 $ 26 $ (1) $ 8,034 U.S. Government agencies 18,003 68 (47) 18,024 States and political subdivisions 1,440 22 -- 1,462 Mortgage-backed securities 18,903 71 (13) 18,961 ------- ------- ------- ------- 46,355 187 (61) 46,481 Equity securities 1,078 1,813 -- 2,891 ------- ------- ------- ------- $ 47,433 $ 2,000 $ (61) $ 49,372 ======= ======= ======= ======= Held to maturity: States and political subdivisions $ 8,159 $ 361 $ (4) $ 8,516 ======= ======= ======= =======
Equity securities consist of Pennsylvania community banks and Federal Home Loan Bank stock. The amortized cost and fair value of securities as of December 31, 1998, by contractual maturity or call date, are shown below. Expected maturities may differ from contractual maturities or call dates because borrowers may have the right to prepay obligations with or without call or prepayment penalties. 33 Securities Available Securities Held For Sale To Maturity ---------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------------------------------------- (In Thousands) Due in one year or less $ 1,498 $ 1,514 $ -- $ -- Due after one year through five years 15,656 15,759 -- -- Due after five years through ten years 7,187 7,275 275 282 Due after ten years 6,073 6,261 7,370 7,869 ------ ------ ------ ------ 30,414 30,809 7,645 8,151 Mortgage-backed securities 28,211 28,326 -- -- Equity securities 1,136 3,135 -- -- ------ ------ ------ ------ $59,761 $62,270 $ 7,645 $ 8,151 ====== ====== ====== ====== Gross realized gains and gross realized losses on sales of securities available for sale were $54,000 and $6,000 respectively in 1998, $80,000 and $10,000 respectively in 1997 and $830,000 and $43,000 respectively in 1996. Securities with a carrying value of $29,632,000 and $19,729,000 at December 31, 1998 and 1997 were pledged to secure public deposits, U.S. Treasury demand notes, securities sold under agreements to repurchase and for other purposes as required or permitted by law. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The components of loans receivable at December 31 were as follows: 1998 1997 ----------------------------- (In Thousands) Real estate: Residential $ 52,038 $ 54,227 Commercial 30,555 32,986 Construction 3,046 2,046 Commercial, financial and agricultural 25,539 26,589 Consumer loans to individuals 42,266 37,082 Lease financing, net of unearned income 33,860 33,877 --------- --------- 187,304 186,807 Less: Unearned income 385 1,167 Allowance for loan losses 3,333 3,250 --------- --------- $ 183,586 $ 182,390 ========= ========= 34 The Bank's net investment in direct financing leases at December 31 consists of: 1998 1997 -------------------------- Minimum lease payments receivable $ 14,579 $ 17,360 Estimated unguaranteed residual values 24,122 22,524 Unearned income (4,841) (6,007) -------- --------- $ 33,860 $ 33,877 ======== ========= The following table presents changes in the allowance for loan losses: Years Ended December 31, 1998 1997 1996 ------------------------------------------ (In Thousands) Balance, beginning $ 3,250 $ 2,616 $ 2,125 Provision for loan losses 720 1,355 1,710 Recoveries 152 109 147 Loans charged off (789) (830) (1,366) ------- -------- -------- Balance, ending $ 3,333 $ 3,250 $ 2,616 ======= ======== ======== The recorded investment in impaired loans, not requiring an allowance for loan losses was $642,000 and $1,704,000 at December 31, 1998 and 1997 respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- and $630,000 at December 31, 1998 and 1997 respectively. The related allowance for loan losses associated with these loans was $-0- and $21,000 at December 31, 1998 and 1997 respectively. For the years ended December 31, 1998, 1997 and 1996, the average recorded investment in these impaired loans was $669,000, $2,716,000 and $3,228,000 and the interest income recognized on these impaired loans was $77,000, $68,000 and $12,000 respectively. PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 1998 1997 ------------------------- (In Thousands) Land and improvements $ 944 $ 989 Buildings and improvements 7,220 7,789 Furniture and equipment 2,163 3,927 ------- ------- 10,327 12,705 Less accumulated depreciation 3,250 5,405 ------- ------- $ 7,077 $ 7,300 ======= ======= 35 DEPOSITS Aggregate time deposits in denominations of $100,000 or more were $27,535,000 and $23,324,000 at December 31, 1998 and 1997 respectively. At December 31, 1998, the scheduled maturities of time deposits are as follows (in thousands): 1999 $ 87,757 2000 12,454 2001 4,521 2002 2,125 2003 2,817 --------- $ 109,674 ======== BORROWINGS Short-term borrowings at December 31 consist of the following: 1998 1997 ------------------------- (In Thousands) Securities sold under agreements to repurchase $ 7,612 $ 2,825 Federal funds purchased -- 1,085 U.S. Treasury demand notes 164 1,000 Other -- 80 ------- ------- $ 7,776 $ 4,990 ======= ======= The outstanding balances and related information of short-term borrowings are summarized as follows: Years Ended December 31, 1998 1997 --------------------------- (In Thousands) Average balance during the year $ 7,648 $ 7,726 Average interest rate during the year 4.63 % 4.84 % Maximum month-end balance during the year $ 14,284 $ 13,456 Securities sold under agreements to repurchase generally mature within one day to one year from the transaction date. Securities with amortized costs and fair values of $6,992,000 and $7,042,000 at December 31, 1998 and $4,749,000 and $4,742,000 at December 31, 1997 were pledged as collateral for these agreements. The securities underlying the agreements were under the Company's control. 36 The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $15,000,000 which expires in March 1999. There were no borrowings under this line of credit at December 31, 1998 and 1997. Long-term debt at December 31, 1998 and 1997 of $2,000,000 consists of an advance from the FHLB bearing interest at a rate of 6.04% and which matures on December 23, 1999. EMPLOYEE BENEFIT PLANS In the third quarter of 1997, the Company terminated its defined benefit pension plan which covered substantially all employees and officers. Upon termination, vested participants were allowed to roll their accumulated benefits into either the Company's profit-sharing plan, an IRA, an annuity contract, an alternative retirement investment account or were paid cash. At the time of the termination, the Company determined the amount that the plan assets exceeded the accumulated benefit obligation of eligible participants of which 25% ($102,000) was transferred to the Company's 401(k) plan. The remaining plan assets were transferred to the Company and it recognized a pre-tax gain of $597,000 in the third quarter of 1997 included in other income in the accompanying consolidated financial statements. The Company has a defined contributory profit-sharing plan which, effective November 1, 1996, included the adoption of a 401(k) plan. The plan permits employees to make pre-tax contributions up to 15% of the employee's compensation. The amount of contributions to the plan, including matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21 are eligible to participate in the plan after one year of employment. Employee contributions are vested at all times, and any Company contributions are fully vested after five years. The Company's contributions are expensed as the cost is incurred, funded currently, and amounted to $175,000, $132,000 and $170,000 for the years ended December 31, 1998, 1997 and 1996 respectively. On August 27, 1996, the Board of Directors approved the creation of a leveraged employee stock ownership plan ("ESOP") for the benefit of employees who meet the eligibility requirements which include having completed one year of service with the Company and having attained age twenty-one. The ESOP Trust purchased shares of the Company's common stock with proceeds from a loan from the Company. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments. The loan bears interest at the prime rate adjusted annually. Interest is payable annually and principal payable in equal annual installments over ten years. The loan is secured by the shares of the stock purchased. As the debt is repaid, shares are released from collateral and allocated to qualified employees based on the proportion of debt service paid in the year. The Company accounts for its leveraged ESOP in accordance with Statement of Position 93-6. Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in the consolidated balance sheets. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and dividends on unallocated ESOP shares are recorded as a reduction of debt. Compensation expense for the ESOP was $324,000, $237,000 and $51,000 for the years ended December 31, 1998, 1997 and 1996 respectively. 37 The status of the ESOP shares are as follows: 1998 1997 ------------------------- Allocated shares 27,365 15,150 Shares released from allocation 120 -- Unreleased shares 93,727 106,062 --------- ---------- Total ESOP shares 121,212 121,212 ========= ========== Fair value of unreleased shares $ 2,132,000 $ 2,201,000 INCOME TAXES The components of the provision for federal income taxes are as follows: Years Ended December 31, 1998 1997 1996 ------------------------------------------ (In Thousands) Current $ 76 $ (117) $ (303) Deferred 1,317 1,184 771 ------- ------- ------ $ 1,393 $ 1,067 $ 468 ======= ======= ====== Income tax expense of the Company is less than the amounts computed by applying statutory federal income tax rates to income before income taxes because of the following: Percentage Of Income Before Income Taxes ------------------------- Years Ended December 31, 1998 1997 1996 ---- ---- ---- Tax at statutory rates 34.0% 34.0% 34.0% Tax exempt interest income, net of interest expense disallowance (3.6) (5.4) (10.4) Low-income housing tax credit (1.3) (1.5) (2.5) Other 1.0 1.2 (1.1) ----- ---- ----- 30.1% 28.3% 20.0% ===== ==== ===== The income tax provision includes $16,000, $24,000 and $268,000 of income taxes relating to realized securities gains for the years ended December 31, 1998, 1997 and 1996 respectively. 38 The net deferred tax liability included in other liabilities in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities: 1998 1997 ----------------- (In Thousands) Deferred tax assets: Allowance for loan losses $ 782 $ 698 Deferred loan origination fees 29 45 Allowance for other real estate losses 66 82 Allowance for loss on other assets -- 85 Deferred compensation 41 43 Core deposit intangible 94 87 Partnership credit carryforward 116 116 Minimum tax credit carryforward 950 912 Net operating loss carryforward 550 -- Other 102 116 ------- ------ Total deferred tax assets 2,730 2,184 ------- ------ Deferred tax liabilities: Net unrealized gain on securities 853 659 Premises and equipment 241 242 Lease financing 4,939 3,126 Other 1 10 ------- ------ Total deferred tax liabilities 6,034 4,037 ------- ------ Net deferred tax liability $(3,304) $(1,853) ====== ====== Net operating loss carryforwards of approximately $1,615,000 expire in 2018. TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS Certain directors and executive officers of the Bank, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, were in the ordinary course of business at normal terms, including interest rates and collateralization, prevailing at the time and did not represent more than normal risks. At December 31, 1998 and 1997, such loans amounted to $1,516,000 and $3,437,000 respectively. During 1998, new loans to such related parties totaled $36,000 and repayments aggregated $1,957,000. REGULATORY MATTERS AND STOCKHOLDERS' EQUITY The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain 39 mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material affect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the regulators has categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's or Bank's category. The Bank's actual capital amounts and ratios are also presented in the table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (In Thousands) As of December 31, 1998: Total capital (to risk weighted assets) $27,058 13.51% $16,022 8.00% $20,028 10.00% Tier 1 capital (to risk weighted assets) 23,731 11.85 8,010 4.00 12,015 6.00 Tier 1 capital (to average assets) 23,731 8.73 10,873 4.00 13,591 5.00 As of December 31, 1997: Total capital (to risk weighted assets) $23,565 12.41% $15,191 8.00% $18,989 10.00% Tier 1 capital (to risk weighted assets) 21,184 11.15 7,600 4.00 11,400 6.00 Tier 1 capital (to average assets) 21,184 8.13 10,422 4.00 13,028 5.00
The Company's ratios do not differ significantly from the Bank's ratios presented above. The Bank is required to maintain average cash reserve balances in vault cash or with the Federal Reserve Bank. The amount of these restricted cash reserve balances at December 31, 1998 was approximately $1,260,000. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 1998, $20,442,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed above. 40 STOCK OPTION PLAN The Company adopted a Stock Option Plan for the directors, officers and employees of the Company which was approved by stockholders in 1995. An aggregate of 500,000 shares of authorized but unissued common stock of the Company were reserved for future issuance under the Plan. The stock options typically have expiration terms ranging between one and ten years subject to certain extensions and early terminations. The per share exercise price of a stock option shall be, at a minimum, equal to the fair value of a share of common stock on the date the option is granted. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1998 1997 1996 ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- Outstanding, beginning of year 55,570 $ 16.72 41,620 $ 16.54 29,970 $ 16.63 Granted 15,500 24.00 18,000 17.13 19,750 16.44 Exercised (2,232) 16.46 -- -- (1,000) 16.63 Forfeited (1,388) 16.63 (4,050) 16.63 (7,100) 16.63 ------ -------- ------ -------- ------ -------- Outstanding, end of year 67,450 $ 18.40 55,570 $ 16.72 41,620 $ 16.54 ====== ======== ====== ======== ====== ======== Exercisable at end of year 51,950 $ 16.73 37,570 $ 16.53 21,870 16.63 ====== ======== ====== ======== ====== ========
Exercise prices for options outstanding as of December 31, 1998 ranged from $16.44 to $24.00 per share. The weighted average remaining contractual life is 8.5 years. The Company applies APB Opinion 25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below: Years Ended December 31, 1998 1997 1996 ------------------------------------- (In Thousands, except per share data) Net income: As reported $ 3,236 $ 2,706 $ 1,872 Pro forma 3,154 2,640 1,796 Earnings per share: As reported 1.93 1.63 1.10 Pro forma 1.88 1.59 1.06 Earnings per share (assuming dilution): As report 1.91 1.63 1.10 Pro forma 1.86 1.59 1.06 41 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Years Ended December 31, 1998 1997 1996 ------------------------------- (In Thousands) Dividend yield 2.46% 2.40% 2.60% Expected life 8 years 8 years 9 years Expected volatility 39.80% 21.00% 7.00% Risk-free interest rate 4.65% 5.75% 6.39% EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, 1998 1997 1996 ----------------------------------------------------- Numerator, net income $3,236,000 $ 2,706,000 $ 1,872,000 ============ =========== =========== Denominator: Denominator for basic earnings per share, weighted average shares 1,679,411 1,660,998 1,706,090 Effect of dilutive securities, employee stock options 16,674 3,474 13 Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 1,696,085 1,664,472 1,706,103 --------- --------- --------- Basic earnings per common share $ 1.93 $ 1.63 $ 1.10 ========= ========== ========== Diluted earnings per common share $ 1.91 $ 1.63 $ 1.10 ========= ========== ==========
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 42 A summary of the Bank's financial instrument commitments is as follows: December 31, 1998 1997 -------------------------- (In Thousands) Commitments to extend credit $ 13,788 $ 14,749 Standby letters of credit 520 540 -------- --------- $ 14,308 $ 15,289 ======== ========= Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each custome's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer and generally consists of real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, when deemed necessary, supporting those commitments. CONCENTRATIONS OF CREDIT RISK The Bank operates primarily in Wayne and Pike Counties, Pennsylvania and, accordingly, has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region's economy. These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal lending limits to any single borrower or group of borrowers. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. 43 The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at December 31, 1998 and 1997: - - For cash and due from banks, interest-bearing deposits with banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. - - For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. - - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans wouldbe made to borrowers with similar credit ratings and for the same remaining maturities. Disclosure of the fair value of leases receivable is not required and has not been included in the table below. - - The fair value of accrued interest receivable and accrued interest payable is the carrying amount. - - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits for similar remaining maturities. - - The fair value of short-term borrowings approximate their carrying amount. - - The fair value of long-term debt is estimated using discounted cash flow analyses based upon the Company's current borrowing rates for similar types of borrowing arrangements. - - The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements. The estimated fair value of the Company's financial instruments were as follows:
December 31, 1998 December 31, 1997 ------------------- ------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In Thousands) Financial assets: Cash and due from banks, interest-bearing deposits with banks and federal funds sold $ 12,598 $ 12,598 $ 10,924 $ 10,924 Securities 69,915 70,421 57,531 57,888 Loans receivable, net 149,726 150,798 148,513 150,008 Accrued interest receivable 1,441 1,441 1,358 1,358 Financial liabilities: Deposits 233,767 234,318 226,754 226,775 Short-term borrowings 7,776 7,776 4,990 4,990 Long-term debt 2,000 2,016 2,000 2,012 Accrued interest payable 2,283 2,283 2,365 2,365 Off-balance sheet financial instruments: Commitments to extend credit and outstanding letters of credit -- -- -- --
44 NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION Balance Sheets December 31, 1998 1997 ---------------- (In Thousands) ASSETS Cash on deposit in bank subsidiary $ 382 $ 290 Interest bearing deposit with another institution 900 500 Securities available for sale 307 330 Investment in bank subsidiary 26,438 23,714 Other assets 51 43 ------ ------ $28,078 $24,877 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 350 $ 283 Stockholders' Equity 27,728 24,594 ------ ------ $28,078 $24,877 ====== ====== Statements of Income
For the Period Year Ended December 31, March 29, 1996 To 1998 1997 December 31, 1996 ----------------------------------- (In Thousands) Income: Dividends from bank subsidiary $ 839 $ 723 $ 2,549 Interest income from bank subsidiary 139 162 -- Other interest income 37 14 41 Gain on sale of securities -- -- 2 ------ ------ ------ 1,015 899 2,592 Expenses 75 54 14 ------ ------ ------ Income before income taxes 940 845 2,578 Income tax expense (benefit) 40 41 (3) ------ ------ ------ 900 804 2,581 Equity in excess of undistributed earnings of subsidiary 2,336 1,902 (1,190) ------ ------ ------ Net income $ 3,236 $ 2,706 $ 1,391 ====== ====== ======
45 Statements of Cash Flows
Year Ended For the Period December 31, March 29, 1996 1998 1997 December 31, 1996 ----------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,236 $ 2,706 $ 1,391 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (2,336) (1,902) 1,190 Other, net 155 86 (64) ------- ------ ------ Net cash provided by operating activities 1,055 890 2,517 ------- ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Sale of securities available for sale -- -- 82 Purchase of securities available for sale -- -- (282) ------- ------ ------ Net cash used in investing activities -- -- (200) ------- ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Stock options exercised 37 -- 12 Acquisition of treasury stock -- -- (1,447) Proceeds from issuance of treasury stock 1 1 3 Release of ESOP shares 204 200 50 Cash dividends paid (805) (696) (540) ------- ------ ------ Net cash used in financing activities (563) (495) (1,922) ------- ------ ------ Increase in cash and cash equivalents 492 395 395 Cash and cash equivalents: Beginning 790 395 -- ------- ------ ------ Ending $ 1,282 $ 790 $ 395 ====== ====== ======
46 Norwood Financial Corp Officers
Russell L. Ridd Chairman of the Board William W. Davis, Jr. President and Chief Executive Officer Lewis J. Critelli Executive Vice President and Chief Financial Officer Edward C. Kasper Senior Vice President John H. Sanders Senior Vice President Joseph A. Kneller Senior Vice President John E. Marshall Secretary Wayne Bank Officers Russell L. Ridd Chairman of the Board William W. Davis, Jr. President and Chief Executive Officer Lewis J. Critelli Executive Vice President and Chief Financial Officer Edward C. Kasper Senior Vice President and Senior Loan Officer/Corporate Bank John H. Sanders Senior Vice President/Retail Bank Joseph A. Kneller Senior Vice President John E. Marshall Secretary Peter Bochnovich Vice President Pauline A. Kovatch Vice President and Assistant Secretary Frank R. Redington Vice President Anthony F. Torquato Vice President Lynne Wetzel Vice President Wayne D. Wilcha Vice President and Trust Officer Ronald J. Ferrance, Jr. Assistant Vice President Carolyn K. Gwozdziewycz Assistant Vice President Kelley J. Lalley Assistant Vice President and Assistant Secretary Barbara A. Ridd Assistant Vice President Nancy A. Hart Controller and Assistant Secretary Catherine Alunni Community Office Manager Laurie J. Bishop Assistant Community Office Manager John F. Carmody Community Office Manager Thomas M. Didato Loan Review Officer and Assistant Secretary William L. Doney Data Processing Manager Robert Dugan Marketing Director Joann Fuller Deposit Operations Manager Gary Henry Community Office Manager Alejandro M. Izquierdo Community Office Manager Norma S. Kuta Community Office Manager Lisa M. Lalley Centralized Loan Processing/Documentation Manager Nancy M. LaTournous Assistant Community Office Manager Melissa D. McDavitt Community Office Manager William E. Murray Assistant Community Office Manager Diane L. Richter Assistant Community Office Manager Nancy M. Worobey Community Office Manager Norwood Investment Corp William W. Davis, Jr. President and Chief Executive Officer Lewis J. Critelli Executive Vice President Scott C. Rickard Vice President
47 Investor Information Stock Listing Norwood Financial Corp stock is traded on the Nasdaq National Market under the symbol NWFL. The following firms are known to make a market in the Company's stock: Hopper Soliday & Co., Inc. 1703 Oregon Pike Lancaster, PA 17601 717-560-3015 Legg Mason Wood Walker, Inc. The Stadium Office Park 330 Montage Mountain Road Suite 201 Scranton, PA 18507 570-346-9300 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: Illinois Stock Transfer Company, 209 West Jackson Blvd., Suite 903, Chicago, IL 60606. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at 312-427-2953. Dividend Calendar: Dividends on Norwood Financial Corp common stock, if approved by the Board of Directors are customarily paid on or about February 1, May 1, August 1 and November 1. Automatic Dividend Reinvestment Plan: The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into Norwood Stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. Shareholders do not incur brokerage commissions for the transactions. Please contact the transfer agent or Lewis J. Critelli for additional information. SEC Reports and Additional Information: A copy of the Company's report on Form 10-K for its fiscal year ended December 31, 1998 including financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission may be obtained upon written request of any stockholder, investor or analyst by contacting Lewis J. Critelli, Executive Vice President and Chief Financial Officer, Norwood Financial Corp, 717 Main Street, P.O. Box 269, Honesdale, PA 18431. 48 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (on Form S-8) of Norwood Financial Corp. of our report dated January 29, 1999, with respect to the consolidated financial statements of Norwood Financial Corp. and subsidiary incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/Beard & Company, Inc. BEARD & COMPANY, INC. Harrisburg, Pennsylvania March 23, 1999 EX-23.2 4 EXHIBIT 23.2 EXHIBIT 23.2 SNODGRASS Certified Public Accountants and Consultants CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Registration Statement of Norwood Financial Corp. on Form S-8 of our report dated February 14, 1997, insofar as such report relates to the financial statements for the year ended December 31, 1996, appearing in the Annual Report on Form 10-K of Norwood Financial Corp. for the year ended December 31, 1998. /s/S.R. Snodgrass, A.C. Wesford, PA March 23, 1999
S.R. Snodgrass. A.C. 101 Bradford Road, Suite 100 Wexford, PA 15090-6909 Phone: 724-934-0344 Facsimile: 724-934-0345
EX-27 5 FDS FOR 10-K
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 12-MOS DEC-31-1998 DEC-31-1998 7,954 1,284 3,360 0 62,270 7,645 8,151 186,919 3,333 279,017 233,767 7,776 7,746 4,000 0 0 180 27,548 279,017 16,311 3,778 129 20,218 8,002 8,477 11,741 720 48 8,031 4,629 4,629 0 0 3,236 1.93 1.91 4.76 588 34 0 0 3,250 789 152 3,333 3,333 0 1,160
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