EX-13 2 0002.txt EXHIBIT 13 EXHIBIT 13 Norwood Financial Corp Five Year Financial Summary
Summary Of Operations For the Years Ended December 31 Summary of Selected Financial Data (Dollars in Thousands, Except Per Share Data) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------- Net Interest Income $ 13,067 $ 12,134 $ 11,741 $ 11,064 $ 10,142 ------------------------------------------------------------------------------------------------- Provision For Loan Losses 480 470 720 1,355 1,710 ------------------------------------------------------------------------------------------------- Net Realized Gain On Sale Of Securities 35 59 48 70 787 ------------------------------------------------------------------------------------------------- Other Income 2,454 1,895 1,649 1,855 1,044 ------------------------------------------------------------------------------------------------- Other Expense 9,712 8,596 8,089 7,861 7,923 ------------------------------------------------------------------------------------------------- Income Before Income Taxes 5,364 5,022 4,629 3,773 2,340 ------------------------------------------------------------------------------------------------- Income Tax Expense 1,504 1,514 1,393 1,067 468 ------------------------------------------------------------------------------------------------- NET INCOME $ 3,860 $ 3,508 $ 3,236 $ 2,706 $ 1,872 ------------------------------------------------------------------------------------------------- Net Income Per Share - Basic $ 2.32 $ 2.09 $ 1.93 $ 1.63 $ 1.10 ------------------------------------------------------------------------------------------------- Net Income Per Share - Diluted $ 2.31 $ 2.08 $ 1.91 $ 1.63 $ 1.10 ------------------------------------------------------------------------------------------------- Cash Dividends Declared 0.71 0.59 0.50 0.44 0.42 ------------------------------------------------------------------------------------------------- Return On Average Assets 1.21% 1.19% 1.21% 1.04% 0.78% ------------------------------------------------------------------------------------------------- Return On Average Equity 13.75% 12.81% 12.38% 11.92% 8.45% ------------------------------------------------------------------------------------------------- Balances At Year-End Total Assets $326,731 $314,827 $279,017 $263,149 $260,572 ------------------------------------------------------------------------------------------------- Loans Receivable 216,477 205,160 186,919 185,640 174,621 ------------------------------------------------------------------------------------------------- Total Deposits 252,959 243,507 233,767 226,754 229,462 ------------------------------------------------------------------------------------------------- Stockholders' Equity 31,370 26,654 27,728 24,594 21,519 ------------------------------------------------------------------------------------------------- Book Value Per Share $ 17.99 $ 15.28 $ 15.56% $ 13.82 $ 12.10 ------------------------------------------------------------------------------------------------- Tier 1 Capital To Risk Adjusted Assets 12.78% 11.98% 12.30% 11.27% 10.26% ------------------------------------------------------------------------------------------------- Total Capital To Risk Adjusted Assets 14.27% 13.50% 14.00% 12.53% 11.51% ------------------------------------------------------------------------------------------------- Allowance For Loan Losses To Toal Loans 1.52% 1.63% 1.78% 1.75% 1.50% ------------------------------------------------------------------------------------------------- Non-Performing Assets To Total Assets 0.22% 0.24% 0.30% 1.03% 2.22% -------------------------------------------------------------------------------------------------
Management's Discussion and Analysis Introduction This management's discussion and analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations for Norwood Financial Corp (the Company) and its subsidiary Wayne Bank (the Bank) for the years ended December 31, 2000, 1999 and 1998. This section should be read in conjunction with the consolidated financial statements and related footnotes. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operation - Summary Net income for the Company for the year 2000 was $3,860,000 compared to $3,508,000 for the year 1999. This represents an increase of $352,000 or 10.0% over the prior year. Basic and diluted earnings per share for 2000 were $2.32 and $2.31 increasing from $2.09 and $2.08 respectively in 1999. Return on average equity showed similar improvement at 13.75% in 2000 increasing from 12.81% in 1999. The return on average assets for the current year was 1.21% compared to 1.19% in 1999. The increase in earnings was principally attributable to higher levels of net interest income and growth in fee income. Net interest income on a fully taxable equivalent basis (fte) totaled $13,424,000 for 2000, an increase of $949,000 or 7.6% from 1999. The improvement in net interest income was due to a $21.6 million growth in average earning assets during 2000, and higher earning asset yields which offset an increase in the average cost of funds. Other income, excluding net realized gains on securities, for 2000 was $2,454,000 an increase of $559,000 or 29.5% over 1999. Other income represented 15.8% of total revenues in 2000, improving from 13.5% in 1999. Net realized gains on sales of securities were $35,000 in 2000 compared to $59,000 in 1999. During 2000 other expenses increased $1,116,000 or 13.0% over 1999 to $9,712,000. The increase was principally due to an increase in the losses on lease residuals; $910,000 in 2000 compared to $385,000 in 1999, the expense of operating additional branches and the implementation of new operating systems including an internet banking service. Net income for the Company for the year 1999 was $3,508,000 compared to $3,236,000 for the year 1998. This represents an increase of $272,000 or 8.4% over prior year. Basic and diluted earnings per share for 1999 were $2.09 and $2.08 respectively increasing from $1.93 and $1.91 respectively in 1998. Return on average equity showed similar improvement at 12.81% in 1999 increasing from 12.38% in 1998. The return on average assets for 1999 was 1.19% compared to 1.21% in 1998. The increase in earnings was principally attributable to higher levels of fee income, growth in net interest income and reduction in the provision for loan losses. Net interest income on a fully taxable equivalent basis (fte) totaled $12,475,000 for 1999, an increase of $454,000 or 3.8% from 1998. The improvement in net interest income was due to $25.9 million growth in average earning assets during 1999, and a lower average cost of funds which partially offset a decline in earning asset yields. The Company made continued progress in reducing its level of non-performing assets during 1999, which totaled $767,000 at December 31, 1999, or .24% of total assets, compared to $826,000 and .30% at year-end 1998. As a result, the Company reduced its provision for loan losses to $470,000 in 1999 compared to $720,000 in 1998. Other income excluding net realized gains on sales of securities for 1999 was $1,895,000 an increase of $246,000 or 14.9% over 1998. Other income represented 13.5% of total revenues in 1999, improving from 12.1% in 1998. Net realized gains on sales of securities were $59,000 in 1999 compared to $48,000 in 1998. During 1999 other expenses increased $507,000 or 6.3% over 1998 to $8,596,000. The increase was principally due to increase in data processing costs related to new information systems, increase in the loss on lease residuals; $385,000 in 1999 compared to $156,000 in 1998, and the cost of opening a branch; $230,000. Expenses were favorably impacted by a lower level of other real estate costs and less legal fees related to disposing of non-performing assets. ------------------------------------- 1 -------------------------------------- Total Assets Total assets at December 31, 2000 were $326.7 million compared to $314.8 million at year-end 1999, an increase of $11.9 million or 3.8%. The Company funded an $11.3 million growth in loans principally with a $9.5 million increase in deposits. Loans Receivable Loans receivable, which includes automobile leases, represent the largest percentage of the Company's earning assets. At December 31, 2000 total loans receivable were $216.5 million compared to $205.2 million in 1999, an increase of $11.3 million or 5.5%. Loan growth in commercial, commercial real estate and consumer loans, which includes indirect automobile lending, was partially offset by lower levels of automobile lease financing. Residential real estate, including home equity lending totaled $59.5 million at year-end 2000 compared to $57.0 million at December 31, 1999. This change is net of pre-payments and refinancings principally in the adjustable rate mortgage portfolio. Fixed rate mortgage products were more favorable during 2000 with the fixed rate portfolio increasing $4.5 million to $19.1 million at December 31, 2000. With the increase in long-term interest rates during the second half of 2000, which impacts residential mortgage rates, the Company had a lower level of mortgage originations during the period than in 1999. With a subsequent decrease in the current interest rate environment, the Company may experience additional mortgage lending in early 2001 as well as additional mortgage refinancing activity. There can be no assurances however to direction of interest rates or the local real estate market. The Company sells a portion of its longer term fixed rate residential loan production for interest rate risk management, with $1.6 million sold in the secondary market during the year. The Company's indirect lending portfolio included in consumer loans to individuals increased $11.1 million to total $56.2 million at year-end, with the growth principally in financing used automobiles. Originations declined in the fourth quarter principally as a result of a general slow down in the automobile market. The Company stopped automobile lease originations during the third quarter of 1999. This was done to monitor experience in early terminations, amount of off-lease vehicles returned and the market values of vehicles returned compared to residual values. As a result, total leases declined $10.4 million in 2000 to $13.6 million at December 31, 2000. The Company maintains a reserve for residual losses which totaled $400,000 at December 31, 2000 with residual value in the remaining portfolio of $10.7 million compared to a $311,000 reserve and $17.9 million of residual value at the prior year end. The Company liquidates its returned off-lease vehicles through various used car dealers and automobile auction centers. At December 31, 2000 the Company had an inventory of automobiles to liquidate of $568,000 decreasing from $974,000 at December 31, 1999. 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 $73.9 million at year-end 2000 increasing from $67.2 million in 1999, an increase of $6.7 million or 10.0%. For the year 2000, total loans receivable averaged $211.2 million with an fte yield of 8.63% compared to $196.0 million and 8.32% during 1999. Total interest income on loans (fte) was $18,217,000 compared to $16,303,000 in 1999. 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, 2000, non-performing loans totaled $680,000 and represented .31% of total loans receivable compared to $657,000 and .32% at year-end 1999. Total non-performing assets which includes other real estate totaled $707,000 and represented .22% of total assets decreasing from $767,000 and .24% at December 31, 1999. At year-end 2000, non-performing assets consisted principally of residential real estate, with the largest such loan totaling $285,000. This loan was subsequently paid off in January 2001. The allowance for loan losses totaled $3,300,000 at year-end 2000 and represented 1.52% of total loans receivable compared to $3,344,000 or 1.63% at year-end 1999. Net charge-offs for 2000 were $524,000, consisting principally of losses on the sale of repossessed automobiles, compared to net charge-offs of $459,000 in 1999. The provision for loan losses for 2000 was $480,000 and $470,000 in 1999. The coverage ratio of allowance for loan losses to non-performing loans was 484.6% at December 31, 2000. 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 ------------------------------------- 2 -------------------------------------- exposure such as concentration of credit in specific industries, economic and industry conditions, trends in delinquencies, collections and collateral value coverage. General reserve percentages are identified by loan type and credit grading and allocated accordingly. Larger credit exposures are analyzed individually. Management considers the allowance at December 31, 2000 adequate for the loan mix and classifications. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. The following table sets forth information with respect to the Company's allowance for loan losses for the years indicated:
Year-Ended December 31, 2000 1999 1998 1997 1996 Allowance balance at beginning of period $ 3,344 $ 3,333 $ 3,250 $ 2,616 $ 2,125 Charge-Offs: Commercial and all other -- (12) (294) (380) (820) Real Estate (9) (17) (14) (119) (226) Consumer (589) (419) (366) (264) (320) Lease Financing (170) (184) (115) (67) -- ------------------------------------------------------- Total (768) (632) (789) (830) (1,366) Recoveries: Commercial and all other 54 74 89 72 71 Real Estate 73 -- 7 3 16 Consumer 88 83 50 34 60 Lease Financing 29 16 6 -- -- ------------------------------------------------------- Total 244 173 152 109 147 Provision expense 480 470 720 1,355 1,710 ------------------------------------------------------- Allowance balance at end of period $ 3,300 $ 3,344 $ 3,333 $ 3,250 $ 2,616 ======================================================= Allowance for loan losses as a percent of total loans outstanding 1.52% 1.63% 1.78% 1.75% 1.50% Net loans charged off as a percent of average loans outstanding .25% .23% .34% .39% .76% Allowance for loan losses as a percent of non-performing loans 484.6% 508.9% 535.8% 149.5% 74.9%
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, 2000, there were no loans not previously discussed where known information about possible credit problems of borrowers cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. At December 31, 2000 1999 1998 1997 1996 (In Thousands) Loans accounted for on a non-accrual basis: Commercial and all other $ 64 $ 64 $ 65 $ 963 $1,633 Real estate 518 513 503 1,112 1,790 Consumer -- 19 20 33 28 ---------------------------------------------- Total 582 596 588 2,108 3,451 Accruing loans which are contractually past due 90 days or more: Commercial and all other $ -- $ -- $ -- $ 44 $ 38 Real estate 34 -- -- -- -- Consumer/leases 64 61 34 23 4 ---------------------------------------------- Total $ 98 $ 61 $ 34 $ 67 $ 42 ---------------------------------------------- Total non-performing loans $ 680 $ 657 $ 622 $2,175 $3,493 Other real estate owned 27 110 204 537 2,283 ---------------------------------------------- Total non-performing assets $ 707 $ 767 $ 826 $2,712 $5,776 ============================================== Non-performing loans to total loans .31% .32% .33% 1.17% 2.00% Non-performing loans to total assets .21% .21% .22% .83% 1.34% Non-performing assets to total assets .22% .24% .30% 1.03% 2.22% Securities The securities portfolio consists principally of United States Government agencies issues, including mortgage backed securities; municipal obligations, and corporate debt. In accordance with SFAS#115 "Accounting for Certain Investments in Debt and Equity Securities" the Company classifies its investments into two categories: held to maturity (HTM) and available for sale (AFS). The Company does not have a trading account. Securities classified as HTM are those in which the Company has the ability and the intent to hold ------------------------------------- 3 -------------------------------------- until contractual maturity. At December 31, 2000, the HTM portfolio totaled $7.5 million and consisted of longer term municipal obligations. Securities classified as AFS are eligible to be sold due to liquidity needs or changes in interest rates. These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded as an adjustment to capital and reported in the equity section of the balance sheet as other comprehensive income. At December 31, 2000, $79.6 million in securities were so classified and carried at their fair value, with unrealized appreciation; net of tax of $488,000, included in accumulated other comprehensive income in stockholders' equity. At December 31, 2000, the modified duration which is a measure of cash flow of the portfolio, was 5.3 years compared to 4.9 years at the prior year-end. The increase was due to reduced cash flow from mortgage-backed securities which were impacted by the higher interest rate environment in 2000 as compared to 1999. Total purchases for the year were $19.6 million. The purchases were funded principally by sales of securities and other cash flow from the portfolio of $21.6 million. At December 31, 2000, the Company's securities portfolio (HTM and AFS) totaled $87.1 million with the mix as follows: U.S. Government agencies 24.0%; mortgage-backed securities, 43.8%; municipal obligations, 18.4%; corporate debt securities, 9.1% and equity securities of other financial institutions 4.7%. At December 31, 2000, the portfolio contained no collateralized mortgage obligations (CMOs), structured notes, step-up bonds and no off-balance sheet derivatives were in use. The portfolio totaled $86.4 million at year-end 1999. Deposits The Company, throughout the ten branches of the Bank, provides a full range of deposit products to its retail and business customers. These include interest-bearing and non-interest bearing transaction accounts, statement savings and money market accounts. Certificates of Deposit (CD) terms range up to five years. The Bank participates in the Jumbo CD ($100,000 and over) markets with local municipalities and school districts, which are typically on a competitive bid basis. Total deposits at December 31, 2000 were $253.0 million increasing from $243.5 million at year-end 1999, an increase of $9.5 million or 3.9%. The increase was principally in core transactions accounts and retail time deposits. Interest bearing demand deposits increased $3.9 million or 14.6% to $30.6 million, reflecting growth in new retail checking account products. Retail time deposits increased $6.6 million, due to a number of promotional CD products offered in 2000, with maturities principally one year or less. Time deposits over $100,000, which consist principally of school district and other public funds, with maturities generally less than one year, were $31.7 million at December 31, 2000, declining slightly from $32.5 million at year-end 1999. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment portfolio structure and relative cost of other funding sources. In addition to non-interest bearing demand deposits of $28.7 million the Company has $6.8 million of cash management accounts which represent commercial customers excess funds invested in over-night securities, which the Company considers core-funding. Market Risk Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates. Net interest income, which is the primary source of the Company's earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. At December 31, 2000, 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, 2000, the Bank had a negative 90 day interest sensitivity gap of $3.6 million or 1.1% of total assets. A negative gap means that rate-sensitive liabilities are higher than rate-sensitive assets at the time interval. This would indicate that in a declining rate environment, the cost of interest-bearing liabilities would decrease faster than the yield on earning assets in the 90 day time frame. The repricing intervals are managed by ALCO strategies; including shortening the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of longer term mortgages. The Company analyzes and measures the time periods in which rate sensitive assets (RSA) and rate sensitive liabilities (RSL) will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if ------------------------------------- 4 -------------------------------------- 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, 2000 (in thousands)
3 Months or 3 Through 1 through >3 Years Total Less 12 Months 3 Years ------------------------------------------------------------- Federal Funds sold and Interest bearing deposits $ 2,703 $ -- $ -- $ -- $ 2,703 Securities (1) 4,533 8,102 24,099 50,396 87,130 Loans Receivable (1) 50,140 49,112 78,304 38,921 216,477 ------------------------------------------------------------- Total rate sensitive assets (RSA) $ 57,376 $ 57,214 $ 102,403 $ 89,317 $ 306,310 ============================================================= Interest bearing demand and savings (2) $ 7,014 $ 10,436 $ 27,337 $ 27,340 $ 72,127 Money Market deposit accounts (2) 4,446 13,340 11,857 -- 29,643 Time deposits 34,537 71,223 13,475 3,266 122,501 Other 15,000 10,860 5,000 5,000 35,860 ------------------------------------------------------------- Total rate sensitive liabilities(RSL) $ 60,997 $ 105,859 $ 57,669 $ 35,606 $ 260,121 ============================================================= Interest sensitivity gap ($ 3,621) ($ 48,645) $ 44,734 $ 53,711 $ 46,179 Cumulative gap ($ 3,621) ($ 52,266) ($ 7,532) $ 46,179 Cumulative gap to total assets -1.1% -16.0% -2.3% 14.1%
(1) Included in the period in which interest rates are next scheduled to adjust or in which they are due. Prepayment speeds are based on historical experience and management judgment. (2) Non-maturity deposits are generally subject to immediate withdrawal. However, based on retention experience in various interest rate environments management considers the deposits to have longer effective maturities. Liquidity Maintenance of liquidity is coordinated by ALCO. Liquidity can be viewed as the ability to fund customers, borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company's primary sources of liquidity include deposit generation, asset maturities and cash flow from loan and securities repayments. At December 31, 2000, the Company had cash and cash equivalents of $11.7 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 $79.6 million which could be used for liquidity needs. This totals $91.3 million and represents 28% of total assets compared to $89.6 million and 28.5% of total assets at December 31, 1999. The Company also monitors other liquidity measures all of which were within policy guidelines at December 31, 2000. The Company believes its liquidity position is adequate. The Company maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support liquidity needs. The borrowing capacity from FHLB was $95.3 million. At year-end 2000 the Company had $28 million in borrowings from the FHLB, decreasing from $30 million at December 31, 1999. Results of Operations 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, 2000 net interest income on a fully taxable basis (fte) was $13,424,000 an increase of $949,000 or 7.6% over 1999. The resultant fte net interest spread and net interest margin for 2000 were 3.84% and 4.47% respectively compared to 3.85% and 4.48% respectively in 1999. Total fte interest income for 2000 was $24,301,000, an increase of $2,711,000 or 12.6% from the prior year. In the generally higher interest rate environment in 2000, with prime rate at 9.50% at December 31, 2000, the earning asset yield increased 34 basis points to 8.09% from 7.75% in 1999. The increase in interest income was also favorably impacted by the earnings on the $21.6 million growth in average earning assets. Interest expense totaled $10,877,000 for 2000, increasing $1,762,000 or 19.3% from 1999. With a higher cost of other borrowings and a competitive market for time deposits the Company's cost of interest-bearing liabilities increased to 4.25% from 3.90% in the prior year. As a result ------------------------------------- 5 -------------------------------------- of a 34 basis point increase in the earning asset yield offset by 35 basis point increase in cost of interest-bearing liabilities, net interest spread was relatively stable at 3.84% compared to 3.85% in 1999. Net interest margin, which is the measurement of the net return on earning assets, also decreased 1 basis point to 4.47% in 2000 from 4.48%. The net interest margin was favorably impacted by the mix of earning asset growth, with 70% of the growth due to loans and 30% in securities, with the loans at a yield of 8.63%, which is higher than the 6.68% yield on securities. The funding mix however was more expensive as other borrowings increased $16.4 million at a cost of 5.99% and deposits, which have a lower cost, increased $7.2 million on average. Interest income earned on loans totaled $18,217,000 with a yield of 8.63% in 2000 increasing $1,914,000 from $16,303,000 with a yield of 8.32% in 1999. The increase in yield was due in part to the higher interest rate environment with an average prime rate of 9.35% in 2000 compared to 8.00% in 1999. Average loans increased $15.2 million to $211.2 million. Loans receivable represented 70.3% of earning assets in 2000. Securities available for sale averaged $80.8 million in 2000 with fte interest income of $5,399,000 and a yield of 6.68% compared to $72.2 million, $4,524,000 and 6.27% respectively in 1999. The increase in yield was principally due to the higher interest rate environment in 2000. Interest-bearing deposits averaged $215.1 million increasing $7.2 million from the average in 1999. The cost of interest bearing deposits for 2000 was 3.97% compared to 3.78% in 1999. The increase in cost was principally due to rates paid on time deposits, with a cost of 5.45% in 2000 increasing from 5.15% in 1999. Short-term borrowings, principally cash management accounts, averaged $6.9 million at a cost of 4.38% compared to $8.2 million at 3.66% in 1999. Other borrowings, which consist of advances from the FHLB, increased on average to $33.9 million in 2000, compared to $17.5 million in 1999. The increase in borrowings was used principally to fund loan growth. For the year ended December 31, 1999 net interest income on a fully taxable basis (fte) was $12,475,000 an increase of $454,000 or 3.8% over 1998. The resultant fte net interest spread and net interest margin for the year 1999 were 3.85% and 4.48% respectively compared to 4.08% and 4.76% respectively in 1998. Total fte interest income for 1999 was $21,590,000 an increase of $1,092,000 or 5.3% from prior year. As the earning asset yield declined 36 basis points to 7.75% from 8.11% in 1998, this increase in interest income was the result of $25.9 million growth in average earning assets. Interest expense totaled $9,115,000 for 1999, increasing $638,000 or 7.5% from 1998. The Company was able to reduce its cost of interest-bearing liabilities to 3.90% compared to 4.03% in 1998. As a result of a 36 basis point decline in the earning asset yield only partially offset by 13 basis point decline in cost of interest-bearing liabilities, net interest spread decreased to 3.85% from 4.08% in 1998. Net interest margin, which is the measurement of net return on earning assets also decreased to 4.48% in 1999 from 4.76%. The decrease in net interest margin was due in part to mix of earning asset growth, with 35% of the growth due to loans and 65% in securities, which at a yield of 6.27% is lower than the 8.32% yield on loans. The funding mix also contributed to the decline in net interest margin as borrowed funds increased $15.5 million at a cost of 5.52% and deposits, which have a lower cost, increased $9.7 million on average. Interest income earned on loans totaled $16,303,000 with a yield of 8.32% in 1999 compared to $16,316,000 with a yield of 8.73% in 1998. The decrease in yield was due in part to lower interest rate environment with an average prime rate of 8.00% in 1999 compared to 8.36% in 1998. Average loans increased $9.1 million to $196.0 million. Loans represented 70.3% of earning assets in 1999 compared to 74% in 1998. Securities available for sale averaged $72.2 million in 1999 with an fte interest income of $4,524,000 and yield of 6.27% compared to $55.0 million, $3,375,000 and 6.14% respectively in 1998. The increase in yield was principally due to the higher interest rate environment in the second half of 1999, and the extension in the average life of the portfolio. Interest-bearing deposits averaged $207.9 million increasing $7.2 million from average in 1998. The cost of deposits for 1999 was 3.78% compared to 3.99% in 1998. The Company decreased its cost of savings accounts by 25 basis points and time deposits by 23 basis points. Also, the percentage of time deposits decreased to 51.5% of total interest bearing deposits compared to 52.3% in 1998. Short-term borrowings, principally cash management accounts, averaged $8.2 million at a cost of 3.66% compared to $7.6 million at 4.63% in 1998. Other borrowings, which consist of advances from the FHLB, increased on average to $17.5 million in 1999, compared to $2.0 million in 1998. The increase in borrowings was used principally to fund purchases of mortgage-backed securities. Other Income Other income excluding net realized gains on sales of securities totaled $2,454,000 in 2000, an increase of $559,000 or 29.5% over 1999. Other income represented 15.8% of total revenues increasing from 13.5% in 1999. Service charges and fees were $1,486,000 in 2000 and $1,235,000 in 1999, an increase of $251,000. The ------------------------------------- 6 -------------------------------------- increase is due in part to growth in fee-based retail checking accounts, $46,000; and account analysis fees on certain types of commercial accounts, $40,000. The Wayne Bank Visa Check Card generated $97,000 in revenues, increasing from $64,000 in 1999 and merchant card processing fees totaled $114,000, an increase of $35,000 from 1999. In addition, a loan promotion generated $49,000 of revenue in 2000. Other sources of fee income totaled $680,000 in 2000 compared to $405,000 in 1999. Commissions on sales of mutual funds, annuities and discount brokerage through Norwood Investment Corp totaled $201,000 on sales of $6.8 million compared to $149,000 in revenues on sales of $6.4 million in 1999. The Company sold its portfolio of mortgage servicing rights (MSR) for a net gain of $105,000 with a total gain on MSR and residential mortgage loans sold of $231,000 compared to $19,000 on loans sold in 1999. Earnings on the increase in the cash surrender value (CSV) of bank owned life insurance (BOLI) purchased in the fourth quarter of 1999, the proceeds of which were used to fund employee benefit plans, was $166,000 compared to $41,000 in 1999. Income on fiduciary activities totaled $288,000 for 2000, an increase of $33,000 or 12.9% over prior year. The increase is due in part to higher estate income. Other income excluding net realized gains on sales of securities totaled $1,895,000 in 1999, an increase of $246,000 or 14.9% over 1998. Service charges and fees were $1,235,000 in 1999 compared to $1,087,000 in 1998 an increase of $148,000. The increase is due in part to growth in fee-based retail checking accounts, $38,000; and an increase in automated teller machine income; $14,000. The Wayne Bank Visa Check Card generated $64,000 in revenues, increasing from $50,000 in 1998 and merchant card processing fees totaled $79,000, an increase of $21,000 from 1998. Commissions on sales of mutual funds, annuities and discount brokerage through Norwood Investment Corp totaled $149,000 on sales of $6.4 million compared to $139,000 in revenues on sales of $5.3 million in 1998. The Company sold $1.7 million in residential mortgages for a gain of $19,000, declining from a gain of $100,000 on $7.2 million in sales in 1998. The decrease in volume sold is due to the increasing interest rate environment during 1999. Trust income totaled $255,000 for 1999, an increase of $82,000 or 47.4% over prior year. The increase is due in part to termination charges and higher estate income. Other Income (000) 2000 1999 1998 ------------------------ Service charges on Deposit Accounts $ 292 $ 213 $ 193 ATM Fees 144 142 128 NSF Fees 509 478 440 Other Service Chgs. & Fees 541 402 326 Trust Income 288 255 173 Mutual Funds & Annuities 201 148 134 Gain on Sales of MSR & Loans 231 19 100 Earnings on Life Insurance 166 41 -- Other Income 82 197 155 ------------------------ $2,454 $1,895 $1,649 Net realized gains on sales of securities 35 59 48 Total $2,489 $1,954 $1,697 ======================== Other Expenses Other expenses totaled $9,712,000 in 2000 an increase of $1,116,000 or 12.9% over 1999. Salaries and employee benefit costs which represent 44.8% of other expenses, were $4,355,000 for 2000, an increase of $274,000 or 6.7%. The increase was principally due to staff expenses related to new branch locations and increasing costs of various employee benefit plans. Advertising expenses increased $91,000 to $185,000 reflecting marketing efforts in Monroe County. Expenses incurred in 2000, and not in 1999, including staffing, occupancy, rental and other expenses related to the new branches totaled $191,000. Losses on lease residuals were $910,000 compared to $385,000 in 1999. The increase was principally due to greater number of cars returned in 2000, the short terms of the maturing leases and the lower market values compared to residual values. These losses were partially offset by lease termination fee income included in other income of $72,000 in 2000 and $78,000 in 1999. Professional fees, including legal costs, were $248,000 in 2000 compared to $186,000 in 1999, with the increase principally due to legal costs related to a general corporate matter which was settled in 2000. Other expenses totaled $8,596,000 for 1999 compared to $8,089,000 in 1998, an increase of $507,000 or 6.3%. Salaries and employee benefit costs which represent 47.6% of other expenses, were $4,081,000 for 1999, an increase of $195,000 or 5.0%. The increase was principally due to staff expenses related to a new branch location opened in June 1999. Total expenses including staffing, rental and other expenses related to the new branch were $230,000. Other real estate owned costs decreased to $5,000 from $115,000 in 1998 due to lesser number of properties carried and sold in 1999. Legal expenses, included in professional fees, declined in 1999 to $49,000 from $74,000 in 1998 principally due to lower costs related to non-performing loans. In the fourth quarter of 1998 the Bank converted its data processing core application systems from an in-house system to an ------------------------------------- 7 -------------------------------------- outsourced environment. As a result of monthly fees, data processing expense increased to $409,000 in 1999 compared to $290,000 in 1998. This was partially offset by decrease in equipment costs. The Bank also incurred certain one-time costs associated with conversion of the lease processing system and its ATM network, both of which occurred in the second quarter of 1999. Losses on lease residuals totaled $385,000 compared to $156,000 in 1998. The increase was principally due to greater number of cars returned in 1999, the short terms of the maturing leases and the lower market values compared to residual values. These losses were partially offset by lease termination fee income, included in other income, of $78,000 in 1999 and $45,000 in 1998. Income Taxes Income tax expense for the year 2000 was $1,504,000 for an effective tax rate of 28.0% compared to an expense of $1,514,000 and an effective rate of 30.1% in 1999. The decrease in the effective tax rate is principally due to higher levels of interest income on municipal securities and increase in the cash surrender value of BOLI which is not subject to Federal Income Tax. Income tax expense for 1999 was $1,514,000 for an effective tax rate of 30.1% compared to an expense of $1,393,000 and an effective rate of 30.1% in 1998. The effective tax rate is lower than the statutory rate of 34% due to holdings of municipal securities and certain loans which generate income partially exempt from Federal Income Taxes. Capital and Dividends Total stockholders' equity at December 31, 2000, was $31.4 million, compared to $26.7 million at year-end 1999. The increase was principally due to retention of earnings of $2,678,000 after dividends declared of $1,182,000, and a $1,807,000 increase in other comprehensive income due to fair value changes in the Company's AFS securities portfolio principally as a result of decreasing interest rates. Because of interest rate volatility the Company's accumulated other comprehensive income could materially fluctuate for each interim period and year-end. At December 31, 2000 the Company had a leverage capital ratio of 9.44%, Tier 1 risk-based capital of 12.78% and total risk-based capital of 14.27% compared to 9.15%, 11.98% and 13.50% respectively in 1999. The following table sets forth the price range and cash dividends declared per share regarding common stock for the period indicated: (unaudited) Price Range Cash dividend High Low paid per share --------------------------------------------- Year 2000 First Quarter $ 21.25 $ 19.00 $ .17 Second Quarter 20.00 17.50 .17 Third Quarter 20.500 20.375 .17 Fourth Quarter 20.875 15.75 .20 Year 1999 First Quarter $ 24.00 $ 21.25 $ .14 Second Quarter 24.00 21.00 .14 Third Quarter 24.125 23.00 .14 Fourth Quarter 23.25 20.50 .17 The book value of the common stock was $17.99 at December 31, 2000, compared to $15.28 at prior year end. At year-end the stock price was $17.25 compared to $20.75 at December 31, 1999. NORWOOD FINANCIAL CORP Summary of Quarterly Results (unaudited) (dollars in thousands, except per share amounts) 2000 December 31 September 30 June 30 March 31 -------------------------------------------------------------------------- Net Interest income $3,311 $3,337 $3,300 $3,119 Provision for loan losses 145 120 120 95 Net realized gains on sales of securities 33 1 -- 1 Other income 578 689 610 577 Other expense 2,369 2,454 2,519 2,370 ------------------------------------------------ Income before income taxes 1,408 1,453 1,271 1,232 Income tax expense 399 414 347 344 ------------------------------------------------ NET INCOME $1,009 $1,039 $ 924 $ 888 ================================================ Basic earnings per share $ 0.61 $ 0.62 $ 0.56 $ 0.53 ================================================ Diluted earnings per share $ 0.61 $ 0.61 $ 0.56 $ 0.53 ================================================ 1999 December 31 September 30 June 30 March 31 -------------------------------------------------------------------------- Net Interest income $3,109 $3,186 $3,016 $2,823 Provision for loan losses 130 110 100 130 Net realized gains on sales of securities -- 1 34 24 Other income 507 546 400 442 Other expense 2,193 2,277 2,133 1,993 ------------------------------------------------ Income before income taxes 1,293 1,346 1,217 1,166 Income tax expense 367 426 369 352 ------------------------------------------------ NET INCOME $ 926 $ 920 $ 848 $ 814 ================================================ Basic earnings per share $ 0.56 $ 0.55 $ 0.50 $ 0.48 ================================================ Diluted earnings per share $ 0.55 $ 0.55 $ 0.50 $ 0.48 ================================================ ------------------------------------- 8 -------------------------------------- Norwood Financial Corp Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31 2000 1999 1998 --------------------------------------------------------------------------------------------------- Average Ave. Average Ave. Average Ave. Balance(2) Interest(1) Rate Balance(2) Interest Rate Balance(2) Interest Rate ASSETS Interest Earning Assets Federal Funds sold $ 521 $ 31 5.95% $ 2,031 $ 94 4.63% $ 1,108 $ 56 5.05% Interest bearing deposits with banks 210 6 2.86 755 15 1.99 1,678 75 4.47 Securities held to maturity 7,480 648 8.66 7,633 654 8.57 8,014 676 8.44 Securities available for sale Taxable 76,537 5,082 6.64 69,401 4,335 6.25 53,116 3,248 6.11 Tax-exempt 4,292 317 7.39 2,800 189 6.75 1,883 127 6.74 --------------------- -------------------- -------------------- Total securities available for sale 80,829 5,399 6.68 72,201 4,524 6.27 54,999 3,375 6.14 Loans Receivable(3,4) 211,174 18,217 8.63 196,005 16,303 8.32 186,877 16,316 8.73 --------------------- -------------------- -------------------- Total Interest earnings assets 300,214 24,301 8.09 278,625 21,590 7.75 252,676 20,498 8.11 Non-interest earning assets Cash and due from banks 7,130 7,409 6,451 Allowance for loan losses (3,354) (3,359) (3,277) Other assets 15,245 13,237 12,265 -------- -------- -------- Total non-interest earning assets 19,021 17,287 15,439 -------- -------- -------- TOTAL ASSETS $319,235 $295,912 $268,115 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest-bearing demand and Money Market $ 60,822 1,515 2.49 $ 58,076 1,397 2.41 $ 52,691 1,306 2.48 Savings 42,492 933 2.20 42,676 934 2.19 43,068 1,049 2.44 Time 111,778 6,097 5.45 107,152 5,520 5.15 104,980 5,647 5.38 --------------------- -------------------- -------------------- Total interest bearing deposits 215,092 8,545 3.97 207,904 7,851 3.78 200,739 8,002 3.99 Short-term borrowings 6,914 303 4.38 8,187 300 3.66 7,648 354 4.63 Other borrowings 33,883 2,029 5.99 17,464 964 5.52 2,000 121 6.05 --------------------- -------------------- -------------------- Total interest- bearing liabilities 255,889 10,877 4.25 233,555 9,115 3.90 210,387 8,477 4.03 ------- ------ ----- Non-interest bearing demand deposits 29,525 28,059 25,490 Other liabilities 5,746 6,921 6,093 -------- -------- -------- Total non-interest bearing liabilities 35,271 34,980 31,583 Stockholders' equity 28,075 27,377 26,145 -------- -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $319,235 $295,912 $268,115 ======== ======== ======== Net interest income (tax-equivalent basis) 13,424 3.84% 12,475 3.85% 12,021 4.08% ==== ==== ==== Tax-equivalent basis adjustment (357) (341) (280) ------- ------- ------- Net interest income $13,067 $12,134 $11,741 ======= ======= ======= Net Interest margin (tax-equivalent basis) 4.47% 4.48% 4.76% ==== ==== ====
------------- 1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. 2. Average balances have been calculated based on daily balances. 3. Loan balances include non-accrual loans and are net of unearned income. 4. Loan yields include the effect of amortization of deferred fees net of costs. ------------------------------------- 9 -------------------------------------- RATE/VOLUME ANALYSIS The following table shows fully taxable equivalent effect of changes in volumes and rate on interest income and interest expense.
(dollars in thousands) 2000 Compared to 1999 1999 Compared to 1998 Variance Due to Variance Due to ------------------------- ---------------------------- INTEREST EARNING ASSETS: Volume Rate Net Volume Rate Net ---------------------------------------------------------------------------------------------------------- Federal funds sold ($ 84) $ 21 ($ 63) $ 43 ($ 5) $ 38 Interest bearing deposits with banks (14) 5 (9) (30) (31) (61) Securities held to maturity (13) 7 (6) (33) 12 (21) Securities available for sale Taxable 463 284 747 1,016 71 1,087 Tax-exempt 109 19 128 62 -- 62 ------------------------------------------------------------- Total securities available for sale 572 303 875 1,078 71 1,149 Loans Receivable 1,293 621 1,914 778 (791) (13) ------------------------------------------------------------- Total interest earning assets 1,754 957 2,711 1,836 (744) 1,092 Interest bearing liabilities: Interest-bearing demand and money market 67 51 118 130 (39) 91 Savings (4) 3 (1) (9) (106) (115) Time 245 331 576 115 (242) (127) ------------------------------------------------------------- Total interest-bearing deposits 308 385 693 236 (387) (151) Short-term borrowings (51) 54 3 24 (78) (54) Other borrowings 977 89 1,066 854 (11) 843 ------------------------------------------------------------- Total interest bearing liabilities 1,234 528 1,762 1,114 (476) 638 ------------------------------------------------------------- Net interest income (tax-equivalent basis) $ 520 $ 429 $ 949 $ 722 ($268) $ 454 =============================================================
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. ------------------------------------- 10 ------------------------------------- [LOGO] Beard Miller Company LLP ----------- Certified Public Accountants and Consultants 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norwood Financial Corp. and its subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.. /s/Beard Miller Company LLP Harrisburg, Pennsylvania January 26, 2000 ------------------------------------- 11 ------------------------------------- NORWOOD FINANCIAL CORP CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999 ---------------------- (In Thousands) ASSETS Cash and due from banks $ 8,991 $ 8,430 Interest-bearing deposits with banks 153 398 Federal funds sold 2,550 1,970 ---------------------- Cash and cash equivalents 11,694 10,798 Securities available for sale 79,646 78,875 Securities held to maturity, fair value 2000 $ 7,786; 1999 $ 7,411 7,484 7,477 Loans receivable, net of allowance for loan losses 2000 $ 3,300; 1999 $ 3,344 213,177 201,816 Bank premises and equipment, net 6,201 6,739 Accrued interest receivable 1,983 1,646 Other assets 6,546 7,476 ---------------------- Total assets $ 326,731 $ 314,827 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 28,688 $ 26,848 Interest-bearing demand 30,556 26,660 Money market deposit accounts 29,643 31,987 Savings 41,571 42,152 Time 122,501 115,860 ---------------------- Total deposits 252,959 243,507 ---------------------- Short-term borrowings 7,860 8,600 Long-term debt 28,000 30,000 Accrued interest payable 3,128 2,385 Other liabilities 3,414 3,681 ---------------------- Total liabilities 295,361 288,173 ---------------------- STOCKHOLDERS' EQUITY Common stock, par value $ .10 per share; authorized 10,000,000 shares; issued 1,803,824 shares 180 180 Surplus 4,629 4,603 Retained earnings 28,441 25,763 Treasury stock, at cost 2000 59,831 shares; 1999 59,889 shares (1,213) (1,214) Accumulated other comprehensive income (loss) 488 (1,319) Unearned Employee Stock Ownership Plan (ESOP) shares (1,155) (1,359) ---------------------- Total stockholders' equity 31,370 26,654 ---------------------- Total liabilities and stockholders' equity $ 326,731 $ 314,827 ======================
See Notes to Consolidated Financial Statements ------------------------------------- 12 ------------------------------------- NORWOOD FINANCIAL CORP CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------ (In Thousands, Except Per Share Data) Interest income: Loans receivable, including fees $18,188 $16,249 $16,311 Securities: Taxable 5,082 4,335 3,248 Tax-exempt 637 557 530 Other 37 108 129 --------------------------- Total interest income 23,944 21,249 20,218 --------------------------- Interest expense: Deposits 8,545 7,851 8,002 Short-term borrowings 303 300 354 Long-term debt 2,029 964 121 --------------------------- Total interest expense 10,877 9,115 8,477 --------------------------- Net interest income 13,067 12,134 11,741 Provision for loan losses 480 470 720 --------------------------- Net interest income after provision for loan losses 12,587 11,664 11,021 --------------------------- Other income: Service charges and fees 1,486 1,235 1,087 Income from fiduciary activities 288 255 173 Net realized gains on sales of securities 35 59 48 Other 680 405 389 --------------------------- Total other income 2,489 1,954 1,697 --------------------------- Other expenses: Salaries and employee benefits 4,355 4,081 3,886 Occupancy 720 712 708 Furniture and equipment 514 475 534 Data processing related operations 432 409 290 Losses on lease residuals 910 385 156 Advertising 185 94 120 Professional fees 248 186 254 Taxes, other than income 271 251 249 Amortization of intangible assets 178 185 214 Other 1,899 1,818 1,678 --------------------------- Total other expenses 9,712 8,596 8,089 --------------------------- Income before income taxes 5,364 5,022 4,629 Income tax expense 1,504 1,514 1,393 --------------------------- Net income $ 3,860 $ 3,508 $ 3,236 =========================== Earnings per share: Basic $ 2.32 $ 2.09 $ 1.93 =========================== Diluted $ 2.31 $ 2.08 $ 1.91 ===========================
See Notes to Consolidated Financial Statements. ------------------------------------- 13 ------------------------------------- NORWOOD FINANCIAL CORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998
Accumu- lated Other Compre- hensive Unearned Common Retained Treasury Income ESOP Stock Surplus Earnings Stock (Loss) Shares Total --------------------------------------------------------------------------- (In Thousands) Balance, December 31, 1997 $ 180 $ 4,384 $ 20,844 $ (344) $ 1,280 $ (1,750) $ 24,594 -------- Comprehensive income: Net income -- -- 3,236 -- -- -- 3,236 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- 375 -- 375 -------- Total comprehensive income 3,611 -------- Cash dividends declared, $ .50 per share -- -- (840) -- -- -- (840) Stock options exercised -- 37 -- -- -- -- 37 Issuance of treasury stock -- -- -- 1 -- -- 1 Release of earned ESOP shares -- 121 -- -- -- 204 325 --------------------------------------------------------------------------- Balance, December 31, 1998 180 4,542 23,240 (343) 1,655 (1,546) 27,728 -------- Comprehensive income: Net income -- -- 3,508 -- -- -- 3,508 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- (2,974) -- (2,974) -------- Total comprehensive income 534 Cash dividends declared, $ .59 per share -- -- (985) -- -- -- (985) Stock options exercised -- (9) -- 70 -- -- 61 Acquisition of treasury stock -- -- -- (941) -- -- (941) Release of earned ESOP shares -- 70 -- -- -- 187 257 --------------------------------------------------------------------------- Balance, December 31, 1999 180 4,603 25,763 (1,214) (1,319) (1,359) 26,654 -------- Comprehensive income: Net income -- -- 3,860 -- -- -- 3,860 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- 1,807 -- 1,807 -------- Total comprehensive income 5,667 -------- Cash dividends declared, $ .71 per share -- -- (1,182) -- -- -- (1,182) Issuance of treasury stock -- -- -- 1 -- -- 1 Release of earned ESOP shares -- 26 -- -- -- 204 230 --------------------------------------------------------------------------- Balance, December 31, 2000 $ 180 $ 4,629 $ 28,441 $ (1,213) $ 488 $ (1,155) $ 31,370 ===========================================================================
See Notes to Consolidated Financial Statements. ------------------------------------- 14 ------------------------------------- NORWOOD FINANCIAL CORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,860 $ 3,508 $ 3,236 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 480 470 720 Depreciation 612 670 670 Amortization of intangible assets 178 185 214 Deferred income taxes (298) (63) 1,317 Net realized gains on sales of securities (35) (59) (48) Earnings on life insurance policy (166) (41) -- Gain (loss) on sale of assets (80) (9) 22 Gain on sale of mortgage loans (231) (19) (100) Mortgage loans originated for sale (1,415) (1,714) (7,126) Proceeds from sale of mortgage loans 1,646 1,733 7,226 Increase in accrued interest receivable (337) (205) (83) Increase (decrease) in accrued interest payable 743 102 (82) Other, net 1,075 751 980 -------------------------------- Net cash provided by operating activities 6,032 5,309 6,946 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 13,811 7,696 5,012 Proceeds from maturities and principal reductions on mortgage-backed securities 7,832 14,421 16,031 Purchases (19,653) (43,240) (33,417) Securities held to maturity, proceeds from maturities -- 175 515 Net increase in loans (13,002) (19,909) (3,203) Purchase of life insurance policy -- (3,070) -- Purchase of bank premises and equipment (351) (311) (446) Proceeds from sales of assets 439 197 1,000 -------------------------------- Net cash used in investing activities (10,924) (44,041) (14,508) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 9,452 9,740 7,013 Net increase (decrease) in short-term borrowings (740) 824 2,786 Repayments of long-term debt (15,000) (2,000) -- Proceeds from long-term debt 13,000 30,000 -- Stock options exercised -- 61 37 Proceeds from (acquisition of) treasury stock 1 (941) 1 Release of ESOP shares 204 187 204 Cash dividends paid (1,129) (939) (805) -------------------------------- Net cash provided by financing activities 5,788 36,932 9,236 -------------------------------- Increase (decrease) in cash and cash equivalents 896 (1,800) 1,674 Cash and cash equivalents: Beginning of year 10,798 12,598 10,924 -------------------------------- End of year $ 11,694 $ 10,798 $ 12,598 ================================
See Notes to Consolidated Financial Statements. ------------------------------------- 15 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING POLICIES Nature of operations: Norwood Financial Corp. (Company) is a one bank holding company. Wayne Bank (Bank) is a wholly-owned subsidiary of the Company. The Bank is a state-chartered bank located in Honesdale, Pennsylvania. The Company derives substantially all of its income from the bank related services which include interest earnings on commercial mortgage, residential real estate, commercial and consumer loan financings, as well as interest earnings on investment securities and deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All intercompany accounts and transactions have been eliminated in consolidation. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the period to maturity. 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 receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. The Company has a portfolio of 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. The accrual of interest is generally 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 is maintained at a level considered adequate to provide for losses that can be ------------------------------------- 16 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING POLICIES (CONTINUED) reasonably anticipated. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. 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 less cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses. Other real estate is included in other assets. Intangible assets: Intangible assets are comprised of goodwill and core deposit acquisition premiums and are included in other assets. Goodwill is amortized over a fifteen year period. Core deposit acquisition premiums, which were developed by specific core deposit life studies, are being amortized over seven to nine years. Annual assessments of the carrying values and remaining amortization periods of intangible assets are made to determine possible carrying value impairment and appropriate adjustments, as deemed necessary. Income taxes: Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiary file a consolidated federal income tax return. Advertising costs: The Company follows the policy of charging the costs of advertising to expense as incurred. Earnings per share: Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Cash flow information: For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the years ended December 31, 2000, 1999 and 1998, were $ 10,134,000, $ 9,013,000 and $ 8,560,000, respectively. Cash payments for income taxes for the years ended December 31, 2000, 1999 and 1998 were $ 2,200,000, $ 994,000 and $ 29,000, respectively. Non-cash investing activities for 2000, 1999 and 1998 ------------------------------------- 17 ------------------------------------- NORWOOD FINANCIAL CORP SUMMARY OF ACCOUNTING POLICIES (CONTINUED) included foreclosed mortgage loans transferred to real estate owned and repossession of other assets of $1,099,000, $ 1,280,000 and $ 1,579,000, 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: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows: Years Ended December 31, 2000 1999 1998 ---------------------------- (In Thousands) Unrealized holding gains (losses) on available for sale securities $ 2,790 $(4,451) $ 618 Less reclassification adjustment for gains realized in income 35 59 48 ---------------------------- Net unrealized gains (losses) 2,755 (4,510) 570 Income tax (benefit) 948 (1,536) 195 ---------------------------- Net of tax amount $ 1,807 $(2,974) $ 375 ============================ 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. New accounting standards: In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (as amended by Statement Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities". This statement and its amendments establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. The statement requires that changes in the fair value of derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted the statement on January 1, 2001. The adoption of the statement did not have a significant impact on the financial condition or results of operations of the Company. In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement replaces SFAS No. 125 of the same name. It revises the standards of securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than these exceptions, earlier or retroactive application of its accounting provision is not permitted. The adoption of the statement did not have a significant impact on the Company. ------------------------------------- 18 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2000: Available for sale: U.S. Government agencies $ 20,963 $ 41 $ (125) $ 20,879 States and political subdivisions 8,523 70 (84) 8,509 Corporate obligations 7,969 113 (129) 7,953 Mortgage-backed securities 38,543 27 (418) 38,152 ------------------------------------------- 75,998 251 (756) 75,493 Equity securities 2,894 1,266 (7) 4,153 ------------------------------------------- $ 78,892 $ 1,517 $ (763) $ 79,646 =========================================== Held to maturity: States and political subdivisions $ 7,484 $ 302 $ -- $ 7,786 =========================================== December 31, 1999: Available for sale: U.S. Treasury securities $ 4,006 $ 2 $ (20) $ 3,988 U.S. Government agencies 18,781 -- (611) 18,170 States and political subdivisions 4,925 -- (251) 4,674 Corporate obligations 2,520 -- (213) 2,307 Mortgage-backed securities 47,766 -- (2,243) 45,523 ------------------------------------------- 77,998 2 (3,338) 74,662 Equity securities 2,878 1,335 -- 4,213 ------------------------------------------- $ 80,876 $ 1,337 $ (3,338) $ 78,875 =========================================== Held to maturity: States and political subdivisions $ 7,477 $ 30 $ (96) $ 7,411 ===========================================
Equity securities consist of bank holding companies and Federal Home Loan Bank stock. ------------------------------------- 19 ------------------------------------- NORWOOD FINANCIAL CORP SECURITIES (CONTINUED) The amortized cost and fair value of securities as of December 31, 2000, 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. Securities Available Securities Held For Sale To Maturity ------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------- (In Thousands) Due in one year or less $ 2,001 $ 1,994 $ -- $ -- Due after one year through five years 22,125 22,265 -- -- Due after five years through ten years 4,305 4,303 100 101 Due after ten years 9,024 8,779 7,384 7,685 ------------------------------------- 37,455 37,341 7,484 7,786 Mortgage-backed securities 38,543 38,152 -- -- Equity securities 2,894 4,153 -- -- ------------------------------------- $78,892 $79,646 $ 7,484 $ 7,786 ===================================== Gross realized gains and gross realized losses on sales of securities available-for-sale were $ 51,000 and $ 16,000, respectively, in 2000, $ 65,000 and $ 6,000, respectively, in 1999 and $ 54,000 and $ 6,000, respectively, in 1998. Securities with a carrying value of $ 37,799,000 and $ 41,285,000 at December 31, 2000 and 1999 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: 2000 1999 ------------------- (In Thousands) Real estate: Residential $ 59,517 $ 56,967 Commercial 56,815 51,562 Construction 2,425 3,339 Commercial, financial and agricultural 17,102 15,672 Consumer loans to individuals 67,286 54,045 Lease financing, net of unearned income 13,644 23,974 216,789 205,559 ------------------- Less: Unearned income and deferred fees 312 399 Allowance for loan losses 3,300 3,344 ------------------- $213,177 $201,816 =================== ------------------------------------- 20 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The Bank's net investment in direct financing leases at December 31 consists of: 2000 1999 -------------------- (In Thousands) Minimum lease payments receivable $ 4,172 $ 9,061 Estimated unguaranteed residual values 10,681 17,759 Unearned income (1,209) (2,846) -------------------- $ 13,644 $ 23,974 ==================== The following table presents changes in the allowance for loan losses: Years Ended December 31, 2000 1999 1998 ----------------------------- (In Thousands) Balance, beginning $ 3,344 $ 3,333 $ 3,250 Provision for loan losses 480 470 720 Recoveries 244 173 152 Loans charged off (768) (632) (789) ----------------------------- Balance, ending $ 3,300 $ 3,344 $ 3,333 ============================= The recorded investment in impaired loans, not requiring an allowance for loan losses was $ 354,000 and $ 360,000 at December 31, 2000 and 1999, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $ -0- at both December 31, 2000 and 1999. For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in these impaired loans was $ 364,000, $ 365,000 and $ 669,000 and the interest income recognized on these impaired loans was $ -0-, $ -0- and $ 77,000, respectively. PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 2000 1999 -------------------- (In Thousands) Land and improvements $ 924 $ 944 Buildings and improvements 6,923 7,225 Furniture and equipment 2,755 2,469 -------------------- 10,602 10,638 Less accumulated depreciation (4,401) (3,899) -------------------- $ 6,201 $ 6,739 ==================== ------------------------------------- 21 ------------------------------------- NORWOOD FINANCIAL CORP DEPOSITS Aggregate time deposits in denominations of $ 100,000 or more were $ 31,731,000 and $ 32,487,000 at December 31, 2000 and 1999, respectively. At December 31, 2000, the scheduled maturities of time deposits are as follows (in thousands): 2001 $ 105,760 2002 9,115 2003 4,359 2004 1,959 2005 1,308 ---------- $ 122,501 ========== BORROWINGS Short-term borrowings at December 31 consist of the following: 2000 1999 -------------- (In Thousands) Securities sold under agreements to repurchase $6,860 $7,600 U.S. Treasury demand notes 1,000 1,000 -------------- $7,860 $8,600 =============== The outstanding balances and related information of short-term borrowings are summarized as follows: Years Ended December 31, 2000 1999 ----------------------- (In Thousands) Average balance during the year $6,914 $8,187 Average interest rate during the year 4.38% 3.66% Maximum month-end balance during the year $9,347 $8,600 Securities sold under agreements to repurchase generally mature within one day to one year from the transaction date. Securities with amortized costs and fair values of $ 8,838,000 and $ 8,814,000 at December 31, 2000 and $ 8,684,000 and $ 8,415,000 at December 31, 1999 were pledged as collateral for these agreements. The securities underlying the agreements were under the Company's control. The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $ 20,000,000 which expires in March 2001. There were no borrowings under this line of credit at December 31, 2000 and 1999. ------------------------------------- 22 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BORROWINGS (CONTINUED) Long-term debt consisted of the following at December 31, 2000 and 1999 (in thousands): 2000 1999 ----------------- Notes with the Federal Home Loan Bank (FHLB): Fixed note due January 2000 at 5.28% $ -- $ 3,000 Fixed note due January 2000 at 5.78% -- 4,000 Fixed note due January 2000 at 6.04% -- 2,000 Fixed note due February 2000 at 5.72% -- 3,000 Fixed note due March 2000 at 5.78% -- 3,000 Fixed note due January 2001 at 6.68% 2,000 -- Adjustable note due February 2001 at 6.6825% 6,000 -- Convertible note due April 2005 at 6.13% 5,000 -- Convertible note due December 2006 at 6.19% 5,000 5,000 Convertible note due April 2009 at 4.83% 5,000 5,000 Convertible note due April 2009 at 5.07% 5,000 5,000 ----------------- $28,000 $30,000 ================= The Bank's maximum borrowing capacity with the Federal Home Loan Bank was $ 95,275,000 of which $ 28,000,000 was outstanding at December 31, 2000. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank. EMPLOYEE BENEFIT PLANS The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan. The plan permits employees to make pre-tax contributions up to 15% of the employee's compensation. The amount of contributions to the plan, including matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21 are eligible to participate in the plan after one year of employment. Employee contributions are vested at all times, and any Company contributions are fully vested after five years. The Company's contributions are expensed as the cost is incurred, funded currently, and amounted to $ 145,000, $115,000 and $ 175,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company has 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 $ 214,000, $285,000 and $ 324,000 for the years ended December 31, 2000, 1999 and 1998, respectively. ------------------------------------- 23 ------------------------------------- NORWOOD FINANCIAL CORP EMPLOYEE BENEFIT PLANS (CONTINUED) The status of the ESOP shares are as follows: 2000 1999 ----------------------- Allocated shares 49,083 37,665 Shares released from allocation 2,523 1,327 Unreleased shares 69,606 82,220 ----------------------- Total ESOP shares 121,212 121,212 ======================= Fair value of unreleased shares $1,201,000 $1,706,000 ======================= INCOME TAXES The components of the provision for federal income taxes are as follows: Years Ended December 31, 2000 1999 1998 ----------------------------- (In Thousands) Current $ 1,802 $ 1,577 $ 76 Deferred (298) (63) 1,317 ----------------------------- $ 1,504 $ 1,514 $ 1,393 ============================= 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, 2000 1999 1998 --------------------------- Tax at statutory rates 34.0 % 34.0 % 34.0 % Tax exempt interest income, net of interest expense disallowance (4.1) (4.0) (3.6) Low-income housing tax credit (1.1) (1.2) (1.3) Other (0.8) 1.3 1.0 --------------------------- 28.0 % 30.1 % 30.1 % ===========================
The income tax provision includes $ 12,000, $ 20,000 and $ 16,000 of income taxes relating to realized securities gains for the years ended December 31, 2000, 1999 and 1998, respectively. ------------------------------------- 24 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES (CONTINUED) The net deferred tax liability included in other liabilities in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities: 2000 1999 ------------------ (In Thousands) Deferred tax assets: Allowance for loan losses $ 865 $ 786 Deferred loan origination fees -- 90 Net unrealized loss on securities -- 680 Deferred compensation 58 31 Core deposit intangible 153 136 Minimum tax credit carryforward -- 834 Other 30 58 ------------------ Total deferred tax assets 1,106 2,615 ------------------ Deferred tax liabilities: Net unrealized gain on securities 266 -- Premises and equipment 195 107 Lease financing 2,991 4,211 Other 10 5 ------------------ Total deferred tax liabilities 3,462 4,323 ------------------ Net deferred tax liability $(2,356) $(1,708) ================== Net operating loss carryforwards of approximately $ 1,570,000 were utilized in 1999. TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS Certain directors and executive officers of the Bank, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, were in the ordinary course of business at normal terms, including interest rates and collateralization, prevailing at the time and did not represent more than normal risks. At December 31, 2000 and 1999, such loans amounted to $ 4,325,000 and $ 3,339,000, respectively. During 2000, new loans to such related parties totaled $1,548,000 and repayments aggregated $ 562,000. REGULATORY MATTERS AND STOCKHOLDERS' EQUITY The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material affect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management ------------------------------------- 25 ------------------------------------- NORWOOD FINANCIAL CORP REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED) believes, as of December 31, 2000, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2000, 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 presented in the table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------- (Dollars In Thousands) As of December 31, 2000: Total capital (to risk weighted assets) $33,081 14.25% $>18,573 >8.00% $>23,216 >10.00% - - - - Tier 1 capital (to risk weighted assets) 29,632 12.76% > 9,286 >4.00% >13,929 > 6.00% - - - - Tier 1 capital (to average assets) 29,632 9.14% >12,971 >4.00% >16,214 > 5.00% - - - - As of December 31, 1999: Total capital (to risk weighted assets) $29,691 13.47% $>17,632 >8.00% $>20,040 >10.00% - - - - Tier 1 capital (to risk weighted assets) 26,384 11.97% > 8,816 >4.00% >13,224 > 6.00% - - - - Tier 1 capital (to average assets) 26,384 8.97% >11,767 >4.00% >14,709 > 5.00% - - - -
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, 2000 and 1999 was approximately $2,315,000 and $ 1,888,000, respectively. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2000, $ 25,581,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed above. STOCK OPTION PLANS The Company adopted a Stock Option Plan for the officers and employees of the Company in 1995. An aggregate of 500,000 shares of authorized but unissued common stock of the Company were reserved for issuance under the Plan. In 1999, the Company adopted the Directors Stock Compensation Plan, with an aggregate of 17,600 shares reserved for 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. ------------------------------------- 26 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTION PLANS (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2000 1999 1998 ------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------- Outstanding, beginning of year 80,330 $ 19.28 67,450 $ 18.40 55,570 $ 16.72 Granted 16,000 16.31 16,500 22.24 15,500 24.00 Exercised -- -- (3,620) 16.52 (2,232) 16.46 Forfeited -- -- -- -- (1,388) 16.63 ------------------------------------------------------------------- Outstanding, end of year 96,330 $ 18.79 80,330 $ 19.28 67,450 $ 18.40 ==================================================================== Exercisable at end of year 80,330 $ 19.28 ===================
Exercise prices for options outstanding as of December 31, 2000 ranged from $ 16.31 to $ 24.00 per share. The weighted average remaining contractual life is 7.5 years. The Company applies APB Opinion 25 and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under the plans 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, 2000 1999 1998 -------------------------- (In Thousands) Net income: As reported $3,860 $ 3,508 $3,236 Pro forma 3,796 3,375 3,154 Earnings per share: As reported 2.32 2.09 1.93 Pro forma 2.28 2.02 1.88 Earnings per share (assuming dilution): As reported 2.31 2.08 1.91 Pro forma 2.27 2.00 1.86 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, 2000 1999 1998 --------------------------- Dividend yield 3.54% 2.46% 2.46% Expected life 8 years 8 years 8 years Expected volatility 19.10% 16.40% 39.80% Risk-free interest rate 5.26% 4.65% 4.65% Weighted average fair value of options granted $3.29 $3.87 $4.30 ------------------------------------- 27 ------------------------------------- NORWOOD FINANCIAL CORP EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, 2000 1999 1998 ------------------------------------ Numerator, net income $3,860,000 $3,508,000 $3,236,000 ==================================== Denominator: Denominator for basic earnings per share, weighted average shares 1,665,553 1,674,653 1,679,411 Effect of dilutive securities, employee stock options 5,963 11,690 16,674 ------------------------------------ Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 1,671,516 1,686,343 1,696,085 ==================================== Basic earnings per common share $ 2.32 $ 2.09 $ 1.93 ==================================== Diluted earnings per common share $ 2.31 $ 2.08 $ 1.91 ====================================
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's financial instrument commitments is as follows: December 31, 2000 1999 ----------------- (In Thousands) Commitments to extend credit $16,401 $21,324 Standby letters of credit 753 868 ----------------- $17,154 $22,192 ================= Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer and generally consists of real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, when deemed necessary, supporting those commitments. CONCENTRATIONS OF CREDIT RISK The Bank operates primarily in Wayne, Pike and Monroe Counties, Pennsylvania and, accordingly, has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region's economy. These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal lending limits to any single borrower or group of borrowers. ------------------------------------- 28 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at December 31, 2000 and 1999: o For cash and due from banks, interest-bearing deposits with banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. o For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. o The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Disclosure of the fair value of leases receivable is not required and has not been included in the table below. o The fair value of accrued interest receivable and accrued interest payable is the carrying amount. o The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits for similar remaining maturities. o The fair value of short-term borrowings approximate their carrying amount. o The fair value of long-term debt is estimated using discounted cash flow analyses based upon the Company's current borrowing rates for similar types of borrowing arrangements. o The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements. The estimated fair values of the Company's financial instruments are as follows:
December 31, 2000 December 31, 1999 ------------------------------------------ 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 $ 11,694 $ 11,694 $ 10,798 $ 10,798 Securities 87,130 87,432 86,352 86,286 Loans receivable, net 199,533 200,211 177,842 176,555 Accrued interest receivable 1,983 1,983 1,646 1,646 Financial liabilities: Deposits 252,959 252,903 243,507 244,033 Short-term borrowings 7,860 7,860 8,600 8,600 Long-term debt 28,000 28,270 30,000 29,693 Accrued interest payable 3,128 3,128 2,385 2,385 Off-balance sheet financial instruments: Commitments to extend credit and outstanding letters of credit -- -- -- --
------------------------------------- 29 ------------------------------------- NORWOOD FINANCIAL CORP NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION Balance Sheets December 31, ----------------- 2000 1999 ----------------- (In Thousands) ASSETS Cash on deposit in bank subsidiary $ 682 $ 510 Securities available for sale 190 531 Investment in bank subsidiary 30,911 25,978 Other assets 16 37 ----------------- $31,799 $27,056 ================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES $ 429 $ 402 STOCKHOLDERS' EQUITY 31,370 26,654 ----------------- $31,799 $27,056 ================= Statements of Income Year Ended December 31, ----------------------- 2000 1999 1998 ----------------------- (In Thousands) Income: Dividends from bank subsidiary $1,182 $ 983 $ 839 Interest income from bank subsidiary 120 119 139 Other interest income 18 32 37 Net realized gains on sales of securities 15 -- -- ------------------------ 1,335 1,134 1,015 Expenses 143 65 75 ------------------------ Income before income taxes 1,192 1,069 940 Income tax expense 2 29 40 ------------------------ 1,190 1,040 900 Equity in undistributed earnings of subsidiary 2,670 2,468 2,336 ------------------------ Net income $3,860 $3,508 $3,236 ======================== ------------------------------------- 30 ------------------------------------- NORWOOD FINANCIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED) Statements of Cash Flows
Year Ended December 31, 2000 1999 1998 ------------------------------ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,860 $ 3,508 $ 3,236 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (2,670) (2,468) (2,336) Net realized gain on sale of securities (15) -- -- Other, net 40 112 155 ------------------------------ Net cash provided by operating activities 1,215 1,152 1,055 ------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in bank subsidiary (400) -- -- Purchase of securities available for sale (78) (292) -- Proceeds from sale and maturity of securities available for sale 359 -- -- ------------------------------ Net cash used in investing activities (119) (292) -- ------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Stock options exercised -- 61 37 Acquisition of treasury stock -- (941) -- Proceeds from issuance of treasury stock 1 -- 1 Release of ESOP shares 204 187 204 Cash dividends paid (1,129) (939) (805) ------------------------------ Net cash used in financing activities (924) (1,632) (563) ------------------------------ Increase (decrease) in cash and cash equivalents 172 (772) 492 Cash and cash equivalents: Beginning 510 1,282 790 ------------------------------ Ending $ 682 $ 510 $ 1,282 ==============================
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