-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BK6wEMI1OGUR6keMPSEdpROF0lw0Gr0T4f1nJ5jbCOF7kNhIAtPgItN7ZAq0PyDn Y61dUTXQyEg1js7iUw8VUQ== 0000946275-08-000234.txt : 20080314 0000946275-08-000234.hdr.sgml : 20080314 20080314134015 ACCESSION NUMBER: 0000946275-08-000234 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080314 DATE AS OF CHANGE: 20080314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1207 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28364 FILM NUMBER: 08688761 BUSINESS ADDRESS: STREET 1: 717 MAIN ST STREET 2: PO BOX 269 CITY: HONESDALE STATE: PA ZIP: 18431 BUSINESS PHONE: 7172531455 10-K 1 f10k_123107-0160.htm FORM 10-K 12-31-07 NORWOOD FINANCIAL CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One):

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007,

 

Or

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________

 

Commission File No. 0-28364

 

NORWOOD FINANCIAL CORP.

(Exact Name of Registrant as Specified in its Charter)

 

Pennsylvania

 

23-2828306

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

717 Main Street, Honesdale, Pennsylvania

 

 

18431

 

(Address of Principal Executive Offices)

 

 

(Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code: (570) 253-1455

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $.10 par value

 

The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x NO  o YES

 

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    x NO   o YES

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o Yes x No

 

As of March 12, 2008, there were 2,740,149 shares outstanding of the registrant’s Common Stock.

 

The Registrant’s voting stock trades on the NASDAQ Global Market under the symbol “NWFL.” The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant’s Common Stock was sold as of June 30, 2007, $32.75 per share, was $76,038,655 based on 2,321,791 shares of Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1.

Portions of the Annual Report to Stockholders for the Fiscal Year ended December 31, 2007. (Parts I, II, and IV)

2.    

Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders. (Part III)


 

NORWOOD FINANCIAL CORP.

FORM 10-K

 

Table of Contents

 

Part I

 

Page

 

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

19

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

25

Item 4.

Submission of Matters to a Vote of Security Holders

25

 

Part II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities

 

26

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

26

Item 8.

Financial Statements and Supplementary Data

26

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

26

Item 9A.

Controls and Procedures

27

Item 9B.

Other Information

27

 

Part III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

27

Item 11.

Executive Compensation

27

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

28

Item 13.

Certain Relationships and Related Transactions and Director Independence

29

Item 14.

Principal Accounting Fees and Services

29

 

Part IV

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

29

 

Signatures

31

 

 

 

 

 

 

 

 

 

 

 

2

 

PART I

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 as detailed in Item 1A include:

 

 

•

our ability to effectively manage future growth

 

•

loan losses in excess of our allowance

 

•

risks inherent in commercial lending

 

•

real estate collateral which is subject to declines in value

 

•

regional economic factors

 

•

loss of senior officers

 

•

comparatively low legal lending limits

 

•

limited market for the Company’s stock

 

•

restrictions on ability to pay dividends

 

•

common stock may lose value

 

•

competitive environment

 

•

issuing additional shares may dilute ownership

 

•

extensive and complex governmental regulation and associated cost

 

•

interest rate risks

 

Norwood Financial Corp. 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.

 

Item 1. Business

 

General

 

Norwood Financial Corp. (the “Company”), a Pennsylvania corporation, is the holding company for Wayne Bank. On March 29, 1996, the Bank completed a holding company reorganization and became a wholly owned subsidiary of the Company. As of December 31, 2007, the Company had total assets of $480.6 million, deposits of $370.0 million, and stockholders’ equity of $55.8 million. The Company’s ratio of average equity to average assets was 11.48%, 11.23% and 11.19% for fiscal years 2007, 2006 and 2005, respectively.

 

Wayne Bank is a Pennsylvania chartered commercial bank headquartered in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne County Savings Bank. Wayne County Savings Bank changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank’s deposits are currently insured to applicable limits by the Deposit Insurance Fund (“DIF”) as administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is regulated by the Pennsylvania Department of Banking (“PDB”) and the FDIC.

 

The Bank is an independent community bank with six offices in Wayne County, three offices in Pike County and three offices in Monroe County. The Bank offers a wide variety of personal and business credit services and trust and investment products and real estate settlement services to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves.

 

 

3

 

The Bank primarily serves the Pennsylvania counties of Wayne, Pike and Monroe, and to a much lesser extent, the counties of Lackawanna and Susquehanna. In addition, the Bank operates twelve automated teller machines, one in each of its branch locations. The Company’s main office is located at 717 Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455. The Bank maintains a website at www.waynebank.com.

 

Competition

 

The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area of Wayne, Pike and Monroe Counties, Pennsylvania. Based on data compiled by the FDIC as of June 30, 2007 (the latest date for which data is available), the Bank had the third largest share of FDIC-insured deposits in Wayne County with approximately 20.9%, second in Pike County with 16.8%, and 10th in Monroe County with 2.0%. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers.  

 

Personnel

 

As of December 31, 2007, the Bank had 112 full-time and 5 part-time employees. None of the Bank’s employees are represented by a collective bargaining group.

 

Lending Activities

 

The Bank’s loan products include loans for personal and business use. This includes mortgage lending to finance principal residences and to a lesser extent second home dwellings. The products include adjustable rate mortgages with terms up to 30 years which are retained and serviced through the Bank, fixed rate mortgage products which may be sold, servicing retained, in the secondary market through the Federal National Mortgage Association (Fannie Mae) or held in the Bank’s portfolio subject to the extent consistent with our asset/liability management strategies. Fixed-rate home equity loans are originated on terms up to 180 months, as well as offering a home equity line of credit tied to prime rate. The Bank to a lesser extent also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a limited network of dealers in Northeast Pennsylvania, but is allowing this portfolio to run-off. At December 31, 2007, there were $11.6 million of indirect loans.

 

Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structures. Commercial lending activities include lines of credit, revolving credit, term loans, mortgages, various forms of secured lending and a limited amount of letter of credit facilities. The structure may be fixed, immediately repricing tied to the prime rate or adjustable at set intervals.

 

Adjustable-rate loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for payment default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate may also be limited by the maximum periodic interest rate adjustment permitted in certain adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank.

 

4

 

Consumer lending, including indirect financing provides benefits to the Bank’s asset/liability management program by reducing the Bank’s exposure to interest rate changes, due to their generally shorter terms. Such loans may entail additional credit risks compared to owner-occupied residential mortgage lending especially when unsecured or secured by collateral such as automobiles that depreciate rapidly. As a result, the Bank has de-emphasized the indirect lending product line.

 

Commercial lending including real-estate related loans entail significant additional risks when compared with residential real estate and consumer lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and market conditions for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. The liquidation of commercial property is often more costly and may involve more time to sell than residential real estate. The Bank offsets such factors with requiring more owner equity, a lower loan to value ratio and by obtaining the personal guaranties of the principals. In addition, a majority of the Bank’s commercial real estate portfolio is owner occupied property.

 

Due to the type and nature of the collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency.

 

There are additional risks associated with indirect automobile lending since we must rely on the automobile dealer to provide accurate information to us and accurate disclosures to the borrowers. These loans are principally done on a non-recourse basis. We seek to mitigate these risks by only dealing with dealers with whom we have a long-standing relationship.

 

Loan Solicitation and Processing

 

The Bank has established various lending limits for its officers and also maintains an Officer Loan Committee to approve higher loan amounts. The loan committee is comprised of the President and Chief Executive Officer, Senior Lending Officer and other Bank officers. The Loan Committee has the authority to approve all loans up to set limits based on the type of loan and the collateral. Requests in excess of these limits must be submitted to the Directors’ Loan Committee or Board of Directors for approval. Additionally, the President and Chief Executive Officer, and the Senior Lending Officer and other officers have the authority to approve secured and unsecured loans up to amounts approved by the Board of Directors and maintained in the Bank’s Loan Policy. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to the loan committee for approval.

 

Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable.

 

Loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral and title insurance, and these applicable insurances must be maintained during the full term of the loan.

 

5

 

Types of Loans. Set forth below is selected data relating to the composition of the Bank’s loan portfolio at the dates indicated.

 

 

 

As of December 31,

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

 

(dollars in thousands)

Type of Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

29,159

 

8.8

 

 

$

34,019

 

10.8

 

 

$

26,755

 

9.2

 

 

$

20,263

 

7.9

 

 

$

17,022

 

7.3

 

Real Estate-Construction

 

 

20,404

 

6.2

 

 

 

18,955

 

6.0

 

 

 

5,944

 

2.0

 

 

 

4,890

 

1.9

 

 

 

5,904

 

2.5

 

Real Estate-Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential.

 

 

129,888

 

39.2

 

 

 

113,783

 

36.0

 

 

 

100,705

 

34.6

 

 

 

90,606

 

35.5

 

 

 

77,459

 

33.1

 

Commercial

 

 

133,593

 

40.3

 

 

 

127,640

 

40.4

 

 

 

133,495

 

45.8

 

 

 

111,164

 

43.6

 

 

 

96,276

 

41.1

 

Lease financing, net of unearned income

 

 

—

 

—

 

 

 

—

 

—

 

 

 

—

 

—

 

 

 

—

 

—

 

 

 

316

 

.1

 

Consumer Loans to Individuals.

 

 

18,526

 

5.5

 

 

 

21,520

 

6.8

 

 

 

24,353

 

8.4

 

 

 

28,193

 

11.1

 

 

 

37,219

 

15.9

 

 

 

 

331,570

 

100.0

 

 

 

315,917

 

100.0

 

 

 

291,252

 

100.0

 

 

 

255,116

 

100.0

 

 

 

234,196

 

100.0

 

Unearned income and deferred fees

 

 

(274

)

 

 

 

 

(350

)

 

 

 

 

(362

)

 

 

 

 

(359

)

 

 

 

 

(463

)

 

 

Allowance for loan losses

 

 

(4,081

)

 

 

 

 

(3,828

)

 

 

 

 

(3,669

)

 

 

 

 

(3,448

)

 

 

 

 

(3,267

)

 

 

 

 

$

327,215

 

 

 

 

$

311,739

 

 

 

 

$

287,221

 

 

 

 

$

251,309

 

 

 

 

$

230,466

 

 

 

 

 

 

 

 

6

 

Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for selected categories of loans as of December 31, 2007. Scheduled repayments are reported in the maturity category in which payment is due.

 

 

 

 

Less than
One Year

 

One to
Five Years

 

Over
Five Years

 

Total

 

 

 

(In thousands)

 

Commercial, Financial
and Agricultural

 

$

10,210

 

$

7,838

 

$

11,111

 

$

29,159

 

Real Estate - Construction

 

 

20,404

 

 

—

 

 

—

 

 

20,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

30,614

 

$

7,838

 

$

11,111

 

$

49,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with fixed rates

 

$

11,249

 

$

5,444

 

$

6,345

 

$

15,518

 

Loans with floating rates

 

 

19,635

 

 

2,394

 

 

4,766

 

 

26,795

 

Total

 

$

30,614

 

$

7,838

 

$

11,111

 

$

49,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing Assets. The following table sets forth information regarding non-accrual loans, foreclosed real estate owned and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated. The Bank did not have any loans accounted for as troubled debt restructurings at the dates indicated. For the year ended December 31, 2007, interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $6,000 of which $1,000 was collected.

 

 

7

 

 

 

As of December 31,

 

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

 

2003

 

 

 

(dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and all other

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Real estate

 

 

109

 

 

 

392

 

 

 

330

 

 

 

32

 

 

 

125

 

Consumer

 

 

2

 

 

 

17

 

 

 

11

 

 

 

8

 

 

 

—

 

Total

 

 

111

 

 

 

409

 

 

 

341

 

 

 

40

 

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing loans which are contractually past-due 90 days or more:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and all other

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Real estate

 

 

49

 

 

 

—

 

 

 

—

 

 

 

5

 

 

 

—

 

Consumer

 

 

3

 

 

 

—

 

 

 

12

 

 

 

22

 

 

 

18

 

Total

 

 

52

 

 

 

—

 

 

 

12

 

 

 

27

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

 

163

 

 

 

409

 

 

 

353

 

 

 

67

 

 

 

143

 

Foreclosed real estate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total non-performing assets

 

$

163

 

 

$

409

 

 

$

353

 

 

$

67

 

 

$

143

 

Total non-performing loans to total loans

 

 

.05

%

 

 

.13

%

 

 

.12

%

 

 

.03

%

 

 

.06

%

Total non-performing loans to total assets

 

 

.03

%

 

 

.09

%

 

 

.08

%

 

 

.02

%

 

 

.04

%

Total non-performing assets to total assets

 

 

.03

%

 

 

.09

%

 

 

.08

%

 

 

.02

%

 

 

.04

%

 

The recorded investment in impaired loans, not requiring an allowance for loan losses was $3,208,000 and $290,000 at December 31, 2007 and 2006, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2007 and 2006. The related allowance for loan losses associated with these loans was $-0- at December 31, 2007 and 2006. For the years ended December 31, 2007, 2006 and 2005, the average recorded investment in these impaired loans was $3,127,000, $286,000 and $316,000 and the interest income recognized on these impaired loans was $290,000, $1,000 and $11,000, respectively. The increase in impaired loans is due to two related credits, which are collateral dependent, with no required allowance. The loans were current as of December 31, 2007.

 

Potential Problem Loans. As of December 31, 2007, there were no loans not previously disclosed, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

 

Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank’s allowance for loan losses for the years indicated:

 

 

8

 

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

 

2005

 

 

2004

 

 

2003

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable net of unearned income

 

$

331,296

 

$

315,567

 

 

$

290,890

 

 

$

254,757

 

 

$

233,733

 

Average loans receivable

 

 

323,444

 

 

301,533

 

 

 

274,053

 

 

 

245,783

 

 

 

225,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance balance at beginning of period

 

$

3,828

 

$

3,669

 

 

$

3,448

 

 

$

3,267

 

 

$

3,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and all other

 

 

—

 

 

—

 

 

 

(4

)

 

 

(19

)

 

 

(121

)

Real Estate

 

 

(4

)

 

—

 

 

 

(6

)

 

 

(10

)

 

 

—

 

Consumer

 

 

(117

)

 

(150

)

 

 

(200

)

 

 

(342

)

 

 

(478

)

Leases

 

 

—

 

 

—

 

 

 

—

 

 

 

(11

)

 

 

(36

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

(121

)

 

(150

)

 

 

(210

)

 

 

(382

)

 

 

(635

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and all other

 

 

—

 

 

18

 

 

 

12

 

 

 

13

 

 

 

5

 

Real Estate

 

 

2

 

 

2

 

 

 

18

 

 

 

8

 

 

 

24

 

Consumer

 

 

54

 

 

65

 

 

 

46

 

 

 

78

 

 

 

64

 

Leases

 

 

3

 

 

4

 

 

 

5

 

 

 

9

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

59

 

 

89

 

 

 

81

 

 

 

108

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs

 

 

(62

)

 

(61

)

 

 

(129

)

 

 

(274

)

 

 

(539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision Expense

 

 

315

 

 

220

 

 

 

350

 

 

 

455

 

 

 

660

 

Allowance balance at end of period

 

$

4,081

 

$

3,828

 

 

$

3,669

 

 

$

3,448

 

 

$

3,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percent of total loans
outstanding

 

 

1.23

%

 

1.21

%

 

 

1.26

%

 

 

1.35

%

 

 

1.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged off as a percent of average loans outstanding

 

 

.02

%

 

.02

%

 

 

.05

%

 

 

.11

%

 

 

.24

%

 

Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which credit losses may occur. The total allowance is available to absorb losses from any type of loan.

 

9

 

 

 

 

As of December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

 

2003

 

 

 

Amount

 

% of
Loans
to Total
Loans

 

Amount

 

% of
Loans
to Total
Loans

 

Amount

 

% of
Loans
to Total
Loans

 

Amount

 

% of
Loans
to Total
Loans

 

 

Amount

 

% of
Loans
to Total
Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

413

 

8.8

%

$

505

 

10.8

%

$

427

 

9.2

%

$

337

 

7.9

%

 

$

291

 

7.3

%

Real estate – construction

 

 

148

 

6.2

 

 

44

 

6.0

 

 

36

 

2.0

 

 

20

 

1.9

 

 

 

27

 

2.5

 

Real estate – mortgage

 

 

2,939

 

79.5

 

 

2,667

 

76.4

 

 

2,713

 

80.4

 

 

2,480

 

79.1

 

 

 

2,222

 

74.2

 

Consumer loans to individuals

 

 

362

 

5.5

 

 

388

 

6.8

 

 

442

 

8.4

 

 

483

 

11.1

 

 

 

634

 

15.9

 

Lease Financing

 

 

—

 

—

 

 

—

 

—

 

 

—

 

—

 

 

—

 

—

 

 

 

9

 

.1

 

General Risk Allocation

 

 

219

 

—

 

 

224

 

—

 

 

51

 

—

 

 

128

 

—

 

 

 

84

 

—

 

Total

 

$

4,081

 

100.0

%

$

3,828

 

100.0

%

$

3,669

 

100.0

%

$

3,448

 

100.0

%

 

$

3,267

 

100.0

%

 

 

 

10

 

INVESTMENT ACTIVITIES

 

General. The Company maintains a portfolio of investment securities consisting principally of obligations of the U.S. Government and its agencies including mortgage-backed securities and obligations of states, counties and municipalities including school districts. To a lesser extent, the Company also has corporate debt obligations in the portfolio as well as a portfolio of equity instruments of other financial services companies. The Company considers its investment portfolio a source of earnings and liquidity.

 

Securities Portfolio. Carrying values of securities at the dates indicated are as follows:

 

 

 

 

As of December 31,

 

 

 

2007

 

2006

 

2005

 

 

 

(dollars in thousands)

 

Securities:
(carrying value)

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

—

 

$

—

 

$

1,989

 

U.S. Government Agencies

 

 

41,508

 

 

47,581

 

 

51,996

 

State and political Subdivisions

 

 

22,622

 

 

17,419

 

 

21,175

 

Corporate Obligations

 

 

4,994

 

 

8,439

 

 

10,450

 

Mortgage-backed securities

 

 

54,082

 

 

38,652

 

 

29,954

 

Equity Securities

 

 

1,486

 

 

1,775

 

 

1,702

 

Total Securities

 

$

124,692

 

$

113,866

 

$

117,266

 

Fair value of Securities

 

$

124,708

 

$

113,883

 

$

117,294

 

 

 

 

11

 

Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company’s securities portfolio as of December 31, 2007. Yields on tax-exempt securities are stated on a fully taxable equivalent basis using a Federal tax rate of 34%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations. Maturity on the mortgage-backed securities is based upon contractual terms, the average life may differ as a result of changes in cash flow. Equity securities with no stated maturity are classified as “one year or less.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Year or Less

 

After One
Through Five Years

 

After Five
Through Ten Years

 

After Ten Years

 

Total Investment Securities

 

 

Carrying
Value

 

Average
Yield

 

Carrying
Value

 

Average
Yield

 

Carrying
Value

 

Average
Yield

 

Carrying
Value

 

Average
Yield

 

Carrying
Value

 

Average
Yield

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

5,988

 

3.68

%

 

$

20,247

 

4.93

%

 

$

15,273

 

5.47

%

 

$

—

 

—

 

 

$

41,508

 

4.94

%

State and political subdivision

 

 

2,168

 

3.50

%

 

 

5,304

 

4.14

%

 

 

6,345

 

6.12

%

 

 

8,856

 

5.91

%

 

 

22,622

 

5.33

%

Corporate Obligations

 

 

999

 

3.28

%

 

 

2,983

 

4.50

%

 

 

1,012

 

5.25

%

 

 

—

 

—

 

 

 

4,994

 

3.32

%

Mortgage-backed Securities

 

 

1,394

 

4.05

%

 

 

7,458

 

4.17

%

 

 

7,673

 

5.40

%

 

 

37,557

 

5.31

%

 

 

54,082

 

4.71

%

Equity Securities

 

 

1,486

 

3.22

%

 

 

—

 

—

 

 

 

—

 

—

 

 

 

—

 

—

 

 

 

1,486

 

3.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Securities

 

$

11,984

 

3.60

%

 

$

35,992

 

4.62

%

 

$

30,303

 

5.58

%

 

$

46,413

 

5.43

%

 

$

124,692

 

4.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Deposit Activities

 

General. The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to 5 years for retail instruments. The Bank participates in Jumbo CD ($100,000 and over) markets with local municipalities and school districts which are typically priced on a competitive bid basis. Other services the Bank offers its customers on a limited basis include cash management, direct deposit and Automated Clearing House (ACH) activity. The Bank operates twelve automated teller machines and is affiliated with the STAR and surcharge-free MoneyPass  ATM networks. Internet banking including bill-pay is offered through the website at www.waynebank.com .

 

The following table sets forth information regarding deposit categories of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

Average

 

Average

 

Average

 

 

 

Balance

 

Rate
Paid

 

Balance

 

Rate
Paid

 

Balance

 

Rate
Paid

 

 

 

(dollars in thousands)

 

Non-interest bearing
demand

 

$

56,523

 

—

%

$

54,798

 

—

%

$

52,109

 

—

%

Interest-bearing demand

 

 

36,594

 

.10

 

 

39,472

 

.10

 

 

44,026

 

.10

 

Money Market

 

 

53,798

 

3.37

 

 

57,410

 

2.87

 

 

49,721

 

1.86

 

Savings

 

 

45,858

 

.47

 

 

49,937

 

.46

 

 

57,128

 

.47

 

Time

 

 

172,986

 

4.57

 

 

146,344

 

3.96

 

 

128,704

 

2.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

365,759

 

 

 

$

347,961

 

 

 

$

331,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturities of Time Deposits. The following table indicates the amount of the Bank’s certificates of deposit in amounts of $100,000 or more and other time deposits of $100,000 or more by time  remaining until maturity as of December 31, 2007.

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Maturity Period

 

 

 

 

 

 

 

Within three months

 

$

35,309

Over three through six months

 

 

11,156

Over six through twelve months

 

 

9,311

Over twelve months

 

 

6,487

 

 

$

62,263

 

 

 

13

 

Short-Term Borrowings

 

The following table sets forth information concerning short-term borrowings (those maturing within one year) which consist principally of securities sold under agreements to repurchase, federal funds purchased and U.S. Treasury demand notes, that the Company had during the periods indicated.

 

 

 

 

Year Ended December 31,

 

 

 

2007

 

 

2006

 

 

2005

 

 

 

(dollars in thousands)

 

Short term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

Average balance during the year

 

$

22,443

 

 

$

22,209

 

 

$

15,059

 

Maximum month-end balance during the year

 

 

33,024

 

 

 

29,677

 

 

 

24,956

 

Average interest rate during the year

 

 

4.15

%

 

 

4.39

%

 

 

2.76

%

Total short-term borrowings at end of the year

 

$

26,686

 

 

$

22,736

 

 

$

18,564

 

Weighted average interest rate at the end of the year

 

 

3.60

%

 

 

4.20

%

 

 

3.76

%

 

 

Trust Activities

 

The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers for which it is generally compensated based on a percentage of assets under management. As of December 31, 2007, the Bank had $101.7 million of assets under management compared to $96.9 million as of December 31, 2006.

 

Subsidiary Activities

 

The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. (NIC), a Pennsylvania Corporation incorporated in 1996, a Pennsylvania licensed insurance agency, is a wholly-owned subsidiary of the Bank. NIC’s business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. The securities are offered through Invest Financial a registered broker/dealer. NIC had sales volume of $8.9 million in 2007, generating gross revenues for the Company of $120,000, compared to $131,000 in 2006 which is included in Other Income.

 

WCB Realty Corp., a Pennsylvania Corporation, is a wholly-owned real estate subsidiary of the Bank whose principal asset is the administrative offices of the Company, which also includes the Main Office of the Bank.

 

WTRO Properties Inc., a Pennsylvania Corporation, is a wholly-owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank has foreclosed. WTRO did not hold title to any property as of December 31, 2007 and 2006.

 

Norwood Settlement Services, LLC, a Pennsylvania Limited Liability Company, was established in 2004 to provide title and settlement service to bank customers and non-customers. The subsidiary is 70% owned by Wayne Bank and 30% owned by Title Strategies, LLC. Gross revenues, included in other income, for 2007 totaled $29,000 and $37,000 in 2006.

 

 

14

 

 

Regulation

 

Set forth below is a brief description of certain laws which relate to the regulation of the Registrant and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

 

Regulation of the Company

 

General. The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”), is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and by the Pennsylvania Department of Banking (the “Department”). The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve and the Department. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of its subsidiary banks.

 

Under the BHCA, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares.

 

Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.

 

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both.

 

Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHCA. Under the BHCA and the Federal Reserve’s bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHCA and (2) any BHCA activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto.

 

Financial Modernization. The Gramm-Leach-Bliley Act, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services

 

15

 

company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. The Company has not submitted notice to the Federal Reserve of its intent to be deemed a financial holding company.

 

Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve’s capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation (“FDIC”). See “Regulation of the Bank-Regulatory Capital Requirements.”

 

Regulation of the Bank

 

General. As a Pennsylvania chartered, FDIC insured commercial bank, the Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.

 

Pennsylvania Banking Law. The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

 

The Federal Deposit Insurance Corporation Act (“FDIA”), however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA.

 

Federal Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC previously administered two

 

16

 

separate insurance funds, the Bank Insurance Fund (“BIF”), which generally insured commercial bank and state savings bank deposits, and the Savings Insurance Fund (“SAIF”), which generally insured savings association deposits.

 

Under the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law on February 15, 2006 (i) the Bank Insurance Fund and the Savings Association Insurance Fund were merged into a new combined fund, called the Deposit Insurance Fund effective March 31, 2006, (ii) the current $100,000 deposit insurance coverage will be indexed for inflation (with adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage for retirement accounts were increased to $250,000 per participant subject to adjustment for inflation. The FDIC has been given greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments.

 

The FDIC is authorized to set the reserve ratios for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the Deposit Insurance Fund’s reserves exceed the designated reserve ratio, the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to insured depository institutions based on the percentage of insured deposits held on December 31, 1996 adjusted for subsequently paid premiums. Insured depository institutions that were in existence on December 31, 1996 and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF.

 

Pursuant to the Reform Act, the FDIC has determined to maintain the designated reserve ratio at its current 1.25%. The FDIC has also adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Beginning in 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment rate for an individual institution to be determined according to a formula based on a weighted average of the institution’s individual CAMEL component ratings plus either five financial ratios or the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 basis points, respectively. The Bank anticipates that it will be able to offset the majority of its deposit insurance premium for 2008 with the special assessment credit.

 

In addition, all insured institutions of the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to finance resolutions of insolvent thrifts. These assessments, the current quarterly rate of which is approximately .0154 of insured deposits, will continue until the Financing Corporation bonds mature in 2017.

 

Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. At December 31, 2007, the Bank exceeded all regulatory capital requirements and was classified as “well capitalized.”

 

The FDIC’s capital regulations establish a minimum 3% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks to 4% to 5%. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization,

 

17

 

rated composite 1 under the Uniform Financial Institutions Rating System. Tier I or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain servicing and purchased credit card relationships, and minus certain other listed assets.

 

The FDIC’s regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank’s allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier I capital.

 

A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC’s regulations also provide that any insured depository institution with a ratio of Tier I capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could be subject to potential termination of deposit insurance.

 

The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department’s capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. The Bank was in compliance in both the FDIC and Pennsylvania capital requirements as of December 31, 2007.

 

Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular loans by a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and other extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

 

Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. As of December 31, 2007, loans-to-one-borrower limitation was $8.6 million and the Bank was in compliance with such limitation.

 

18

 

Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Trustees of the FHLB.

 

As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank’s outstanding advances from the FHLB. At December 31, 2007, the Bank was in compliance with this requirement.

 

Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2007, the Bank met its reserve requirements.

 

Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends which cause the Bank’s retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.

 

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

 

Item 1A. Risk Factors

 

In determining whether to invest in our securities, investors should consider, among other factors, the following:

 

19

 

Risks Related to Our Business

 

Our success will depend upon our ability to effectively manage our future growth.

 

We believe that we have in place the management and systems, including data processing systems, internal controls and a strong credit culture, to support continued growth. However, our continued growth and profitability depend on the ability of our officers and key employees to manage such growth effectively, to attract and retain skilled employees and to maintain adequate internal controls and a strong credit culture. Accordingly, there can be no assurance that we will be successful in managing our expansion, and the failure to do so would adversely affect our financial condition and results of operations.

 

If we experience loan losses in excess of our allowance, our earnings will be adversely affected.

 

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectibility is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.

 

As of December 31, 2007, our allowance for loan losses was $4,081,000 which represented 1.23% of outstanding loans. At such date, we had 5 nonperforming loans totaling $111,000 and two impaired loans which are collateral dependent of $3,208,000. We actively manage our nonperforming loans in an effort to minimize credit losses. Although management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to our allowance for loan losses would result in a decrease in our net income and capital, and could have a material adverse effect on our financial condition and results of operations.

 

Most of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

 

Commercial loans are often larger and may involve greater risks than other types of lending. Because payments onsuch loans are often dependent on the successful operation of the property or business involved, repayment of such loans may be more sensitive than other types of loans to adverse conditions in the real estate market or the economy. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be

 

20

 

substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.

 

Most of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.

 

In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure our loans with real estate collateral. As of December 31, 2007, approximately 86% of our loans, had real estate as a primary, secondary or tertiary component of collateral. In addition, approximately 43% of our securities portfolio consisted of mortgage-backed securities issued by either Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) or Guaranteed National Mortgage Association (GNMA). Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the real estate collateral securing our loans could be reduced. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.

 

Our business is geographically concentrated and is subject to regional economic factors that could have an adverse impact on our business.

 

Substantially all of our business is with customers in our market area of Northeastern Pennsylvania. Most of our customers are consumers and small and medium-sized businesses which are dependent upon the regional economy. Adverse changes in economic and business conditions in our markets could adversely affect our borrowers, their ability to repay their loans and to borrow additional funds, and consequently our financial condition and performance.

 

Additionally, we often secure our loans with real estate collateral, most of which is located in Northeastern Pennsylvania. A decline in local economic conditions could adversely affect the values of such real estate. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

 

The loss of senior executive officers and certain other key personnel could hurt our business.

 

Our success depends, to a great extent, upon the services of William W. Davis, Jr., our President and Chief Executive Officer, and Lewis J. Critelli, our Executive Vice President, Secretary and Chief Financial Officer. Although we have employment agreements with non-compete provisions with Messrs. Davis and Critelli, the existence of such agreements does not assure that we will retain their services. The unexpected loss of these individuals could have a material adverse effect on our operations. From time to time, we also need to recruit personnel to fill vacant positions for experienced lending officers and branch managers. Competition for qualified personnel in the banking industry is intense, and there can be no assurance that we will continue to be successful in attracting, recruiting and retaining the necessary skilled managerial, marketing and technical personnel for the successful operation of our existing lending, operations, accounting and administrative functions or to support the expansion of the functions necessary for our future growth. Our inability to hire or retain key personnel could have a material adverse effect on our results of operations.

 

21

 

Our legal lending limits are relatively low and restrict our ability to compete for larger customers.

 

At December 31, 2007, our lending limit per borrower was approximately $8.6 million, or approximately 15% of our capital plus allowance for loan losses. Accordingly, the size of loans that we can offer to potential borrowers is less than the size of loans that many of our competitors with larger capitalization are able to offer. We may engage in loan participations with other banks for loans in excess of our legal lending limits. However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and our customers.

 

Risks Related to Our Common Stock

 

There is a limited trading market for our common stock, which may adversely impact your ability to sell your shares and the price you receive for your shares.

 

Although our common stock is quoted on the Nasdaq Global Market, there has been limited trading activity in our stock and an active trading market is not expected to develop. This means that there may be limited liquidity for our common stock, which may make it difficult to buy or sell our common stock, may negatively affect the price of our common stock and may cause volatility in the price of our common stock.

 

There are restrictions on our ability to pay cash dividends.

 

Although we have paid cash dividends on a quarterly basis since 1996, and the Bank has paid dividends for many previous years, there is no assurance that we will continue to pay cash dividends. Future payment of cash dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board may deem relevant and will be subject to applicable federal and state laws that impose restrictions on our ability to pay dividends.

 

Our common stock is not insured and you could lose the value of your entire investment.

 

An investment in shares of our common stock is not a deposit and is not insured against loss by the government.

 

Our management and significant shareholders control a substantial percentage of our stock and therefore have the ability to exercise substantial control over our affairs.

 

As of December 31, 2007, our directors and executive officers beneficially owned approximately 273,363 shares, or approximately 9.5% of our common stock, including options to purchase 113,082 shares, in the aggregate, of our common stock at exercise prices ranging from $10.36 to $31.50 per share. Because of the large percentage of stock held by our directors and executive officers and other significant shareholders, these persons could influence the outcome of any matter submitted to a vote of our shareholders.

 

We may issue additional shares of common or preferred stock, which may dilute the ownership and voting power of our shareholders and the book value of our common stock.

 

We are currently authorized to issue up to 10,000,000 shares of common stock of which 2,753,616 shares are currently outstanding and up to 5,000,000 shares of preferred stock of which no shares are outstanding. Our Board of Directors has authority, without action or vote of the shareholders, to issue all

 

22

 

or part of the authorized but unissued shares and to establish the terms of any series of preferred stock. These authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other stockholders. In addition, a total of 250,000 shares of common stock have been reserved for issuance under the Norwood Financial Corp 2006 Stock Option Plan, of which 69,700 were issued as of December 31, 2007. As of December 31, 2007, options to purchase a total of 158,422 shares were exercisable and had exercise prices ranging from $10.37 to $31.50. Any such issuance will dilute the percentage ownership interest of shareholders and may further dilute the book value of our common stock.

 

Provisions of our Articles of Incorporation and the Pennsylvania Business Corporation Law could deter takeovers which are opposed by the Board of Directors.

 

Our articles of incorporation require the approval of 80% of our outstanding shares for any merger or consolidation unless the transaction meets certain fair price criteria or the business combination has been approved or authorized by the Board of Directors. In addition, our articles of incorporation may require the disgorgement of profits realized by any person who attempts to acquire control of the Company. As a Pennsylvania corporation with a class of securities registered with the Securities and Exchange Commission, the Company is governed by certain provisions of the Pennsylvania Business Corporation Law that, inter alia, permit the disparate treatment of certain shareholders; prohibit calls of special meetings of shareholders; require unanimous written consent for shareholder action in lieu of a meeting; require shareholder approval for certain transactions in which a shareholder has an interest; and impose additional requirements on business combinations with persons who are the beneficial owners of more than 20% of the Company’s stock.

 

Risks Related to Our Industry

 

We operate in a competitive market which could constrain our future growth and profitability.

 

We operate in a competitive environment, competing for deposits and loans with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial intermediaries operating in our market area offer certain services, such as international banking services, which we do not offer. Moreover, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.

 

We are required to comply with extensive and complex governmental regulation which can adversely affect our business.

 

Our operations are and will be affected by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. We are subject to supervision and periodic examination by the Federal Reserve Board (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. We are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that we are found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be

 

23

 

made to existing federal and state legislation and regulations or the effect that any such changes may have on our future business and earnings prospects. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitability.

 

In addition, the monetary policies of the FRB have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the FRB to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to the monetary policies of the FRB or to existing federal and state legislation or the effect that such change may have on our future business and earnings prospects.

 

During the past several years, significant legislative attention has been focused on the regulation and deregulation of the financial services industry. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities which compete directly with traditional bank business.

 

We realize income primarily from the difference between interest earned on loans and investments and interest paid on deposits and borrowings, and changes in interest rates may adversely affect our profitability and assets.

 

Changes in prevailing interest rates may hurt our business. We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income.

 

Interest rates affect how much money we can lend. For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease. In addition, changes in interest rates can affect the average life of loans and investment securities. A reduction in interest rates generally results in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost. This causes reinvestment risk, because we generally are not able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Changes in market interest rates could also reduce the value of our financial assets. If we are unsuccessful in managing the effects of changes in interest rates, our financial condition and results of operations could suffer.

 

As a public company, we are subject to numerous reporting requirements that are currently evolving and could substantially increase our operating expenses and divert management’s attention from the operation of our business.

 

The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the SEC has promulgated new rules covering a variety of subjects. Compliance with these new rules has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue. In addition, compliance with the requirements has taken a significant amount of management’s and the Board of Directors’ time and resources. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers.

 

24

 

As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal control over financial reporting beginning with the annual report on Form 10-K for our fiscal year ending December 31, 2007. In addition, the independent registered public accounting firm auditing the company’s financial statements must report on the effectiveness of the company’s internal control over financial reporting. This requirement is first applicable to our annual report on Form 10-K for fiscal 2007 and for all future annual reports. The costs associated with the implementation of this requirement, including documentation and testing, totaled $125,000. If we are ever unable to conclude that we have effective internal control over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting for any future year-ends as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.

 

Item 1B. Unresolved Staff Comments

 

None

 

Item 2. Properties

 

The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and eleven additional branch offices. The Bank’s total investment in office property and equipment is $13.6 million with a net book value of $5.7 million as of December 31, 2007. The Bank currently operates automated teller machines at all twelve of its facilities. The Bank leases four of its locations with minimum lease commitments of $3,813,000 through 2029. The four locations have various renewal options.

 

Item 3. Legal Proceedings

 

Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.

 

Item 4. Submission of Matters to a Vote of Security-Holders

 

None.

 

25

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Information relating to the market for Registrant’s common equity and related stockholder matters appears under “Capital and Dividends” in the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2007 (“Annual Report”) and is incorporated herein by reference.

 

 

 

 

Issuer Purchases of Equity Securities

 

 

 



Total Number
of Shares
purchased

 




Average Price Paid
Per Share

 


Total Number of
Shares Purchased as Part of Publicly
Announced Plans
or Programs *

 

Maximum Number
(or Approximate
Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

October 1 to 31, 2007

 

—

 

$

—

 

—

 

—

 

November 1 to 30, 2007

 

29,200

 

 

31.80

 

29,200

 

24,363

 

December 1 to 31, 2007

 

—

 

 

—

 

—

 

—

 

Total

 

29,200

 

$

31.80

 

29,200

 

24,363

 

 

* On June 15, 2005, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 140,700 shares) in the open market.

 

Item 6. Selected Financial Data

 

The above-captioned information appears under “Summary of Selected Financial Data” in the Annual Report, and is incorporated herein by reference.

 

Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

The above-captioned information appears under “Management’s Discussion and Analysis” in the Annual Report and is incorporated herein by reference from the Annual Report.

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

 

The above-captioned information appears under “Management’s Discussion and Analysis -- Market Risk” in the Annual Report and is incorporated herein by reference.

 

Item 8. Financial Statements and Supplementary Data

 

The Company’s consolidated financial statements listed in Item 15 are incorporated herein by reference from the Annual Report.

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

None.

 

26

 

 

Item 9A. Controls and Procedures  

 

(a) Disclosure Controls and Procedures. The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

(b) Internal Control over Financial Reporting. Management’s Report on Internal Control over Financial Reporting and the Report of the Company’s Independent Registered Public Accounting Firm are incorporated herein by reference from the Annual Report. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information contained under the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance” and “Proposal I -- Election of Directors” and “Corporate Governance” in the Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated herein by reference.

 

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller. The Company undertakes to provide a copy of the Code of Ethics to any person without charge, upon request to Lewis J. Critelli, Executive Vice President, Secretary and Chief Financial Officer, Norwood Financial Corp., 717 Main Street, Honesdale, PA 18431.

 

Item 11. Executive Compensation

 

The information contained under the sections captioned “Executive Compensation” and "Director Compensation" in the Proxy Statement is incorporated herein by reference.

 

27

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

(a)

Security Ownership of Certain Beneficial Owners

 

Information required by this item is incorporated herein by reference to the Section captioned “Principal Holders of Our Common Stock” of the Proxy Statement.

 

 

(b)

Security Ownership of Management

 

Information required by this item is incorporated herein by reference to the sections captioned “Proposal I -- Election of Directors” of the Proxy Statement.

 

 

(c)

Changes in Control

 

Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

 

 

(d)

Equity Compensation Plan Information

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

 

 

 

 

 

 

 

 

 

 

(a)

 

(b)

 

(c)

 

 

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a))

 

Equity compensation plans
approved by shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plan

 

 

103,829

 

 

 

$

19.95

 

 

 

—

 

 

2006 Stock Option Plan

 

 

68,675

 

 

 

 

31.02

 

 

 

180,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not
approved by security holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1999 Directors Stock Compensation Plan

 

 

7,918

 

 

 

 

17.10

 

 

 

—

 

 

TOTAL

 

 

180,422

 

 

 

$

24.04

 

 

 

180,300

 

 

 

 

28

 

The 1999 Directors Stock Compensation Plan provides for annual grants of options to non-employee directors as of the close of business on the day of the first regularly scheduled board meeting in December of each year. The amounts of such awards are determined by the board or a committee thereof. The exercise price for each option is equal to the fair market value of the stock as of the date of grant. Options generally have terms of ten years and one day from the date of grant and vest over periods ranging from six months to one year from the date of grant. Except in the event of death or disability, optionees may not sell shares acquired on exercise of options within six months of the date of grant. Options are not transferable except in the event of the death of the optionee.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

The information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned “Related Party Transactions” and “Corporate Governance”.

 

Item 14. Principal Accounting Fees and Services

 

The information required by this item is incorporated herein by reference to the section on the Proxy Statement captioned “Proposal 2-Ratification of Appointment of Independent Registered Public Accounting Firm.”

 

PART IV

 

Item 15. Exhibits, Financial Statement, and Schedules

 

 

(a)

Listed below are all financial statements and exhibits filed as part of this report, and are incorporated by reference.

 

 

1.

The consolidated balance sheets of Norwood Financial Corp. and subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2007, together with the related notes and the independent registered public accounting firm reports of Beard Miller Company LLP, independent registered public accounting firm.

 

 

2.

Schedules omitted as they are not applicable.

 

29

 

 

3.

Exhibits

 

3(i)

Articles of Incorporation of Norwood Financial Corp.*

3(ii)

Bylaws of Norwood Financial Corp.

4.0

Specimen Stock Certificate of Norwood Financial Corp.*

10.1+

Amended Employment Agreement with William W. Davis, Jr.**

10.2+

Amended Employment Agreement with Lewis J. Critelli**

10.3+

Form of Change-in-Control Severance Agreement with seven key employees of the Bank***

10.5+

Norwood Financial Corp. Stock Option Plan****

10.6+

Salary Continuation Agreement between the Bank and William W. Davis, Jr.***

10.7+

Salary Continuation Agreement between the Bank and Lewis J. Critelli***

10.8+

Salary Continuation Agreement between the Bank and Edward C. Kasper***

10.9+

1999 Directors Stock Compensation Plan***

10.10+

Salary Continuation Agreement between the Bank and Joseph A. Kneller*****

10.11+

Salary Continuation Agreement between the Bank and John H. Sanders*****

10.12+

2006 Stock Option Plan******

10.13+

First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.*******

10.14+

First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli *******

10.15+

First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper*******

10.16+

First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller *******

10.17+

First and Second Amendments to Salary Continuation Agreement with John H. Sanders******

13

Annual Report to Stockholders for the fiscal year ended December 31, 2007

21

Subsidiaries of Norwood Financial Corp. (see Item 1. Business, General and Subsidiary Activity)

23

Consent of Independent Registered Public Accounting Firm

31.1

Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2

Rule 13a-14(a)/15d-14(a) Certification of CFO

32

Certification pursuant to 18 U.S.C. SS.1350, as adopted pursuant to SS.906 of Sarbanes Oxley Act of 2002

 

+

Management contract or compensatory plan arrangement.

*

Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No.0-28364.

**

Incorporated by reference into this document from the identically numbered exhibits to the registrant’s Form 8-K filed with the Commission March 6, 2006.

***

Incorporated herein by reference into this document from the Exhibits to the Registrant’s Form 10-K filed with the Commission on March 23, 2000, File No. 0-28364.

****

Incorporated by reference into this document from the Exhibits to Form S-8 filed with the Commission on August 14, 1998, File No. 333-61487.

*****

Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 22, 2004, File No. 0-28364.

******

Incorporated by reference to this document from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006.

*******

Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed April 4, 2006.

 

 

30

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

NORWOOD FINANCIAL CORP.

 

 

Dated: March 14, 2008

 

 

 

 

/s/ William W. Davis, Jr.

 

 

By:

William W. Davis, Jr.

President, Chief Executive Officer and Director

(Duly Authorized Representative)

 

Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 14, 2008 on behalf of the Registrant and in the capacities indicated.

 

 

/s/ William W. Davis, Jr.

 

/s/ Lewis J. Critelli

William W. Davis, Jr.

President, Chief Executive Officer and Director

(Principal Executive Officer)

 

Lewis J. Critelli

Executive Vice President, Secretary and Chief Financial Officer

(Principal Financial Accounting Officer)

 

 

/s/ Andrew A. Forte

 

/s/ John E. Marshall

Andrew A. Forte

Director

 

John E. Marshall

Director

 

 

/s/ Daniel J. O’Neill

 

/s/ Dr. Kenneth A. Phillips

Daniel J. O’Neill

Director

 

Dr. Kenneth A. Phillips

Director

 

 

/s/ Gary P. Rickard

 

/s/ Richard L. Snyder

Gary P. Rickard

Director

 

Richard L. Snyder

Director

 

 

/s/ Ralph A. Matergia

 

/s/ Susan Gumble-Cottell

Ralph A. Matergia

Director

 

Susan Gumble-Cottell

Director

 

 

31

 

 

 EX-13 2 ex-13.txt 2007 CONSOLIDATED FINANCIAL REPORT 2007 NORWOOD FINANCIAL CORP ANNUAL REPORT TO SHAREHOLDERS - ------------------------------------------------------------------------------- NORWOOD FINANCIAL CORP SUMMARY OF SELECTED FINANCIAL DATA (dollars in thousands, except per share data)
For the years ended December 31, 2007 2006 2005 2004 2003 -------------------------------------------------------------------------------------------------- Net interest income $ 17,272 $ 16,183 $ 15,263 $ 14,012 $ 13,322 Provision for loan losses 315 220 350 455 660 Other income 3,507 3,517 3,506 3,088 2,801 Net realized gains on sales of securities 17 66 42 458 692 Other expense 11,341 10,957 10,623 10,090 9,808 Income before income taxes 9,140 8,589 7,838 7,013 6,347 Income tax expense 2,629 2,679 2,341 2,003 1,694 NET INCOME $ 6,511 $ 5,910 $ 5,497 $ 5,010 $ 4,653 Net income per share-Basic $ 2.34 $ 2.11 $ 1.96 $ 1.80 $ 1.70 Net income per share-Diluted 2.30 2.07 1.92 1.77 1.67 Cash dividends declared 0.94 0.85 0.71 0.66 0.62 Dividend pay-out ratio 40.17% 40.28% 36.41% 36.51% 36.31% Return on average assets 1.39% 1.33% 1.31% 1.27% 1.22% Return on average equity 12.10% 11.85% 11.72% 11.39% 11.24% BALANCES AT YEAR-END Total assets $480,610 $454,356 $433,556 $411,626 $387,483 Loans receivable 331,296 315,567 290,890 254,757 233,733 Allowance for loan losses 4,081 3,828 3,669 3,448 3,267 Total deposits 370,000 358,103 340,603 318,645 306,669 Shareholders' equity 55,819 52,231 48,108 45,685 42,831 Trust assets under management 101,714 96,879 86,972 83,397 73,991 Book value per share $ 20.27 $ 18.67 $ 17.07 $ 16.14 $ 15.20 Tier 1 Capital to risk-adjusted assets 16.26% 15.67% 15.29% 15.91% 15.58% Total Capital to risk-adjusted assets 17.60% 16.99% 16.63% 17.34% 17.09% Allowance for loan losses to total loans 1.23% 1.21% 1.26% 1.35% 1.40% Non-performing assets to total assets 0.03% 0.09% 0.08% 0.02% 0.04% --------------------------------------------------------------------------------------------------
NORWOOD ------- FINANCIAL CORP PRESIDENT'S LETTER PAGES 2-7 BOARD OF DIRECTORS PAGES 6-7 BRANCH LOCATIONS PAGE 8 FINANCIAL REPORT INDEX PAGE 9 2007 NORWOOD FINANCIAL CORP ANNUAL REPORT TO SHAREHOLDERS MOVING FORWARD WITH CONFIDENCE, WHILE ALWAYS BEING GUIDED BY OUR PAST,
- ------------------------------------------------------------------------------------------------------------------------------------ It is truly a pleasure to report to million, deposits of $370.0 with full collection of principal, you that your Company had a million and shareholders' equity interest and fees. We would also very strong financial performance of $55.8 million. Total assets like to note that Norwood never in 2007. We had record earnings increased $26.3 million from participated in the Subprime for the year ended December 31, December 31, 2006. mortgage market. The Company 2007 of $6,511,000 which had net charge-offs of $62,000 represented an increase of Loans receivable increased $15.7 for the year-ended December $601,000, or 10.2% over the million, or 5.0% from the prior 31, 2007 representing only .02% $5,910,000 earned in 2006. year. The increase in loans was of average loans. Though loan Earnings per share on a fully centered in residential mortgage quality indicators remain strong, diluted basis were $2.30 for the activity, including home equity we felt it was prudent to increase current year compared to $2.07 lending and to a lesser extent, in the provision for loan losses to in 2006. The Company declared the commercial real estate loan $315,000 for the year ended cash dividends totaling $.94 per portfolio. The majority of the loan December 31, 2007, from share in 2007, an increase of $.09 growth was funded with an $11.9 $220,000 for the similar period per share, or 10.6%, over the $.85 million increase in deposits, in 2006, as we do recognize the per share declared in 2006. This principally in money market stress on the local and national marks the sixteenth consecutive accounts and non-interest bearing economy. The allowance for loan year of increased cash dividends checking accounts. losses increased $253,000 from for our shareholders. The return December 31, 2006 to $4,081,000 on average assets for the year was Non-performing loans totaled and represented 1.23% of total 1.39% with a return on average $163,000 and represented .05% loans as of December 31, 2007. equity of 12.10%. Both of these of total loans as of December 31, peformed measures improved 2007 compared to $409,000, or For the year, net interest income over the prior year. .13%, as of December 31, 2006. (fully taxable equivalent) totaled Our improvement over the prior $17,811,000 with a net interest Total assets as of December 31, year was the result of resolving margin (fte) of 3.98% compared 2007 were $480.6 million with our largest non-performing loan to $16,708,000, and a net loans receivable of $331.3 during the third quarter of 2007 interest margin (fte) of 3.96% in
[PICTURE OMITTED] WILLIAM W. DAVIS, JR. President and Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------ 2006. The slight increase in net due to costs associated with the NET INCOME ($000) interest margin for the year was Tannersville Office which opened [Bar graph with following data points] principally due to an increase in in December 2006. $4,653 $5,010 $5,497 $5,910 $6,511 the yield on the investment 2003 2004 2005 2006 2007 securities portfolio and an WE STRONGLY ENCOURAGE increased amount of loans on the YOU TO READ THE balance sheet. These increases FINANCIAL SECTION OF were partially offset by an increase THIS ANNUAL REPORT FOR in the cost of deposits, principally A MORE DETAILED ANALYSIS higher costing time deposits OF OUR RESULTS. For the year, other income Wayne Bank's primary market TOTAL DEPOSITS * LOANS o (IN MILLIONS) totaled $3,524,000 compared to area consists of three of the fastest [Bar graph with following data points] $3,583,000 in the prior year. The growing counties in Pennsylvania * $306.7 $318.6 $340.6 $358.1 $370.0 decrease was principally due to a - Wayne, Pike and Monroe. o $233.7 $254.8 $290.9 $315.6 $331.3 lower level of gains on the sales This tri-county region serves as a 2003 2004 2005 2006 2007 of mortgage loans which totaled haven for people in neighboring $23,000 in 2007 and $147,000 states as the area provides great in the prior year, which included relief from larger congested areas $110,000 gain on the sale of such as Philadelphia and New mortgage servicing rights. This York. They travel to the region decrease was partially offset by a to take advantage of the natural $68,000 increase in Wealth beauty of the mountains, pristine NET INTEREST INCOME (FTE %$ IN 000) Management/Trust revenues. lakes and waterfalls and wooded [Bar graph with following data points] areas. The amenities are many $13,945 $14,653 $15,589 $16,708 $17,811 For the year, other expenses with ski resorts, craft shops, art 2003 2004 2005 2006 2007 totaled $11,341,000, an increase galleries, golf courses, museums, of $384,000 or 3.5% over the prior an indoor water park, resorts, year. The increase was principally and most recently the advent of a
casino in Monroe County. With services allow the Bank to meet Checking account to cultivate tourism being high on the list of all of our customers needs. more business relationships. To major industries, it is no wonder strengthen our business that many of these visitors decide relationships even more, Wayne to purchase a home in the area. Bank will introduce a new product We have worked diligently to DILUTED EARNINGS (PER SHARE) branded "Business Link" in 2008. position Wayne Bank as the first [Bar graph with following data points] The service is Remote Deposit choice in banking for those new $1.67 $1.77 $1.92 $2.07 $2.30 Capture that allows a business to to the region. Wayne Bank offers 03 04 05 06 07 virtually deposit their checks via land loans, a terrific construction the Internet without having to mortgage program, tiered loan go to the bank, again saving time. rates, Jumbo loans for the more We believe this service will retain expensive homes and home equity our current business accounts and products to suit the needs of the help us expand Wayne Bank's growing populace. Wayne Bank footprint without the additional did not enter into the Subprime investment in branch locations. lending arena, which generated The Internet has become more significant loan volume for some popular with our customers and Technology is top-of-mind at financial institutions, but was Wayne Bank's team works to Wayne Bank as we look to ways based on weak underwriting. make our services more conve- to streamline processes within Our mortgage lending programs. nient, accessible and user-friendly. our organization that add are built on solid credit Along those lines, we are efficiencies. We recently converted fundamentals that are best for constantly updating and to a digital image filing system both the customer and the Bank. adding more information to which enables us to respond timely Wayne Bank's website to the needs of our customers We also play a significant role in (waynebank.com) and now feature who request copies of documents, the commercial development of a short, online loan application. transaction histories or other our market area. The Bank is These services are in addition information. Additionally, Wayne involved in many of the major to Direct Link, Free Internet Bank is in the planning stage of projects throughout Wayne, Banking with Free Bill Pay that is implementing a branch capture Pike and Monroe Counties. available for both businesses and device, so that our branch network We provide commercial financing consumers alike. The Bank will will be able to make their check to a wide range of businesses which continue to improve our website's deposits virtually to our corporate support the regional economy; capabilities to keep up with the headquarters eliminating the need including the hotel industry, retail demands of our customers for for couriers and increasing our shopping areas, local resorts, this marketing channel. Many deposit cut-off times to provide summer camps, building customers are using Direct Link, better customer service. contractors, and residential Wayne Bank's Internet banking property owner associations. service to handle some or all of Wayne Bank's success is due to their banking transactions and we the talent and dedication of our The Wealth Management and expect this trend to continue. employees as they focus, each and Trust Services Division provides everyday, to serve our customers our clients with a level of service An ongoing focus is to grow our in a positive, effective and efficient second to none. Our investment small business customer base, and manner. During the past year, we management products, trust to that end we launched a very recognized the achievements and administration and executor attractive FREE Business accordingly promoted a number
[PICTURE OMITTED] SENIOR MANAGEMENT TEAM - ------------------------------------------------------------------------------------------------------------------------------------ EDWARD C. KASPER / WAYNE D. WILCHA / WILLIAM W. DAVIS, JR. / JOSEPH A. KNELLER / LEWIS J. CRITELLI / JOHN H. SANDERS - ------------------------------------------------------------------------------------------------------------------------------------ of employees to Vice President. the Shohola Community Office in Monroe county. He is also Those recipients include Linda Manager was named the Teller extremely involved with tourism Moran, Karyn Vashlishan and Training Officer. and hospitality trade associations Kelley Lalley. In addition, Sandy in the Pocono region. Halas was promoted to Assistant In 2007, we were extremely pleased Vice President, as well as the new to have Andrew Forte join the Since its founding in 1871, Wayne appointments of Gary Sipe, Vice Board of Directors of Wayne Bank Bank has been a leader in President, Wealth Management and Norwood Financial Corp. community involvement. We Investment Officer; Neicy Ramos, Andy has strong financial are a notable presence in the Business Development Officer management background, is a communities we serve and that is in Monroe County and Wendy CPA and is pursuing his doctorate due in part to the volunteerism Davis, Assistant Community at pace University. He currently and support our reemployees Officer Manager in Shohola. In is President of Forte, Inc. which contribute to the local area. The addition, Karen Verbeke formerly operates the Stroudsmoor Inn Senior Management team leads
[PICTURES OMITTED] NORWOOD FINANCIAL 2007 BOARD OF DIRECTORS - ------------------------------------------------------------------------------------------------------------------------------------ (FROM LEFT TO RIGHT) WILLIAM W. DAVIS, JR. / JOHN E. MARSHALL / GARY P. RICKARD / DANIEL J. O'NEILL - ------------------------------------------------------------------------------------------------------------------------------------ the way by serving as Directors Sanctuary and the Dorflinger- nonprofit organizations through or board members for many Suydam Wildlife Sanctuary are volunteering and financial support organizations such as the Wayne notable in our support as they such as the American Cancer County YMCA, Wayne County provide natural history, Society's Relay for Life, The Memorial Hospital, Wayne conservation, culture and American Red Cross and the County Builders Association, education to the area through United Way, just to mention a few. the Wayne County Chamber of their programs. In addition, We are proud to support the local Commerce, the Wayne County Wayne Bank supports the Pike area and are committed to making Historical Society, the Greater County Chamber of Commerce, our community a better place to Honesdale Partnership and the Pocono Builders Association and live and work. Wayne Economic Development the Pocono Mountain Chamber Corporation. Conservation of Commerce. Additionally, We marked another milestone in groups such as Lacawac employees support many 2007, as Russell L. Ridd retired as
[PICTURES OMITTED] - ------------------------------------------------------------------------------------------------------------------------------------ DR. KENNETH A. PHILLIPS / RALPH A. MATERGIA, ESQ. / ANDREW A. FORTE / SUSAN GUMBLE-COTTELL / RICHARD L. SNYDER - ------------------------------------------------------------------------------------------------------------------------------------ our Chairman of the Board. Russell At the Annual Reorganizational needs. We truly appreciate your had a 44 year career with the Bank. Meeting in April, John E. support and confidence and look He joined the Bank in 1963, was Marshall was appointed forward to hearing any of your appointed President and Director Chairman of the Board of comments and suggestions! in 1980 and Chairman in 1993. Directors of Norwood and Wayne During Russell's career, the Bank Bank. John brings many years of Sincerely yours, grew from $10 million in assets experience to the position having to $460 million. The Board served as a Director since 1983. passed a resolution designating /s/ William W. Davis, Jr. Russell, Director Emeritus of We look forward to another year William W. Davis, Jr. Norwood Financial Corp and of innovation and achievement President & Chief Executive Officer Wayne Bank. We sincerely wish in 2008. Please think of Wayne Russell well in his retirement. Bank first, for all you financial
[MAP OMITTED] - ------------------------------------------------------------------------------------------------------------------------------------ BRANCH LOCATIONS AND SERVICE AREA COVERED - ------------------------------------------------------------------------------------------------------------------------------------ Administrative Office: Route 6 East Route 611 & Stroud Mall 717 Main Street Hawley, PA 18428 Stroudsburg, PA 18360 P.O. Box 269 Honesdale, PA 18431 111 West Harford Street 637 Route 739 Milford, PA 18337 Lords Valley Shopping Plaza Community Offices: Lords Valley, PA 18428 717 Main Street Weis Market, Route 590 Honesdale, PA 18431 Hamlin, PA 18427 Route 209, 5165 Milford Road Marshalls Creek, PA 18335 245 Willow Avenue 107 Richardson Avenue Honesdale, PA 18431 Shohola, PA 18458 Route 611, Fountain Springs East II Tannersville, PA 18372 Belmont & Water Streets Route 370 & Lake Como Road Waymart, PA 18472 Lakewood, PA 18439 Online at: waynebank.com
NORWOOD ------- FINANCIAL CORP 2007 CONSOLIDATED FINANCIAL REPORT ----------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS 10-27 MANAGEMENT'S REPORT ON CONTROL OVER FINANCIAL REPORTING 28 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 29 CONSOLIDATED BALANCE SHEETS 31 CONSOLIDATED STATEMENTS OF INCOME 32 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 33 CONSOLIDATED STATEMENTS OF CASH FLOWS 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35-55 INVESTOR INFORMATION 56 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) as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006, and 2005. All share and per share amounts have been adjusted to reflect the effect of the 5% stock dividend distributed to shareholders on May 26, 2006. 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, demand for real estate 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. CRITICAL ACCOUNTING POLICIES Note 2 to the Company's consolidated financial statements (incorporated by reference in Item 8 of the form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on securities. Please refer to the discussion of the allowance for loan losses calculation under "Non-performing Assets and Allowance for Loan Losses" in the "Financial Condition" section. For periods ending prior to January 1, 2006, the Company accounted for stock option plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under APB Opinion No. 25, no stock-based employee compensation was reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the grant date. The Company adopted SFAS No. 123(R), "Share-Based Payment", as of January 1, 2006, using the modified prospective transition method. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. See Note 2 for additional discussion of this pronouncement's impact on the Company's consolidated financial statements. 10 The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes it is more likely than not that all deferred tax assets will be realized. In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost 2) the financial condition of the issuer and 3) the intent and ability of the Company to hold the security to allow for a recovery to fair value. The Company believes that the unrealized losses, at December 31, 2007 and 2006 represent temporary impairment of the securities. RESULTS OF OPERATION - SUMMARY Net income for the Company for the year ended December 31, 2007 totaled $6,511,000, an increase of $601,000 or 10.2% over the $5,910,000 earned in 2006. Basic and diluted earnings per share were $2.34 and $2.30 respectively increasing from $2.11 and $2.07, respectively in 2006. The return on average assets (ROA) for the year ended December 31, 2007 was 1.39% improving from 1.33% for 2006. Return on average equity (ROE) increased to 12.10% for the current year from 11.85% in 2006. The increase in earnings was principally attributable to an increase in net interest income which totaled $17,811,000 on a fully taxable equivalent (fte) basis in 2007 compared to $16,708,000 (fte) in 2006. This represents an increase of $1,103,000, or 6.6%. Net interest income was favorably impacted by a $21.9 million, or 7.3% increase in average loans receivable for 2007 compared to average loans receivable in 2006. The yield on the securities portfolio increased 76 basis points which also favorably impacted net interest income. These two items were partially offset by a 59 basis point increase in the cost of interest bearing deposits, principally short-term time deposits. Loans receivable increased $15.7 million to total $331.3 million as of December 31, 2007. The increase in loans was centered in residential mortgage activity and to a lesser extent, in the commercial real estate portfolio. The majority of the loan growth was funded with an $11.9 million increase in deposits, principally in money market accounts and non-interest bearing checking. The Company's loan quality metrics remained strong with non-performing loans decreasing to .05% of total loans at December 31, 2007 from .13% as of the prior year end. Net charge-offs were only $62,000 for the year, or .02% of average loans. Loan loss provision expense increased to $315,000 in 2007, from $220,000 in 2006 as the Company recognizes a general slow down in the local economy. Other income for 2007 totaled $3,524,000 compared to $3,583,000 in 2006. The decrease was principally due to a lower level of gains on the sales of mortgage loans which totaled $23,000 in 2007 and $147,000 in the prior year, which included $110,000 gain on the sale of a portfolio of mortgage servicing rights. Other expenses totaled $11,341,000 in 2007, an increase of $384,000 or 3.5% over the prior year. The increase was principally due to costs associated with the Tannersville Office which opened in December 2006. 11 The following table sets forth changes in net income (in thousands): Net income for 2006 $ 5,910 Net interest income 1,089 Provision for loan losses (95) Gain on sale of mortgage loans (124) Other income 65 Salaries and employee benefits (170) Occupancy (119) Other expense (95) Income tax expense 50 ------- Net income for 2007 $ 6,511 ======= Net income for the Company for the year ended December 31, 2006 totaled $5,910,000, an increase of $413,000 or 7.5% over the $5,497,000 earned for 2005. Basic and diluted earnings per share for 2006 were $2.11 and $2.07 respectively, increasing from $1.96 and $1.92, respectively in 2005. The return on average assets (ROA) for the year ended December 31, 2006 was 1.33% improving from 1.31% for 2005. Return on average equity also showed improvement at 11.85% in 2006 compared to 11.72% in 2005. The increase in earnings was principally attributable to an increase in net interest income and a lower level of provision for loan losses. Net interest income on a fully taxable equivalent basis (fte) totaled $16,708,000 in 2006, compared to $15,889,000 in 2005, an increase of $819,000, or 5.2%. Net interest income was favorably impacted by $27.5 million, or 10.0%, increase in average loans receivable for 2006 compared to average loans receivable in 2005. The Company reduced its provision for loan losses to $220,000 for the year ended December 31, 2006 from $350,000 for 2005. The decrease was principally due to a lower level of charge-offs, $61,000 in 2006 declining from $129,000 in 2005. Loans receivable increased $24.7 million, to total $315.6 million as of December 31, 2006. The Company had balanced growth throughout the year with the commercial loan portfolio, including commercial real estate, increasing $12.7 million and loans secured by residential real estate growing $13.1 million. The majority of the loan growth was funded with a $17.5 million increase in deposits, principally short-term time deposits. Other income for 2006 totaled $3,583,000 compared to $3,548,000 for 2005. The increase was principally due to $147,000 of gains on sales of mortgage loans and servicing rights in 2006 compared to $64,000 in similar gains in 2005. Other expenses totaled $10,957,000, an increase of $334,000 or 3.1% over 2005. The increase was primarily due to rising salary and employee benefit costs. The resulting efficiency ratio for 2006 was 54.0% improving from 54.7% in 2005. 12 The following table sets forth changes in net income (in thousands): Net income for 2005 $5,497 Net interest income 920 Provision for loan losses 130 Gains on sales of mortgage loans 83 Other income (48) Salaries and employee benefits (245) Professional fees 104 All other expenses (193) Income tax expense (338) ------ Net income for 2006 $5,910 ====== FINANCIAL CONDITION Total Assets Total assets as of December 31, 2007, were $480.6 million compared to $454.4 million as of year-end 2006, an increase of $26.2 million or 5.8%. Loans Receivable As of December 31, 2007, loans receivable totaled $331.3 million compared to $315.6 million as of year-end 2006, an increase of $15.7 million, or 5.0%. Loan growth in residential and commercial real estate was partially offset by lower commercial term loans and lines of credit and a net run-off in indirect automobile financing, which is included in consumer loans to individuals. Residential real estate, which includes home equity lending, totaled $129.9 million as of December 31, 2007, compared to $113.8 million as of year-end 2006. The increase of $16.1 million is net of prepayments, refinancing activity and sales of mortgage loans into the secondary market. Fixed rate mortgage products were preferred by the Bank's customers and accounted for the majority of the activity. The Company does not originate any non-traditional mortgage products such as interest-only loans or option adjustable rate mortgages and has no sub-prime mortgage exposure. The Company evaluates sales of its long-term fixed rate residential loan production for interest rate risk management, with $1.1 million of 30 year fixed rate loans sold into the secondary market during 2007. The Company held in portfolio the majority of fixed rate residential mortgage production in 2007. The Company also had growth in home equity lending in 2007 through its branch system. Total outstandings increased $3.0 million to $52.6 million as of December 31, 2007. Commercial loans consist principally of loans made to small businesses within the Company's market and are usually secured by real estate or other assets of the borrower. Commercial real estate loans totaled $133.6 million as of December 31, 2007, increasing from $127.6 million as of December 31, 2006, an increase of $6.0 million or 4.7%. The terms for commercial real estate are typically 15 to 20 years, with adjustable rates based on a spread to the prime rate. The majority of the Company's commercial real estate portfolio is owner occupied and includes the personal guarantees of the principals. The growth in commercial real estate lending was 13 centered in the Pike and Monroe County market areas. Commercial loans consisting principally of lines of credit and term loans secured by equipment or other assets decreased $4.9 million to $29.2 million as of December 31, 2007. The decrease was principally due to pay-offs in equipment loans and lower usage on lines of credit. The Company's indirect lending portfolio (included in consumer loans to individuals) declined $2.4 million to $11.6 million as of December 31, 2007. The Company has de-emphasized indirect automobile lending due to increased pricing competition offered by automotive industry finance companies. 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. As of December 31, 2007, non-performing loans totaled $163,000 and represented .05% of total loans receivable compared to $409,000 and .13% as of year-end 2006. The Company resolved its largest non-performing loan during 2007 with full collection of principal, interest and fees. Total non-performing assets, which includes foreclosed real estate totaled $163,000 and represented ..03% of total assets, compared to $409,000 and .09% as of December 31, 2006. As of December 31, 2007 and 2006, the Company had no foreclosed real estate. The allowance for loan losses totaled $4,081,000 as of December 31, 2007 and represented 1.23% of total loans receivable compared to $3,828,000 and 1.21% of total loans as of year-end 2006. Net charge-offs for 2007 were $62,000, consisting principally of losses on the sale of repossessed automobiles and a loss on one residential mortgage, compared to net charge-offs of $61,000 in 2006. The provision for loan losses for 2007 was $315,000, compared to $220,000 in 2006. 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 an analysis of impaired loans and a historical review of losses. Other factors considered in the analysis include; concentrations of credit in specific industries in the commercial portfolio; the local and regional economic conditions; trends in delinquencies, internal risk rating classification, large dollar loans of over $2 million and growth in the portfolio. As of December 31, 2007, the Company considered its concentration of credit risk profile to be acceptable. The local, regional and national economy weakened in 2007 as energy prices increased and the real estate market slowed. Local unemployment rates showed a modest increase. The Company has modestly increased its number of large commercial credits and saw a slow down in growth in commercial real estate related loans. As a result of its analysis, after applying these factors, management considers the allowance as of December 31, 2007, adequate. 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. 14 The following table sets forth information with respect to the Company's allowance for loan losses at the dates indicated:
Year-ended December 31, ------------------------------------------------------- (dollars in thousands) 2007 2006 2005 2004 2003 ------------------------------------------------------- Allowance balance at beginning of year $ 3,828 $ 3,669 $ 3,448 $ 3,267 $ 3,146 Charge-offs: Commercial and all other - - (4) (19) (121) Real Estate (4) - (6) (10) - Consumer (117) (150) (200) (342) (478) Lease Financing - - - (11) (36) ------- ------- ------- ------- ------- Total (121) (150) (210) (382) (635) Recoveries: Commercial and all other - 18 12 13 5 Real Estate 2 2 18 8 24 Consumer 54 65 46 78 64 Lease Financing 3 4 5 9 3 ------- ------- ------- ------- ------- Total 59 89 81 108 96 Provision expense 315 220 350 455 660 ------- ------- ------- ------- ------- Allowance balance at end of year $ 4,081 $ 3,828 $ 3,669 $ 3,448 $ 3,267 ======= ======= ======= ======= ======= Allowance for loan losses as a percent of total loans outstanding 1.23% 1.21% 1.26% 1.35% 1.40% Net loans charged off as a percent of average loans outstanding .02% .02% .05% .11% .24% Allowance coverage of non-performing loans 25.0x 9.4x 10.4x 51.5x 22.8x
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, 2007, the Company had $3,208,000 impaired and collateral dependent loans compared to $290,000 at year-end 2006. This increase is due to two related credits with no required allowance.
December 31, ------------------------------------------------------- (dollars in thousands) 2007 2006 2005 2004 2003 ------------------------------------------------------- Non-accrual loans: Commercial and all other $ - $ - $ - $ - $ - Real estate 109 392 330 32 125 Consumer 2 17 11 8 - ------- ------- ------- ------- ------- Total 111 409 341 40 125 Accruing loans which are contractually past due 90 days or more 52 - 12 27 18 ------- ------- ------- ------- ------- Total non-performing loans 163 409 353 67 143 ------- ------- ------- ------- ------- Foreclosed real estate - - - - - Total non-performing assets $ 163 $ 409 $ 353 $ 67 $ 143 ======================================================= Non-performing loans to total loans .05% .13% .12% .03% .06% Non-performing loans to total assets .03% .09% .08% .02% .04% Non-performing assets to total assets .03% .09% .08% .02% .04%
15 SECURITIES The securities portfolio consists principally of issues of United States Government agencies, including mortgage-backed securities, municipal obligations, and corporate debt. In accordance with FAS No.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 the security until contractual maturity. As of December 31, 2007, the HTM portfolio totaled $705,000 and consisted entirely of municipal obligations. Securities classified as AFS are eligible to be sold due to liquidity needs or interest rate risk management. These securities are adjusted to and carried at their fair market value with any unrealized gains or losses, net of deferred income taxes, recorded as an adjustment to capital and reported in the equity section of the balance sheet as accumulated other comprehensive income (loss). As of December 31, 2007, $124.0 million in securities were classified as AFS and carried at their fair market value, with unrealized appreciation, net of tax, of $1,054,000, included in accumulated other comprehensive income in stockholders' equity. As of December 31, 2007, the average life of the portfolio was 2.2 years. The Company has maintained a relatively short average life in the portfolio in order to generate cash flow to support loan growth. Purchases for the year totaled $62.0 million with securities called, maturities and cash flow of $52.4 million and proceeds from sales of $74,000. The purchases were funded principally by cash flow from the portfolio. As of December 31, the carrying value of the Company's securities portfolio (HTM and AFS) totaled $124.7 million with the mix as follows:
2007 2006 -------------------------------------------------- (dollars in thousands) Carrying Carrying Value % of portfolio Value % of portfolio -------------------------------------------------- US Government agencies $ 41,508 33.4% $ 47,581 41.9% States & political subdivisions 22,622 18.1 17,419 15.3 Corporate obligations 4,994 4.0 8,439 7.4 Mortgage-backed securities 54,082 43.3 38,652 33.8 Equity securities 1,486 1.2 1,775 1.6 -------- ----- -------- ----- Total $124,692 100.0% $113,866 100.0% ======== ===== ======== =====
The portfolio had $19.1 million of floating rate instruments, principally adjustable rate mortgage backed securities as of December 31, 2007 compared to $17.7 million at year end 2006. The portfolio contained no structured notes, step-up bonds and no off-balance sheet derivatives were in use. The U.S. Government agency portfolio consists principally of callable notes with final maturities of generally less than five years. The mortgage backed securities are pass-through bonds with the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corp (Freddie Mac), and Guaranteed National Mortgage Association (GNMA). During 2007, the Company increased its holdings of mortgage-backed securities with the expectation that these bonds will provide regular cash flow, provide liquidity and support loan growth. DEPOSITS The Company, through the twelve branches of the Bank, provides a full range of deposit products to its retail and business customers. These products include interest-bearing and non-interest bearing transaction accounts, statement savings and money market accounts. Time deposits consist of certificates of deposit (CDs) with terms of up to five years and include Individual Retirement Accounts. The Bank participates in the Jumbo CD ($100,000 and over) markets with local municipalities and school districts, which are typically awarded on a competitive bid basis. 16 Total deposits as of December 31, 2007, totaled $370.0 million increasing from $358.1 million as of year-end 2006, an increase of $11.9 million or 3.3%. The increase was principally due to growth in money market and non-interest bearing demand accounts, $7.9 million and $6.2 million respectively, as compared to December 31, 2006. This was partially offset by a decline in savings and interest-bearing demand accounts of $2.2 million and $4.2 million respectively, as compared to December 31, 2006. Time deposits over $100,000, which consist principally of school district and other public funds, with maturities generally less than one year, totaled $62.3 million as of December 31, 2007, compared to $56.7 million at year-end 2006. The increase was principally due to a higher level of jumbo CDs with local school districts. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment portfolio structure and the relative cost of other funding sources. As of December 31, 2007, non-interest bearing demand deposits totaled $60.1 million, increasing $6.2 million or 11.5% from the prior year-end. This growth is partially attributable to an increase in commercial deposits, as a result of the Bank's promotion of a free-business checking account in 2007. Interest bearing demand accounts totaled $32.4 million as of December 31, 2007 compared to $36.6 million at year end 2006. The decrease is principally due to certain municipal accounts converting to cash management accounts. Cash management accounts included in short-term borrowings, totaled $24.0 million at year end 2007 compared to $20.7 million as of December 31, 2006. These balances represent commercial and municipal customers' funds invested in overnight securities. The Company considers these accounts as a source of 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 should 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. As of December 31, 2007, the level of net interest income at risk in a 200 basis points increase or decrease was within the Company's policy limits, of a decline less than 8% of net interest income. 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, 2007, the Bank had a positive 90 day interest sensitivity gap of $6.0 million or 1.3% of total assets. A positive gap indicates that the balance sheet has more rate-sensitive assets (RSA) than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, the yield on interest-earning assets would increase faster than the cost of interest-bearing liabilities in the 90 17 day time frame. The level of RSA and RSL for an interval is managed by ALCO strategies, including adjusting the average life of the investment portfolio through purchase and sales, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long term fixed rate mortgages. The Company analyzes and measures the time periods in which RSA and RSL will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Interest rates may change at different rates changing the shape of the yield curve. During 2007, short-term interests declined more than long-term interests. For example, the Federal Funds rate declined 100 basis points while the 10 year treasury rate dropped 60 basis points. This created a positive shaped yield curve as of December 31, 2007. In 2006 as the Federal Funds rate increased 100 basis points while the two to ten year treasury bond yields increased about 40 basis points. As a result the yield curve was inverted for most of 2006. 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. It should be noted that 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, 2007 (dollars in thousands):
December 31, 2007 Rate Sensitivity Table 3 Months 3-12 Months or Less Months 1-3 Years 3 Years Total ---------------------------------------------------------------- Federal Funds Sold and interest bearing deposits $ 50 $ - $ - $ - $ 50 Securities 20,487 26,455 40,609 37,141 124,692 Loans Receivable 90,225 47,769 84,664 108,638 331,296 ---------------------------------------------------------------- Total Rate Sensitive Assets (RSA) $ 110,762 $ 74,224 $ 125,273 $ 145,779 $ 456,038 ================================================================ Non-maturity interest bearing deposits $ 21,046 $ 23,353 $ 61,873 $ 27,086 $ 133,358 Time Deposits 73,576 71,406 20,280 11,319 176,581 Other 10,144 13,434 26,108 - 49,686 ---------------------------------------------------------------- Total Rate Sensitive Liabilities (RSL) $ 104,766 $ 108,193 $ 108,261 $ 38,405 $ 359,625 ================================================================ Interest Sensitivity Gap $ 5,996 $ (33,969) $ 17,012 $ 107,374 $ 96,413 Cumulative gap 5,996 (27,973) (10,961) 96,413 RSA/RSL-cumulative 105.7% 86.9% 96.6% 126.8% December 31, 2006 Interest Sensitivity Gap $ 23,962 $ (34,427) $ 8,813 $ 91,169 $ 89,517 Cumulative gap 23,962 (10,465) (1,652) 89,517 RSA/RSL-cumulative 126.5% 94.9% 99.5% 126.3%
18 LIQUIDITY Liquidity is 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 payments on loans and securities. As of December 31, 2007, the Company had cash and cash equivalents of $9.1 million in the form of cash, due from banks, and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $124.0 million, which could be used for liquidity needs. This totals $133.1 million and represents 27.7% of total assets compared to $122.4 million and 26.9% of total assets as of December 31, 2006. The change was principally due to a higher level of securities available for sale as of December 31, 2007. The Company also monitors other liquidity measures, all of which were within the Company's policy guidelines as of December 31, 2007. Based upon these measures, the Company believes its liquidity position is adequate. The Company maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB), the Atlantic Central Bankers Bank (ACBB) and other correspondent banks, which support liquidity needs. The total available under all the lines was $41 million, with $800,000 outstanding at December 31, 2007. The maximum borrowing capacity from FHLB was $240.2 million. As of December 31, 2007, the Company had $23 million in term borrowings from the FHLB, increasing from $13 million in similar borrowings from the FHLB as of December 31, 2006. The growth of $10 million was used to fund an increase in earning assets in 2007. OFF-BALANCE SHEET ARRANGEMENTS The Company's financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, as of December 31, 2007 totaled $47.3 million. They consisted of $16.1 million in commercial real estate, construction and land developments loans, $10.9 million in home equity lines of credit, $2.3 million in standby letters of credit and $18.0 million in other unused commitments principally commercial lines of credit. Because these instruments have fixed maturity dates and because many of them will expire without being drawn upon, they do not represent any significant liquidity risk. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources. CONTRACTUAL OBLIGATIONS The following table represents the aggregate of on and off balance sheet contractual obligations to make future payments (in thousands):
` December 31, 2007 ---------------------------------------------------------------- Total Less than 1 year 1-3 years 4-5 years Over 5 years ---------------------------------------------------------------- Time deposits $176,581 $144,982 $ 20,280 $ 11,319 $ - Long-term debt 23,000 5,000 - 8,000 10,000 Operating leases 3,813 279 494 487 2,553 ---------------------------------------------------------------- $203,394 $150,261 $ 20,774 $ 19,806 $ 12,553 ================================================================
19 RESULTS OF OPERATIONS NET INTEREST INCOME The following analysis should be read in conjunction with the "Consolidated Average Balance Sheets with Resultant Interest and Rates" and "Rate/Volume Analysis" tables. Net interest income is the most significant source of revenue for the Company and represented 83.0% of total revenue for the year ended December 31, 2007. Net interest income (fte) totaled $17,811,000 for the year ended December 31, 2007 compared to $16,708,000 for 2006, an increase of $1,103,000, or 6.6%. The resulting fte net interest spread and net interest margin were 3.27% and 3.98% respectively in 2007 compared to 3.36% and 3.96% respectively, in 2006. Interest income (fte) for the year ended December 31, 2007 totaled $29,794,000, an increase of $3,320,000 over $26,474,000 earned in 2006. The fte yield on average earning assets for 2007 was 6.66%, increasing 39 basis points, from 6.27% in 2006. The increase in interest income was principally due to higher yields on the securities available for sale portfolio and loan portfolio and a higher percentage of loans on the balance sheet. The prime interest rate was flat at 8.25% from January to mid-September 2007 and decreased to 7.25% by December 31, 2007. This decline in short-term rates impacts the Company's floating rate loans, principally commercial real estate, commercial and home equity lines of credit which are tied to the prime rate. As of December 31, 2007, $69.1 million of loans were immediately repriceable. Average earning assets for 2007 totaled $447.4 million, an increase of $25.4 million over the average for 2006. The mix of earning assets also improved with higher yielding loans representing 72.3% of average earning assets compared to 71.2% during 2006. Interest income (fte) earned on loans totaled $23,876,000 for the year ended December 31, 2007 with a resulting fte yield of 7.38% compared to $21,600,000 with a yield (fte) of 7.16% in 2006. The increase was due to growth in average volume of loans of $21.9 million and a higher average prime interest rate in 2007 than average in 2006. The securities available for sale portfolio averaged $118.7 million during 2007 with interest income (fte) of $5,623,000 and yield (fte) of 4.74% compared to $116.6 million with interest income (fte) of $4,637,000 and yield (fte) of 3.98% in 2006. The increase in yield was due to the reinvestment of cash flow and maturities from the portfolio into higher yielding instruments. Interest expense for the year ended December 31, 2007 totaled $11,983,000 with cost of interest-bearing liabilities of 3.39% compared to interest expense of $9,766,000 at an average cost of 2.91% for 2006. The increase was principally due to a more expensive mix of interest-bearing liabilities with a higher percentage of average time deposits in 2007, 50.7% compared to 43.6% on average in 2006. In addition, the cost of time deposits increased on average to 4.57% in 2007 as compared to 3.96% in 2006. The increase was principally due to higher average short-term rates in 2007 and a competitive market for these deposits. Net interest income represented 81.9% of total revenue for the year ended December 31, 2006 and totaled $16,708,000. This represents an increase of $819,000, or 5.2% over the $15,889,000 earned in 2005. The resulting fte net interest spread and fte net interest margin were 3.36% and 3.96%, respectively in 2006 compared to 3.58% and 3.99% respectively in 2005. Interest income (fte) for the year ended December 31, 2006 totaled $26,474,000 an increase of $4,080,000 over $22,394,000 in 2005. The fte yield on average earning assets for 2006 was 6.27% increasing from 5.62% in 2005. The increase in interest income was principally due to higher yields on loans and investments, growth in average earning assets and a higher percentage of loans on the balance sheet. The prime rate of 20 interest and other short-term interest rates reflected a steady increase from June 2004 to June 2006. During that period the prime rate increased from 4.00% to 8.25%. This has improved the yield on the Company's floating rate loans, principally commercial real estate and commercial lines of credit, which are tied to the prime rate. As of December 31, 2006, $78.8 million of loans were immediately repricable. Average earning assets for 2006 totaled $422.0 million, an increase of $23.9 million over the average for 2005. The mix of earning assets also improved with higher yield loans representing 71.2% of average earning assets in 2006 compared to 68.8% in 2005. Interest income (fte) earned on loans totaled $21,600,000 for the year ended December 31, 2006 with a resulting fte yield of 7.16% compared to $17,727,000 with an fte yield of 6.47% in 2005. Rising short-term interest rates and an increase in average volume of $27.4 million, or 10.0%, were responsible for the improvement in income and yield. The securities available for sale portfolio averaged $116.6 million during 2006, with fte interest income of $4,637,000 and a fte yield of 3.98% compared to $116.6 million with fte interest income of $4,139,000 and a fte yield of 3.55% in 2005. The increase in yield was due to re-investment of cash flows from the portfolio into higher yielding instruments, due to the increase in short-term interest rates. Interest expense for the year ended December 31, 2006 totaled $9,766,000, an increase of $3,261,000 over $6,505,000 in 2005. The increase was principally due to higher short-term interest rates and a more expensive mix of interest-bearing liabilities in 2006. The Company incurred higher costs for time deposits, in 2006 at 3.96% compared to 2.82% in 2005. The cost of time deposits was influenced by competitive pressures, and higher short-term rates. Higher interest rates also impacted the cost of money market accounts and short-term borrowings. The mix of average interest-bearing liabilities was also more expensive in 2006, with average time deposits and short-term borrowings representing 49.3% of the total compared to 45.4% on average in 2005. OTHER INCOME Other income totaled $3,524,000 for the year ended December 31, 2007 compared to $3,583,000 in 2006. Service charges and fees increased $54,000 to $2,509,000 in 2007. The increase was due to an $87,000 increase in overdraft (NSF) fees to $1,347,000 partially offset by a $39,000 decrease in business account analysis fees as the bank now offers a free business checking account with no analysis fees. Income from fiduciary activities totaled $423,000 in 2007 increasing $68,000 from 2006. The increase was due to new business and a higher level of estate fees. Assets under management increased $4.8 million to $101.7 million. Gains on sales of mortgage loans and servicing rights totaled $23,000 for the 2007 period compared to $147,000 in 2006. The decrease was due to the gain in 2006 on the sale of $13.7 million of mortgage servicing rights on loans previously sold in the secondary market. Other income totaled $3,583,000 for the year ended December 31, 2006 compared to $3,548,000 in 2005. Service charges and fees decreased $52,000 to $2,455,000. The decrease was partially due to a $26,000 decline in service charges on deposit accounts reflecting growth in the Bank's free retail checking products. Loan related services decreased $79,000 due in part to no-fee loan promotions conducted in 2006. Income from fiduciary activities totaled $355,000 in 2006 increasing $12,000 from 2005. The increase was principally due to $9.9 million growth in assets under management which totaled $96.9 million as of December 31, 2006. Gains on sales of mortgage loans and servicing rights, included in Other, totaled $147,000 in 2006 compared to $64,000 in 2005. The increase was due to the gain on sale of $13.7 million of mortgage servicing rights on loans previously sold in the secondary market to FNMA. 21 Other Income (dollars in thousands) For the year-ended December 31 2007 2006 2005 ------------------------------------ Service charges on deposit accounts $ 226 $ 296 $ 322 ATM Fees 241 224 215 NSF Fees 1,347 1,260 1,265 Safe Deposit Box Rental 55 55 56 Loan related service fees 236 271 350 Debit Card 328 282 253 Fiduciary activities 423 355 343 Commissions on mutual funds & annuities 120 131 150 Gain on sales of mortgage loans 23 147 64 Earnings on bank-owned life insurance 333 309 296 Other income 175 187 192 ------------------------------------ 3,507 3,517 3,506 Net realized gains on sales of securities 17 66 42 ------------------------------------ Total $3,524 $3,583 $3,548 ==================================== OTHER EXPENSES Other expenses for the year ended December 31, 2007 totaled $11,341,000, an increase of $384,000, or 3.50% over the $10,957,000 in 2006. Salaries and employee benefits expense which represented 51.4% of total other expenses, increased $170,000 or 3.0% to $5,825,000 in 2007. The Company incurred $251,000 of expense related to stock options in 2007, compared to $136,000 in 2006 with the increase related to the timing of grants awarded in 2006. The Company had expense of $444,000 related to its Employee Stock Ownership Plan (ESOP) in 2006 with no similar expense in 2007 as the plan had a ten year life and was fully allocated as of September 30, 2006. This decrease in expense was partially offset by higher 401k Plan expense of $220,000 and incentives of $62,000. Occupancy expenses increased $119,000 to $1,087,000 in 2007 with $71,000 of the increase related to the Tannersville branch which opened in December 2006. Furniture and equipment expense increased $74,000 to $553,000 due to maintenance expense on imaging equipment and $31,000 of costs associated with Tannersville. The efficiency ratio, which is total other expenses as a percentage of net interest income (fte) plus other income, for the year ended December 31, 2007 was 53.2% improving from 54.0% for 2006. Other expenses for the year ended December 31, 2006 totaled $10,957,000, an increase of $334,000 or 3.15% over $10,623,000 in 2005. Salaries and employee benefits expense, which represented 51.6% of total expense, increased $245,000 or 4.5% to $5,655,000 in 2006. The cost of health insurance premiums paid by the Company for its employees increased $105,000 in 2006. The Company incurred $136,000 of expense related to stock options granted in 2006 as a result of adopting FASB Statement No. 123 (R), "Share Based Payment". The Company had expense of $444,000 related to its employee stock ownership plan (ESOP) in 2006 compared to $588,000 in 2005. The ESOP had a ten year life and was fully funded as of September 30, 2006. 22 Furniture and equipment expense decreased $96,000 to $479,000 in 2006 principally due to lower maintenance expense. Data processing related operations totaled $700,000 in 2006 compared to $625,000 in 2005. The increase was due to enhancement to the Bank's on-line banking product and implementation of software related to image based check processing. Advertising expense increased $65,000 to $224,000 in 2006 reflecting increased use of radio advertising. Professional fees decreased $104,000 due to lower level of corporate legal fees and accounting services. INCOME TAXES Income tax expense for the year ended December 31, 2007 totaled $2,629,000 for an effective tax rate of 28.8% compared to an expense of $2,679,000 and an effective tax rate of 31.2% in 2006. The decrease in the effective tax rate is partially due to a higher level of tax-exempt income in 2007. Income tax expense for the year ended December 31, 2006 totaled $2,679,000 for an effective tax rate of 31.2% compared to an expense of $2,341,000 and an effective tax rate of 29.9% for 2005. The higher effective tax rate was principally due to a lower level of tax exempt interest income and the tax effect of compensation expense related to stock options. CAPITAL AND DIVIDENDS Total stockholders' equity as of December 31, 2007, was $55.8 million, compared to $52.2 million as of year-end 2006. The increase was principally due to retention of earnings of $3,905,000 after cash dividends declared of $2,606,000. Accumulated other comprehensive income increased $1,098,000 due to an increase in the fair value of securities in the Company's portfolio principally as a result of a change in interest rates. As of December 31, 2007 the Company had a leverage capital ratio of 11.38%, Tier 1 risk-based capital of 16.26% and total risk-based capital of 17.60% compared to, 11.43%, 15.67% and 16.99%, respectively, in 2006. The Company's stock is traded on The Nasdaq Global Market under the symbol, NWFL. As of December 31, 2007, there were approximately 1,500 recorded beneficial shareholders based on transfer agent mailings. The following table sets forth the price range and cash dividends declared per share regarding the common stock for the periods indicated: Closing Price Range ----------------------------- Cash dividends High Low declared per share ----------------------------------------------------- Year 2006 - --------- First Quarter $ 31.16 $ 29.59 $ .20 Second Quarter 33.75 30.24 .21 Third Quarter 32.00 31.07 .21 Fourth Quarter 31.68 30.22 .23 Year 2007 - --------- First Quarter $ 33.75 $ 30.55 $ .23 Second Quarter 33.35 31.48 .23 Third Quarter 32.75 30.05 .23 Fourth Quarter 32.50 29.90 .25 The book value per share of the common stock was $20.27 as of December 31, 2007 compared to $18.67 as of December 31, 2007. As of year-end 2007, the stock price was $31.25, compared to $31.50 as of December 31, 2006. 23 STOCK PERFORMANCE GRAPH Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq Stock Market index and (b) the cumulative total stockholder return on stocks included in the Nasdaq Bank index, as prepared for Nasdaq by the Center for Research in Securities Prices ("CRSP") at the University of Chicago. All three investment comparisons assume the investment of $100 at the market close on December 31, 2002 and the reinvestment of dividends paid. The graph provides comparison at December 31, 2002 and each fiscal year through December 31, 2007. [STOCK PERFORMANCE GRAPH OMITTED]
- ----------------------------------------------------------------------------------------------- Legend 12/2002 12/2003 12/2004 12/2005 12/2006 12/2007 Norwood Finanical Corp 100.0 136.9 187.4 174.9 184.2 193.0 Nasdaq Stock Market (US Companies) 100.0 149.5 162.7 166.2 182.6 198.0 Nasdaq Bank Stocks 100.0 128.6 147.2 143.8 161.4 127.9 SIC 6020-6029,6710-6719 US & Foreign - -----------------------------------------------------------------------------------------------
There can be no assurance that the Company's future stock performance will be the same or similar to the historical performance shown in the above graph. The Company neither makes nor endorses any predictions as to stock performance. 24 NORWOOD FINANCIAL CORP. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (Dollars in thousands, except per share amounts)
2007 December 31 September 30 June 30 March 31 ------------------------------------------------- Interest income $7,473 $7,457 $7,246 $7,079 Interest expense 3,070 2,965 2,960 2,988 ------------------------------------------------- Net interest income 4,403 4,492 4,286 4,091 Provision for loan losses 120 90 55 50 Other income 858 913 842 894 Net realized gains on sales of securities 2 - 15 - Other expense 2,846 2,787 2,847 2,861 ------------------------------------------------- Income before income taxes 2,297 2,528 2,241 2,074 Income tax expense 625 722 671 611 ------------------------------------------------- NET INCOME $1,672 $1,806 $1,570 $1,463 ================================================= Basic earnings per share $ 0.61 $ 0.65 $ 0.56 $ 0.52 ================================================= Diluted earnings per share $ 0.60 $ 0.64 $ 0.55 $ 0.51 =================================================
2006 December 31 September 30 June 30 March 31 ------------------------------------------------- Interest income $6,956 $6,647 $6,350 $5,996 Interest expense 2,830 2,545 2,321 2,070 ------------------------------------------------- Net interest income 4,126 4,102 4,029 3,926 Provision for loan losses 50 45 55 70 Other income 862 849 989 817 Net realized gains on sales of securities - 45 14 7 Other expense 2,620 2,730 2,841 2,766 ------------------------------------------------- Income before income taxes 2,318 2,221 2,136 1,914 Income tax expense 739 699 660 581 ------------------------------------------------- NET INCOME $1,579 $1,522 $1,476 $1,333 ================================================= Basic earnings per share $ 0.56 $ 0.54 $ 0.53 $ 0.48 ================================================= Diluted earnings per share $ 0.55 $ 0.53 $ 0.52 $ 0.47 =================================================
25 NORWOOD FINANCIAL CORP. CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES (Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31 2007 2006 2005 ---------------------------------------------------------------------------------------------- Average Ave Average Ave Average Ave Balance(2) Interest (1) Rate Balance(2) Interest (1) Rate Balance(2) Interest (1) Rate ---------------------------------------------------------------------------------------------- ASSETS Interest Earning Assets: Federal funds sold $ 3,895 $ 195 5.01% $ 2,778 $ 142 5.11% $ 3,730 $ 129 3.46% Interest bearing deposits with banks 483 26 5.38 98 5 5.10 123 3 2.44 Securities held to maturity 830 74 8.92 981 90 9.17 3,608 396 10.98 Securities available for sale Taxable 99,399 4,571 4.60 99,571 3,712 3.73 98,038 3,116 3.18 Tax-exempt 19,320 1,052 5.45 17,070 925 5.42 18,602 1,023 5.50 ------------------- ------------------- ------------------- Total securities available for sale 118,719 5,623 4.74 116,641 4,637 3.98 116,640 4,139 3.55 Loans receivable (3,4) 323,444 23,876 7.38 301,533 21,600 7.16 274,053 17,727 6.47 ------------------- ------------------- ------------------- Total interest earning assets 447,371 29,794 6.66 422,031 26,474 6.27 398,154 22,394 5.62 Non-interest earning assets: Cash and due from banks 8,128 8,857 8,569 Allowance for loan losses (3,925) (3,785) (3,597) Other assets 17,318 16,976 16,049 -------- -------- -------- Total non-interest earning assets 21,521 22,048 21,021 -------- -------- -------- TOTAL ASSETS $468,892 $444,079 $419,175 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liablities: Interest-bearing demand and money market $ 90,392 1,852 2.05 $ 96,882 1,688 1.74 $ 93,747 $ 969 1.03 Savings 45,858 215 0.47 49,937 232 0.46 57,128 268 0.47 Time 172,986 7,900 4.57 146,344 5,798 3.96 128,704 3,634 2.82 ------------------- ------------------- ------------------- Total interest-bearing deposits 309,236 9,967 3.22 293,163 7,718 2.63 279,579 4,871 1.74 Short-term borrowings 22,443 932 4.15 19,284 823 4.27 15,783 416 2.64 Long-term debt 22,315 1,084 4.86 23,419 1,225 5.23 23,000 1,218 5.30 ------------------- ------------------- ------------------- Total interest bearing liabilities 353,994 11,983 3.39 335,866 9,766 2.91 318,362 6,505 2.04 ------- ------- ------- Non-interest bearing liabilities: Non-interest bearing demand deposits 56,523 54,798 52,109 Other liabilities 4,545 3,526 1,804 -------- -------- -------- Total non-interest bearing liabilities 61,068 58,324 53,913 -------- -------- -------- Stockholders' equity 53,830 49,889 46,900 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $468,892 $444,079 $419,175 ======== ======== ======== Net interest income (tax-equivalent basis) 17,811 3.27% 16,708 3.36% 15,889 3.58% Tax-equivalent basis adjustment (539) ==== (525) ==== (626) ==== ------- ------- ------- Net Interest Income $17,272 $16,183 $15,263 ======= ======= ======= Net Interest margin (tax-equivalent basis) 3.98% 3.96% 3.99% ==== ==== ====
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. 26 RATE/VOLUME ANALYSIS The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease) --------------------------------------------------------------- (dollars in thousands) 2007 compared to 2006 2006 compared to 2005 --------------------------------------------------------------- Variance due to Variance due to --------------------------------------------------------------- Volume Rate Net Volume Rate Net --------------------------------------------------------------- INTEREST EARNING ASSETS: - -------------------------------------------------------------------------------------------------------- Federal funds sold $ 56 $ (3) $ 53 $ (38) $ 51 $ 13 Interest bearing deposits with banks 21 - 21 (1) 3 2 Securities held to maturity (14) (2) (16) (250) (56) (306) Securities available for sale Taxable (6) 865 859 49 547 596 Tax-exempt 122 5 127 (83) (15) (98) --------------------------------------------------------------- Total securities available for sale 116 870 986 (34) 532 498 Loans receivable 1,603 673 2,276 1,870 2,003 3,873 --------------------------------------------------------------- Total interest earning assets 1,783 1,537 3,320 1,547 2,533 4,080 --------------------------------------------------------------- INTEREST BEARING LIABILITIES: - -------------------------------------------------------------------------------------------------------- Interest-bearing demand and money market (119) 283 164 33 686 719 Savings (19) 2 (17) (33) (3) (36) Time 1,143 959 2,102 549 1,615 2,164 --------------------------------------------------------------- Total interest-bearing deposits 1,006 1,243 2,249 549 2,298 2,847 Short-term borrowings 132 (23) 109 107 300 407 Long-term debt (56) (85) (141) 22 (15) 7 --------------------------------------------------------------- Total interest bearing liabilities 1,081 1,136 2,217 678 2,583 3,261 --------------------------------------------------------------- Net interest income (tax-equivalent basis) $ 701 $ 401 $ 1,103 $ 869 $ (50) $ 819 ===============================================================
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate. 27 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING TO THE SHAREHOLDERS OF NORWOOD FINANCIAL CORP. Management of Norwood Financial Corp. and its subsidiary (Norwood) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Norwood's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Norwood's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Norwood; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Norwood's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Norwood's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Norwood's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal Control - Integrated Framework." Based on our assessment and those criteria, management determined that Norwood maintained effective internal control over financial reporting as of December 31, 2007. Norwood's independent registered certified public accounting firm has audited the effectiveness of Norwood's internal control over financial reporting. Their report appears on page 30. 28 [LOGO] bmc REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Norwood Financial Corp. Honesdale, Pennsylvania We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and its subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2007. Norwood Financial Corp. and its subsidiary's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share-based payments in 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Norwood Financial Corp. and its subsidiary's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2008 expressed an unqualified opinion. /s/Beard Miller Company LLP Beard Miller Company LLP Lancaster, Pennsylvania March 11, 2008 29 [LOGO] bmc REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Norwood Financial Corp. Honesdale, Pennsylvania We have audited Norwood Financial Corp. and its subsidiary's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Norwood Financial Corp. and its subsidiary's Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Norwood Financial Corp. and its subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related statements of income, stockholders' equity and cash flows of Norwood Financial Corp. and its subsidiary, and our report dated March 11, 2008 expressed an unqualified opinion. /s/Beard Miller Company, LLP Beard Miller Company, LLP Lancaster, Pennsylvania March 11, 2008 30 CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 2007 2006 ---------------------- (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 9,014 $ 9,450 Interest bearing deposits with banks 50 67 ---------------------- Cash and Cash Equivalents 9,064 9,517 Securities available for sale 123,987 112,912 Securities held to maturity, fair value 2007 $721; 2006 $971 705 954 Loans receivable, net of allowance for loan losses 2007 $4,081; 2006 $3,828 327,215 311,739 Investment in FHLB stock, at cost 2,072 1,687 Bank premises and equipment, net 5,742 6,020 Bank owned life insurance 7,767 7,479 Accrued interest receivable 2,343 2,129 Other assets 1,715 1,919 ---------------------- Total Assets $ 480,610 $ 454,356 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 60,061 $ 53,856 Interest-bearing demand 32,426 36,600 Money market deposit accounts 57,970 50,048 Savings 42,962 45,144 Time 176,581 172,455 ---------------------- Total Deposits 370,000 358,103 Short-term borrowings 26,686 22,736 Long-term debt 23,000 13,000 Accrued interest payable 3,198 2,894 Other liabilities 1,907 5,392 ---------------------- Total Liabilities 424,791 402,125 ---------------------- STOCKHOLDERS' EQUITY Common stock, par value $.10 per share; authorized 10,000,000 shares; issued 2,840,872 shares 284 284 Surplus 10,159 10,149 Retained earnings 47,030 43,125 Treasury stock, at cost 2007 87,256 shares; 2006 43,721 shares (2,708) (1,283) Accumulated other comprehensive income (loss) 1,054 (44) ---------------------- Total Stockholders' Equity 55,819 52,231 ---------------------- Total Liabilities and Stockholders' Equity $ 480,610 $ 454,356 ======================
See notes to consolidated financial statements. 31 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, --------------------------- 2007 2006 2005 --------------------------- (In Thousands, Except per Share Data) INTEREST INCOME Loans receivable, including fees $23,720 $21,422 $17,583 Securities: Taxable 4,571 3,712 3,116 Tax-exempt 743 668 937 Other 221 147 132 --------------------------- Total Interest Income 29,255 25,949 21,768 --------------------------- INTEREST EXPENSE Deposits 9,967 7,718 4,871 Short-term borrowings 932 823 416 Long-term debt 1,084 1,225 1,218 --------------------------- Total Interest Expense 11,983 9,766 6,505 --------------------------- Net Interest Income 17,272 16,183 15,263 PROVISION FOR LOAN LOSSES 315 220 350 --------------------------- Net Interest Income after Provision for Loan Losses 16,957 15,963 14,913 --------------------------- OTHER INCOME Service charges and fees 2,509 2,455 2,507 Income from fiduciary activities 423 355 343 Net realized gains on sales of securities 17 66 42 Earnings on life insurance policies 333 309 296 Other 242 398 360 --------------------------- Total Other Income 3,524 3,583 3,548 --------------------------- OTHER EXPENSES Salaries and employee benefits 5,825 5,655 5,410 Occupancy 1,087 968 928 Furniture and equipment 553 479 575 Data processing related operations 690 700 625 Advertising 235 224 159 Professional fees 349 340 444 Postage and telephone 491 471 470 Taxes, other than income 414 354 334 Amortization of intangible assets 52 52 52 Other 1,645 1,714 1,626 --------------------------- Total Other Expenses 11,341 10,957 10,623 --------------------------- Income before Income Taxes 9,140 8,589 7,838 INCOME TAX EXPENSE 2,629 2,679 2,341 --------------------------- Net Income $ 6,511 $ 5,910 $ 5,497 =========================== EARNINGS PER SHARE Basic $ 2.34 $ 2.11 $ 1.96 =========================== Diluted $ 2.30 $ 2.07 $ 1.92 ===========================
See notes to consolidated financial statements. 32 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2007, 2006 and 2005 ---------------------------------------------------------------------------------- Accumulated Number of Other Unearned Shares Common Retained Treasury Comprehensive ESOP Issued Stock Surplus Earnings Stock Income (Loss) Shares Total ---------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE - DECEMBER 31, 2004 2,705,715 $ 270 $ 5,336 $40,222 $ (149) $ 333 $(327) $45,685 Comprehensive income: - - - - - - - ------- Net income 5,497 5,497 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects - - - - - (1,105) - (1,105) ------- Total Comprehensive Income 4,392 ------- Cash dividends declared, $0.71 per share - - - (1,997) - - - (1,997) Stock options exercised (9,239 shs) - - (78) - 228 - - 150 Tax benefit of stock options exercised - - 18 - - - - 18 Acquisition of treasury stock (25,201 shs) - - - - (819) - - (819) Sale of treasury stock for ESOP (3,686 shs) - - 7 - 107 - - 114 Release of earned ESOP shares, net - - 365 - - - 200 565 ---------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2005 2,705,715 270 5,648 43,722 (633) (772) (127) 48,108 Comprehensive income: * Net income - - - 5,910 - - - 5,910 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects - - - - - 728 - 728 ------- Total Comprehensive Income 6,638 ------- Cash dividends declared, $0.85 per share - - - (2,368) - - - (2,368) 5% stock dividend at $30.59 per share 135,157 14 4,121 (4,139) - - - (4) Treasury stock effect of 5% stock dividend (1,933 shs) - - - - - - - - Acquisition of treasury stock (28,746 shs) -- - - - (890) - - (890) Stock options exercised (4,331 shs) - - (68) - 128 - - 60 Tax benefit of stock options exercised - - 10 - - - - 10 Sale of treasury stock for ESOP (3,816 shs) - - 8 - 112 - - 120 Compensation expense related to stock options - - 136 - - - - 136 Release of earned ESOP shares, net - - 294 - - - 127 421 ----------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2006 2,840,872 284 10,149 43,125 (1,283) (44) - 52,231 Comprehensive income: - - - - - - - - Net income - - - 6,511 - - - 6,511 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects - - - - - 1,098 - 1,098 ------- Total Comprehensive Income - - - - - - - 7,609 ------- Cash dividends declared, $0.94 per share - - - (2,606) - - - (2,606) Acquisition of treasury stock (72,875 shs) - - - - (2,313) - - (2,313) Stock options exercised (24,720 shs) - - (404) - 745 - - 341 Tax benefit of stock options exercised - - 162 - - - - 162 Sale of treasury stock for ESOP (4,620 shs) - - 1 - 143 - - 144 Compensation expense related to stock options - - 251 - - - - 251 ----------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2007 2,840,872 $ 284 $10,159 $47,030 $(2,708) $ 1,054 $ - $55,819 ==================================================================================
See notes to consolidated financial statements. 33 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------ 2007 2006 2005 ------------------------------------ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,511 $ 5,910 $ 5,497 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 315 220 350 Depreciation 566 503 535 Amortization of intangible assets 52 52 52 Deferred income taxes (151) (108) (37) Net amortization (accretion)?of securities premiums and discounts 113 301 431 Net realized gains on sales of securities (17) (66) Net increase in investment in life insurance (288) (266) (254) Gain on sale of bank premises and equipment and foreclosed real estate (1) (12) (5) Gain on sale of mortgage loans (23) (147) (64) Mortgage loans originated for sale (794) (2,065) (6,650) Proceeds from sale of mortgage loans 817 2,212 6,714 Tax benefit of stock options exercised - - 18 Release of ESOP shares - 421 565 Compensation expense related to stock options 251 136 - Decrease (increase) in accrued interest receivable and other assets (414) 1,137 (1,725) Increase (decrease) in accrued interest payable and other liabilities (3,228) 4,543 1,575 ------------------------------------ Net Cash Provided by Operating Activities 3,709 12,771 6,960 ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 74 96 6,073 Proceeds from maturities and principal reductions on mortgage-backed securities 52,408 35,962 11,799 Purchases (62,005) (32,291) (18,878) Securities held to maturity, proceeds from maturities 250 505 4,330 (Increase) decrease in investment in FHLB stock (385) (67) 605 Net increase in loans (15,839) (24,892) (36,374) Purchase of bank premises and equipment (288) (1,130) (446) Proceeds from sales of premises and equipment and foreclosed real estate 1 64 12 ------------------------------------ Net Cash Used in Investing Activities (25,784) (21,753) (32,879) ------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 11,897 17,500 21,958 Net increase (decrease) in short-term borrowings 3,950 4,172 (4,418) Proceeds from long-term debt 15,000 - 5,000 Repayments of long-term debt (5,000) (10,000) (5,000) Stock options exercised 341 60 150 Tax benefit of stock options exercised 162 10 - Purchase of ESOP shares from treasury stock 144 120 114 Acquisition of treasury stock (2,313) (890) (819) Cash dividends paid (2,559) (2,289) (1,916) ------------------------------------ Net Cash Provided by Financing Activities 21,622 8,683 15,069 ------------------------------------ Net Decrease in Cash and Cash Equivalents (453) (299) (10,850) CASH AND CASH EQUIVALENTS - BEGINNING 9,517 9,816 20,666 ------------------------------------ CASH AND CASH EQUIVALENTS - ENDING $ 9,064 $ 9,517 $ 9,816 ====================================
See notes to consolidated financial statements. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - 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 mortgages, residential real estate mortgages, commercial and consumer loans, as well as interest earnings on investment securities and fees from 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 accounting principles generally accepted in the United States of America 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets and the determination of other-than-temporary impairment on securities. Significant Group Concentrations of Credit Risk Most of the Company's activities are with customers located within northeastern Pennsylvania. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. 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. 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 term of the security. 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 term of the security. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 35 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This restricted stock is carried at cost. 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 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 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 revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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. 36 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. 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 as follows: Years ----- Buildings and improvements 10 - 40 Furniture and equipment 3 - 10 Transfers of Financial Assets Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Foreclosed 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 its 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. Foreclosed real estate is included in other assets. Bank Owned Life Insurance The Company invests in bank owned life insurance ("BOLI") as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Company is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies is included in other income on the income statement. Intangible Assets Intangible assets represent goodwill arising from acquisitions. Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. On January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," and SFAS 147, "Accounting for Certain Acquisitions of Banking and Thrift Institutions." At December 31, 2007 and 2006, the Company had intangible assets of $169,000 and $221,000, which is net of accumulated amortization of $611,000 and $559,000, which are included in other assets. These intangible assets will continue to be amortized on a straight-line basis over fifteen years under the provisions of SFAS 142 and SFAS 147. Amortization expense related to intangible assets was $52,000 for each of the years ended December 31, 2007, 2006 and 2005. The amortization expense will be $52,000 for each of the years ended December 31, 2008, 2009 and 2010 and $13,000 for the year ended December 31, 2011. 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. 37 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings per Share On April 11, 2006, the Company declared a 5% stock dividend on common stock outstanding payable May 26, 2006 to shareholders of record on May 12, 2006. The stock dividend resulted in the issuance of 135,157 additional common shares. All share amounts and per share data have been adjusted for the effect of the stock dividend. 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. Stock Option Plans In December 2004, the Financial Acounting Standards Board (FASB) issued Statement No. 123 (R), "Share-Based Payment." Statement No. 123 (R) replaces Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123 (R) requires the fair value of share-based payment transactions to be recognized as compensation costs in the financial statements over the period that an employee provides service in exchange for the award. The fair value of the share-based payments is estimated using the Black-Scholes option-pricing model. The Company adopted Statement No. 123 (R) effective January 1, 2006, using the modified-prospective transition method. Under the modified-prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified-prospective method. For the year ended December 31, 2005, the Company accounted for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. Year Ended December 31, ------------------------------ 2005 ------------------------------ (Thousands, Except per Share Data) Net income, as reported $ 5,497 Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes (194) ------- Pro forma net income $ 5,303 ======= Earnings per share (basic): As reported $ 1.96 Pro forma $ 1.89 Earnings per share (assuming dilution): As reported $ 1.92 Pro forma $ 1.85 38 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, all of which mature within 90 days. Cash payments for interest for the years ended December 31, 2007, 2006 and 2005 were $11,679,000, $8,563,000, and $6,014,000, respectively. Cash payments for income taxes for the years ended December 31, 2007, 2006 and 2005 were $2,845,000, $2,677,000, and $2,449,000, respectively. Non-cash investing activities for 2007, 2006 and 2005 included foreclosed mortgage loans transferred to foreclosed real estate and repossession of other assets of $48,000, $154,000, and $112,000, 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 accepted in the United States of America 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, ------------------------------ 2007 2006 2005 ------------------------------ (In Thousands) Unrealized holding gains/(losses) on available for sale securities $ 1,665 $ 1,173 $ (1,636) Reclassification adjustment for gains realized in income 17 66 42 ------------------------------ Net Unrealized Gains/(Losses) 1,648 1,107 (1,678) Income tax expense (benefit) 550 379 (573) ------------------------------ Net of Tax Amount $ 1,098 $ 728 $ (1,105) ==============================
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, among 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. 39 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Standards In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements" (EITF 06-4). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee's benefit during his or her retirement, then the liability recognized during the employee's active service period should be based on the future cost of insurance to be incurred during the employee's retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The EITF is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. The Company has chosen approach (b) and is expected to record a cumulative effect adjustment as of January 1, 2008 to the balance of retained earnings of $520,000, with $90,000 of Net Periodic Postretirement Benefit expense for the year ended December 31, 2008. On September 7, 2006, the Task Force reached a conclusion on EITF Issue No. 06-5, "Accounting for Purchases of Life Insurance - Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance" (EITF 06-5"). The Scope of EITF 06-5 consists of six separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of key persons. The six issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4 EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-5 did not have a material impact on the Company's consolidated financial statements. In September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement 157 applies to all accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows. In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, "Effective Date of FASB Statement No. 157," that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity's financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115". SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial statements. 40 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FASB Statement No. 141 (R) "Business Combinations" was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company's fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company's accounting for business combinations beginning January 1, 2009. FASB Statement No. 160 "Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51" was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company's fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will have an immaterial impact on the Company's consolidated financial statements in future periods. Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, "Share-Based Payment," of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the "simplified" method in developing an estimate of expected term of "plain vanilla" share options and allows usage of the "simplified" method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the "simplified" method for estimating the expected term of "plain vanilla" share option grants after December 31, 2007. SAB 110 is effective January 1, 2008. Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at Fair Value Through Earnings" expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff's views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan Commitments." Specifically, the SAB revises the SEC staff's views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff's views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect SAB 109 to have a material impact on its consolidated financial statements. In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards" ("EITF 06-11"). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company expects that EITF 06-11 will not have an impact on its consolidated financial statements. Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 156, "Accounting for Servicing of Financial Assets - An Amendment of FASB Statement No 140" (SFAS 156). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The adoption of SFAS 156 did not have a significant effect on the consolidated financial statements. 41 NOTE 3 - SECURITIES The amortized cost and fair value of securities were as follows:
December 31, 2007 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------ (In Thousands) AVAILABLE FOR SALE: U.S. Government agencies $ 41,110 $ 435 $ (37) $ 41,508 States and political subdivisions 21,765 196 (44) 21,917 Corporate obligations 5,078 - (84) 4,994 Mortgage-backed securities 53,846 458 (222) 54,082 ------------------------------------------------ 121,799 1,089 (387) 122,501 Equity securities 585 941 (40) 1,486 ------------------------------------------------ $ 122,384 $ 2,030 $ (427) $ 123,987 ================================================ HELD TO MATURITY: States and political subdivisions $ 705 $ 16 $ - $ 721 ================================================
December 31, 2006 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------ (In Thousands) AVAILABLE FOR SALE: U.S. Government agencies $ 48,117 $ 10 $ (546) $ 47,581 States and political subdivisions 16,572 73 (180) 16,465 Corporate obligations 8,552 - (113) 8,439 Mortgage-backed securities 39,123 98 (569) 38,652 ------------------------------------------------ 112,364 181 (1,408) 111,137 Equity securities 593 1,182 - 1,775 ------------------------------------------------ $ 112,957 $ 1,363 $ (1,408) $ 112,912 ================================================ HELD TO MATURITY: States and political subdivisions $ 954 $ 17 $ - $ 971 ================================================
The following tables show the Company's investments' gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2007 -------------------------------------------------------------------- Less than 12 Months 12 Months or More Total -------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------------------------------------------------------------------- (In Thousands) U.S. Government agencies $ - $ - $ 9,461 $ (37) $ 9,461 $ (37) States and political subdivisions 344 (1) 5,401 (43) 5,745 (44) Corporate obligations 3,006 (67) 1,988 (17) 4,994 (84) Mortgage-backed securities 8,095 (19) 10,854 (203) 18,949 (222) Equity securities 178 (40) - - 178 (40) -------------------------------------------------------------------- $ 11,623 $ (127) $ 27,704 $ (300) $ 39,327 $ (427) ====================================================================
42 NOTE 3 - SECURITIES (CONTINUED)
December 31, 2006 -------------------------------------------------------------------- Less than 12 Months 12 Months or More Total -------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------------------------------------------------------------------- (In Thousands) U.S. Government agencies $ 9,966 $ (32) $ 34,605 $ (514) $ 44,571 $ (546) States and political subdivisions 3,104 (8) 8,064 (172) 11,168 (180) Corporate obligations - - 7,440 (113) 7,440 (113) Mortgage-backed securities 4,952 (35) 21,419 (534) 26,371 (569) -------------------------------------------------------------------- $ 18,022 $ (75) $ 71,528 $ (1,333) $ 89,550 $ (1,408) ====================================================================
The Company has 12 securities in the less than twelve month category and 46 securities in the twelve months or more category. In management's opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery. The amortized cost and fair value of debt securities as of December 31, 2007 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity -------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------- (In Thousands) Due in one year or less $ 9,125 $ 9,104 $ - $ - Due after one year through five years 28,497 28,533 - - Due after five years through ten years 21,560 21,925 705 721 Due after ten years 8,771 8,857 - - -------------------------------------- 67,953 68,419 705 721 Mortgage-backed securities 53,846 54,082 - - -------------------------------------- $121,799 $122,501 $ 705 $ 721 ====================================== Gross realized gains and gross realized losses on sales of securities available for sale were $40,000 and $23,000, respectively, in 2007, $66,000 and $-0-, respectively, in 2006, $107,000 and $65,000, respectively, in 2005. Securities with a carrying value of $56,398,000 and $50,677,000 at December 31, 2007 and 2006, respectively, 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. 41 NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The components of loans receivable at December 31 were as follows: 2007 2006 ------------------- (In Thousands) Real estate: Residential $129,888 $113,783 Commercial 133,593 127,640 Construction 20,404 18,955 Commercial, financial and agricultural 29,159 34,019 Consumer loans to individuals 18,526 21,520 ------------------- 331,570 315,917 Unearned income and deferred fees (274) (350) Allowance for loan losses (4,081) (3,828) ------------------- $327,215 $311,739 =================== The following table presents changes in the allowance for loan losses: Years Ended December 31, ------------------------- 2007 2006 2005 ------------------------- (In Thousands) Balance, beginning $3,828 $3,669 $3,448 Provision for loan losses 315 220 350 Recoveries 59 89 81 Loans charged off (121) (150) (210) ------------------------- Balance, ending $4,081 $3,828 $3,669 ========================= The recorded investment in impaired loans, not requiring an allowance for loan losses was $3,208,000 and $290,000 at December 31, 2007 and 2006, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2007 and 2006. For the years ended December 31, 2007, 2006 and 2005, the average recorded investment in these impaired loans was $3,127,000, $286,000, and $316,000, and the interest income recognized on these impaired loans was $290,000, $1,000, and $11,000, respectively. Loans on which the accrual of interest has been discontinued amounted to $111,000 and $409,000 at December 31, 2007 and 2006, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $52,000 and $-0- at December 31, 2007 and 2006, respectively. NOTE 5 - PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 2007 2006 ----------------------- (In Thousands) Land and improvements $ 925 $ 925 Buildings and improvements 7,875 7,766 Furniture and equipment 4,798 4,638 ----------------------- 13,598 13,329 Accumulated depreciation (7,856) (7,309) ----------------------- $ 5,742 $ 6,020 ======================= 44 NOTE 5 - PREMISES AND EQUIPMENT (CONTINUED) Certain facilities are leased under various operating leases. Rental expense for these leases was $283,000, $222,000, and $203,000, for the years ended December 31, 2007, 2006 and 2005. Future minimum rental commitments under noncancellable leases as of December 31, 2007 were as follows (in thousands): 2008 $ 279 2009 266 2010 228 2011 239 2012 248 Thereafter 2,553 ------- $ 3,813 ======= NOTE 6 - DEPOSITS Aggregate time deposits in denominations of $100,000 or more were $62,263,000 and $56,736,000 at December 31, 2007 and 2006, respectively. At December 31, 2007, the scheduled maturities of time deposits are as follows (in thousands): 2008 $144,982 2009 15,778 2010 4,502 2011 4,748 2012 6,571 -------- $176,581 ======== NOTE 7 - BORROWINGS Short-term borrowings at December 31 consist of the following: 2007 2006 ------------------ (In Thousands) Securities sold under agreements to repurchase $24,885 $21,736 Federal funds purchased 800 - U.S. Treasury demand notes 1,001 1,000 ------------------ $26,686 $22,736 ================== The outstanding balances and related information of short-term borrowings are summarized as follows:
Years Ended December 31, ------------------------------- 2007 2006 2005 ------------------------------- (Dollars In Thousands) Average balance during the year $22,443 $22,209 $15,059 Average interest rate during the year 4.15% 4.39% 2.76% Maximum month-end balance during the year $33,024 $29,677 $24,956 Weighted average interest rate at the end of the year 3.60% 4.20% 3.76%
Securities sold under agreements to repurchase generally mature within one day to one year from the transaction date. Securities with an amortized cost and fair value of $27,127,000 and $27,410,000, respectively at December 31, 2007 and $24,535,000 and $24,720,000, respectively at December 31, 2006 were pledged as collateral for these agreements. The securities underlying the agreements were under the Company's control. 45 NOTE 7 - BORROWINGS (CONTINUED) 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 December 2011. There were no borrowings under this line at December 31, 2007 and 2006. The Company has a line of credit commitment available from Atlantic Central Bankers Bank for $7,000,000 which expires in May 2008 and Wachovia Bank for $2,000,000 which has no set expiration date. There were no borrowings under these lines of credit at December 31, 2007 and 2006. The Company has a line of credit commitment available which has no set expiration date from PNC Bank for $12,000,000 at December 31, 2007. Borrowings under this line of credit were $800,000 at December 31, 2007 and $-0- at December 31, 2006. Long-term debt consisted of the following at December 31, 2007 and 2006: 2007 2006 -------------------- (In Thousands) Notes with the Federal Home Loan Bank (FHLB): Fixed note due April 2008 at 4.17% $ 5,000 $ 5,000 Convertible note due April 2009 at 4.83% - 5,000 Convertible note due January 2011 at 5.24% 3,000 3,000 Convertible note due October 2012 at 4.37% 5,000 - Convertible note due January 2017 at 4.71% 10,000 - -------------------- $23,000 $13,000 ==================== The convertible notes contain an option which allows the FHLB, at quarterly intervals, to change the note to an adjustable-rate advance at three-month LIBOR plus 11 to 17 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge. Contractual maturities of long-term debt at December 31, 2007 are as follows (in thousands): 2008 $ 5,000 2009 - 2010 - 2011 3,000 2012 5,000 Thereafter 10,000 ------- $23,000 ======= The Bank's maximum borrowing capacity with the Federal Home Loan Bank was $240,172,000 of which $23,000,000 was outstanding at December 31, 2007. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank. NOTE 8 - 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 $400,000, $181,000, and $207,000 for the years ended December 31, 2007, 2006 and 2005, respectively. 46 NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED) The Company has a non-qualified supplemental executive retirement plan for the benefit of certain executive officers. At December 31, 2007 and 2006, other liabilities include approximately $966,000 and $858,000 accrued under the Plan. Compensation expense includes approximately $108,000, $138,000, and $140,000, relating to the supplemental executive retirement plan for 2007, 2006 and 2005, respectively. To fund the benefits under this plan, the Company is the owner of single premium life insurance policies on participants in the non-qualified retirement plan. At December 31, 2007 and 2006, the cash value of these policies was $7,767,000 and $7,479,000, 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 made 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 was secured by the shares of the stock purchased and was paid off in 2006. As the debt was repaid, shares were 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. Dividends recorded as a reduction of debt were $-0- and $12,000 for the years ended December 31, 2007 and 2006, respectively. The total employer contribution was $-0- and $143,000 for the years ended December 31, 2007 and 2006, respectively. Compensation expense for the ESOP was $-0-, $444,000, and $588,000 for the years ended December 31, 2007, 2006, and 2005, respectively. . The status of the ESOP shares at December 31 are as follows: 2007 2006 -------------------- Allocated shares 160,243 162,690 Shares released from allocation 30,666 28,219 Unreleased shares - - -------------------- Total ESOP shares 190,909 190,909 ==================== Fair value of unreleased shares $ - $ - ==================== NOTE 9 - INCOME TAXES The components of the provision for federal income taxes are as follows: Years Ended December 31, ------------------------- 2007 2006 2005 ------------------------- (In Thousands) Current $2,780 $2,787 $2,378 Deferred (151) (108) (37) -------------------------- $2,629 $2,679 $2,341 ========================== 47 NOTE 9 - INCOME TAXES (CONTINUED) Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as, the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return purposes. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets. 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, ----------------------------------------- 2007 2006 2005 ----------------------------------------- Tax at statutory rates 34.0 % 34.0 % 34.0 % Tax exempt interest income, net of interest expense disallowance (3.4) (3.6) (4.7) Increase in fair market value of ESOP - 1.2 1.6 Incentive Stock Options 0.8 0.5 - Earnings on life insurance (1.1) (1.0) (1.1) Other (1.5) 0.1 0.1 ----------------------------------------- 28.8 % 31.2 % 29.9 % =========================================
The income tax provision includes $6,000, $22,000, and $14,000, of income taxes relating to realized securities gains for the years ended December 31, 2007, 2006, and 2005, respectively. The net deferred tax asset included in other assets in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities: 2007 2006 ------------------------ (In Thousands) Deferred tax assets: Allowance for loan losses $ 1,271 $ 1,142 Deferred compensation 345 292 Intangible assets 68 94 Net unrealized losses on securities - 1 Other 29 21 ------------------------ Total Deferred Tax Assets 1,713 1,550 ------------------------ Deferred tax liabilities: Premises and equipment 226 215 Deferred loan fees 307 305 Net unrealized gains on securities 549 - ------------------------ Total Deferred Tax Liabilities 1,082 520 ------------------------ Net Deferred Tax Asset $ 631 $ 1,030 ======================== 48 NOTE 9 - INCOME TAXES (CONTINUED) Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards (FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company's evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2007. Our policy is to recognize interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statements of Income. The amount of interest and penalties for the year ended December 31, 2007 was immaterial. The tax years subject to examination by the taxing authorities are the years ended December 31, 2006, 2005, 2004 and 2003. Effective January 1, 2007, the Company adopted the provision of FASB Staff Position ("FSP") FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations. NOTE 10 - TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS Certain directors and executive officers of the Company, 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, 2007 and 2006 such loans amounted to $5,635,000 and $5,959,000, respectively. During 2007, new loans to such related parties totaled $228,000 and repayments and other reductions aggregated $552,000. NOTE 11 - 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 effect 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 and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2007, the most recent notification from the regulators has categorized 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 Bank's category. 49 NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED) The Bank's actual capital amounts and ratios are presented in the table:
To Be Well Capitalized under Prompt For Capital Adequacy Corrective Action Actual Purposes Provisions -------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------- (Dollars in Thousands) As of December 31, 2007: Total capital (to risk-weighted assets) $57,968 17.43 % $>26,606 >8.00 % $>33,258 >10.00 % - - - - Tier 1 capital (to risk-weighted assets) 53,545 16.10 >13,303 >4.00 >19,955 > 6.00 - - - - Tier 1 capital (to average assets) 53,545 11.14 >19,226 >4.00 >24,033 > 5.00 - - - - As of December 31, 2006: Total capital (to risk-weighted assets) $55,017 16.73 % $>26,308 >8.00 % $>32,885 >10.00 % - - - - Tier 1 capital (to risk-weighted assets) 50,800 15.45 >13,153 >4.00 >19,728 > 6.00 - - - - Tier 1 capital (to average assets) 50,800 11.15 >18,224 >4.00 >22,780 > 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, 2007 and 2006 was approximately $266,000 and $253,000, 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, 2007, $48,809,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed above. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including the Company, unless such loans are collateralized by specific obligations. NOTE 12 - STOCK OPTION PLANS The Company's shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual Meeting on April 26, 2006. An aggregate of 250,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 40,000 shares for awards to outside directors. Under this plan, the Company granted 22,000 options in 2007 which included 4,000 options granted to outside directors and 47,700 options in 2006, which included 7,675 options granted to outside directors. The Company adopted a Stock Option Plan for the officers and employees of the Company in 1995. An aggregate of 750,000 shares of authorized but unissued common stock of the Company were reserved for future issuance under the Plan. In 1999, the Company adopted the Directors Stock Compensation Plan with an aggregate of 26,400 shares reserved for issuance under the Plan. The stock options typically have expiration terms of ten years subject to certain extensions and early terminations and vest over periods ranging from six months to one year from the date of grant. 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. There were no options granted under either plan in 2005, as both plans have expired. Total unrecognized compensation cost related to nonvested options under the Plan was $154,000 as of December 31, 2007 and $251,000 as of December 31, 2006. Salaries and employee benefits expense includes $251,000 and $136,000 related to the adoption of Statement No.123(R) for the years ended December 31, 2007 and 2006, respectively. Net income was reduced by $236,000 and $129,000 for the years ended December 31, 2007 and 2006 respectively. 50 NOTE 12 - STOCK OPTION PLANS (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2007 2006 2005 ---------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Average Average Exercise Intrinsic Exercise Intrinsic Exercise Options Price Value Options Price Value Options Price ---------------------------------------------------------------------------------------- Outstanding, beginning of year 183,645 $21.81 140,296 $18.45 149,997 $18.25 Granted 22,000 31.25 47,700 30.91 - - Exercised (24,723) 13.76 (4,351) 13.05 (9,701) 15.44 Forfeited (500) 31.50 - - - - --------------------------------------------------------------------------------------- Outstanding, end of year 180,422 $24.04 $1,301,000 183,645 $21.81 $1,780,000 140,296 $18.45 ======================================================================================= Exercisable, at end of year 158,422 $23.04 $1,301,000 ==============================
Exercise prices for options outstanding as of December 31, 2007 ranged from $10.37 to $31.50 per share. The weighted average remaining contractual life is 6.1 years. 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, ---------------------------- 2007 2006 2005 ---------------------------- Dividend yield 2.75% 2.70% -% Expected life 7 years 7 years - Expected volatility 24.17% 25.12% -% Risk-free interest rate 3.53% 4.85% -% Weighted average fair value of options granted $ 6.99 $ 8.11 $ - The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company's history and expectation of dividend payouts. Proceeds from stock option exercises totaled $341,000 in 2007. Shares issued in connection with stock options exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. During 2007, all the shares issued in connection with stock option exercises, 24,723 shares in total, were issued from available treasury shares. 51 NOTE 12 - STOCK OPTION PLANS (CONTINUED) As of December 31, 2007, outstanding stock options consist of the following: Average Average Options Exercise Remaining Options Exercise Outstanding Price Life, Years Exercisable Price ----------- ----- ----------- ----------- ----- 14,962 $15.24 1.0 14,962 $15.24 14,174 14.12 2.0 14,174 14.12 9,450 10.36 3.0 9,450 10.36 16,537 16.98 4.0 16,537 16.98 16,537 19.05 5.0 16,537 19.05 19,612 23.95 6.0 19,612 23.95 20,475 30.00 7.0 20,475 30.00 24,675 30.38 8.3 24,675 30.38 22,000 31.50 9.0 22,000 31.50 22,000 31.25 10.0 - - ------- ------- Total 180,422 $24.04 6.1 158,422 $23.04 ======= ======= NOTE 13 - EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, ------------------------ 2007 2006 2005 ------------------------ (In Thousands, Except per Share Data) Numerator, net income $6,511 $5,910 $5,497 ======================== Denominator: Denominator for basic earnings per share, weighted average shares 2,777 2,795 2,800 Effect of dilutive securities, employee stock options 49 55 59 ------------------------ Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 2,826 2,850 2,859 ======================== Basic earnings per common share $ 2.34 $ 2.11 $ 1.96 ======================== Diluted earnings per common share $ 2.30 $ 2.07 $ 1.92 ========================
NOTE 14 - 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. 52 NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED) A summary of the Bank's financial instrument commitments is as follows: December 31, -------------------- 2007 2006 -------------------- (In Thousands) Commitments to grant loans $10,835 $12,611 Unfunded commitments under lines of credit 34,146 34,150 Standby letters of credit 2,348 7,215 -------------------- $47,329 $53,976 ==================== 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 majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit when deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2007 for guarantees under standby letters of credit issued is not material. NOTE 15 - 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, 2007 and 2006: o For cash and due from banks and interest-bearing deposits with banks, 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. 53 NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) o The fair value of the investment in FHLB stock is the carrying amount. 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, 2007 December 31, 2006 ----------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------- (In Thousands) Financial assets: Cash and due from banks and interest-bearing deposits with banks $ 9,064 $ 9,064 $ 9,517 $ 9,517 Securities 124,692 124,708 113,866 113,883 Loans receivable, net 327,215 326,482 311,739 305,779 Investment in FHLB stock 2,072 2,072 1,687 1,687 Accrued interest receivable 2,343 2,343 2,129 2,129 Financial liabilities: Deposits 370,000 370,159 358,103 357,691 Short-term borrowings 26,686 26,686 22,736 22,736 Long-term debt 23,000 22,097 13,000 12,974 Accrued interest payable 3,198 3,198 2,894 2,894 Off-balance sheet financial instruments: Commitments to extend credit and outstanding letters of credit - - - -
54 NOTE 16 - NORWOOD FINANCIAL CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS December 31, ----------------- 2007 2006 ----------------- (In Thousands) ASSETS Cash on deposit in bank subsidiary $ 148 $ 552 Securities available for sale 623 808 Investment in bank subsidiary 54,678 50,781 Other assets 1,058 731 ----------------- $56,507 $52,872 ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 688 $ 641 Stockholders' equity 55,819 52,231 ----------------- $56,507 $52,872 =================
STATEMENTS OF INCOME Years Ended December 31, ----------------------------- 2007 2006 2005 ----------------------------- (In Thousands) Income: Dividends from bank subsidiary $ 4,156 $ 2,369 $ 1,997 Interest income from bank subsidiary - 5 16 Other interest income 30 28 26 Net realized gain (loss) on sales of securities 17 15 - ----------------------------- 4,203 2,417 2,039 Expenses 177 175 198 ----------------------------- 4,026 2,242 1,841 Income tax expense (benefit) (51) (43) (53) ----------------------------- 4,077 2,285 1,894 Equity in undistributed earnings of subsidiary 2,434 3,625 3,603 ----------------------------- Net Income $ 6,511 $ 5,910 $ 5,497 =============================
STATEMENTS OF CASH FLOWS Years Ended December 31, ----------------------------- 2007 2006 2005 ----------------------------- (In Thousands) Cash Flows from Operating Activities Net income $ 6,511 $ 5,910 $ 5,497 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (2,434) (3,625) (3,603) Release of ESOP shares - 421 565 Other, net (168) (131) (615) ----------------------------- Net Cash Provided by Operating Activities 3,909 2,575 1,844 ----------------------------- Cash Flows from Investing Activities Proceeds from sale of securities 74 30 - Purchase of securities available for sale - (43) (52) ----------------------------- Net Cash Provided by (Used) in Investing Activities 74 (13) (52) ----------------------------- Cash Flows from Financing Activities Stock options exercised 341 60 150 ESOP purchase of shares from treasury stock 144 120 114 Acquisition of treasury stock (2,313) (890) (819) Cash dividends paid (2,559) (2,289) (1,916) ----------------------------- Net Cash Used in Financing Activities (4,387) (2,999) (2,471) ----------------------------- Net Decrease in Cash and Cash Equivalents (404) (437) (679) Cash and Cash Equivalents - Beginning 552 989 1,668 ----------------------------- Cash and Cash Equivalents - Ending $ 148 $ 552 $ 989 =============================
55 INVESTOR INFORMATION STOCK LISTING Norwood Financial Corp. stock is traded on the Nasdaq Global Market under the symbol NWFL. The following firms are known to make a market in the Company's stock: Ferris Baker Watts Janney Montgomery Scott, LLC Baltimore, MD Scranton, PA 18503 410-659-4616 800-638-4417 Legg Mason, Inc. Boenning & Scattergood, Inc. Scranton, PA 18507 West Conshohoken, PA 570-346-9300 800-496-1170 Stifel Nicolaus 800-793-7226 TRANSFER AGENT Illinois Stock Transfer Company, 209 West Jackson Blvd., Suite 903, Chicago, IL 60606. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at 312-427-2953. DIVIDEND CALENDAR Dividends on Norwood Financial Corp. common stock, if approved by the Board of Directors are customarily paid on or about February 1, May 1, August 1 and November 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into Norwood stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. Shareholders do not incur brokerage commissions for the transactions. Please contact the transfer agent or Lewis J. Critelli for additional information. SEC REPORTS AND ADDITIONAL INFORMATION A copy of the Company's annual report on Form 10-K for its fiscal year ended December 31, 2007 including financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission may be obtained upon written request of any stockholder, investor or analyst by contacting Lewis J. Critelli, Executive Vice President, Secretary, and Chief Financial Officer, Norwood Financial Corp., 717 Main Street, PO Box 269, Honesdale, PA 18431, 570-253-1455. 56 [PICTURE OMITTED] At our Annual Reorganizational Meeting held on April 24, 2007, John Marshall, Director since 1983, succeeded long-standing Chairman, Russell L. Ridd. Mr. Ridd had a 44-year career at Wayne Bank. He joined the bank in 1963, was appointed to President and Director in 1980, and Chairman in 1993. The Board unanimously passed a resolution designating Mr. Ridd, Director Emeritus of Norwood Financial Corp and Wayne Bank.
- ------------------------------------------------------------------------------------------------------------------------------------ NORWOOD FINANCIAL CORP - DIRECTORY OF OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ NORWOOD FINANCIAL CORP Karyn Vashlishan Vice President John E. Marshall Chairman of the Board Karen R. Gasper Internal Auditor & Assistant William W. Davis, Jr. President & Chief Executive Officer Vice President Lewis J. Critelli Executive Vice President, Chief Financial Sandra Halas Assistant Vice President Officer & Secretary Norma J. Kuta Assistant Vice President Edward C. Kasper Senior Vice President Renee M. Gilbert Community Office Manager John H. Sanders Senior Vice President Marianne M. Glamann Community Office Manager Joseph A. Kneller Senior Vice President Teresa Melucci Community Office Manager Sandra Mruczkewycz Community Office Manager WAYNE BANK Nancy M. Worobey Community Office Manager John E. Marshall Chairman of the Board Laurie J. Bishop Assistant Community Office Manager William W. Davis, Jr. President & Chief Executive Officer Wendy L. Davis Assistant Community Office Manager Lewis Critelli Executive Vice President, Chief Financial Christine Ferdinando Assistant Community Office Manager Office and Secretary Jill Melody Assistant Community Office Manager Edward C. Kasper Senior Vice President & Senior Loan Diane L. Richter Assistant Community Office Manager Officer/Corporate Bank Toni M. Stenger Assistant Community Office Manager John H. Sanders Senior Vice President/Retail Bank Gary D. Henry Consumer Lending Officer Joseph A. Kneller Senior Vice President Thomas Kowalski Resource Recovery Manager Wayne D. Wilcha Senior Vice President & Trust Officer William E. Murray Mortgage Originator Robert J. Behrens, Jr. Vice President Sarah J. Rapp Human Resources Officer John F. Carmody Vice President Nilda I. Ramos Business Development Officer JoAnn Fuller Vice President Doreen A. Swingle Residential Mortgage Lending Officer Carolyn K. Gwozdziewycz Vice President Karen Verbeke Training Officer Nancy A. Hart Vice President, Controller & Assistant Secretary NORWOOD INVESTMENT CORP Raymond C. Hebden Vice President William W. Davis, Jr. President & Chief Executive Officer William J. Henigan, Jr. Vice President Lewis J. Critelli Executive Vice President Jennifer Jaycox Vice President Scott C. Rickard Senior Investment Representative, William R. Kerstetter Vice President Invest Financial Corp Kelley J. Lalley Vice President & Assistant Secretary Linda M. Moran Vice President MONROE COUNTY ASSOCIATE BOARD MaryAlice Petzinger Vice President Michael J. Baxter James H. Ott Barbara A. Ridd Vice President & Assistant Secretary Sara Cramer Marvin Papillon Gary H. Sipe Vice President Andrew Forte Ray Price Eli T. Tomlinson Vice President Ralph A. Matergia Ron Sarajian Vice President Randy R. Motts
NORWOOD - ------- FINANCIAL CORP VISIT US AT: WAYNEBANK.COM EX-23 3 ex-23.htm CONSENT

 

Exhibit 23

 

Consent of Independent Registered Public Accounting Firm

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.’s 333-61487 and 333-134831) of Norwood Financial Corp. of our reports dated March 11, 2008, relating to the consolidated financial statements and Norwood Financial Corp.’s internal control over financial reporting, which appears in the Annual Report on Form 10-K for the year ended December 31, 2007.

 

 

 

/s/ Beard Miller Company LLP

 

Beard Miller Company LLP
Reading, Pennsylvania
March 11, 2008

 

 

 

 

 

 EX-31 4 ex31-1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION

 

I, William W. Davis, Jr., certify that:

 

1.

I have reviewed this annual report on Form 10-K of Norwood Financial Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

 

 

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: March 14, 2008

 

 

By:

/s/ William W. Davis, Jr.

 

 

 

William W. Davis, Jr.

President and Chief Executive Officer

 

 

 

 

 

 EX-31 5 ex31-2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION

 

I, Lewis J. Critelli, certify that:

 

1.

I have reviewed this annual report on Form 10-K of Norwood Financial Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

 

 

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date: March 14, 2008

 

 

By:

/s/ Lewis J. Critelli

 

 

 

Lewis J. Critelli

Executive Vice President, Secretary and Chief Financial Officer

 

 

 

 

 

 EX-32 6 ex-32.htm EXHIBIT 32

Exhibit 32

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Annual Report of Norwood Financial Corp. (the Company) on Form 10-K for the year ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, William W. Davis, Jr., President and Chief Executive Officer, and Lewis J. Critelli, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)        The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

/s/ William W. Davis, Jr.

 

 

 

/s/ Lewis J. Critelli

William W. Davis, Jr.

 

Lewis J. Critelli

President and Chief Executive Officer

 

Executive Vice President, Secretary and
Chief Financial Officer

 

 

 

 

 

March 14, 2008

 

 

 

 

 

 

 

 -----END PRIVACY-ENHANCED MESSAGE-----