-----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, NdNDlR7t+rB6BN80qziFuWkqXhT/d0P8/DFmaVREyW5ZpOLSP0X2fWFtloXWOhkI Yd7qpFXQWIbFfQptXPHr1A== 0000946275-05-000358.txt : 20050322 0000946275-05-000358.hdr.sgml : 20050322 20050322125503 ACCESSION NUMBER: 0000946275-05-000358 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050322 DATE AS OF CHANGE: 20050322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28364 FILM NUMBER: 05696178 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_123104-0160.txt FORM 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, 2004 ----------------- 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. 0-28366 Norwood Financial Corp. - -------------------------------------------------------------------------------- (Exact Name of Registrant as specified in Its Charter) Pennsylvania 23-2828306 - ----------------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) 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: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, --- to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES NO X --- --- As of March 14, 2005, there were 2,664,983 shares outstanding of the registrant's Common Stock. The Registrant's voting stock trades on the NASDAQ National Market under the symbol "NWFL." The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant's Common Stock was sold on June 30, 2004, was $64,064,960 ($29.49 per share based on 2,172,430 shares of Common Stock outstanding). Solely for purposes of this calculation, directors, executive officers and greater than 5% stockholders are treated as affiliates. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2004. (Parts I, II, and IV) 2. Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders. (Part III) 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 include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. 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, 2004, the Company had total assets of $411.6 million, deposits of $318.6 million, and stockholders' equity of $45.7 million. Wayne Bank is a Pennsylvania chartered commercial bank located in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne County Savings Bank. Wayne County Savings Bank changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank's deposits are currently insured by the Bank Insurance Fund ("BIF") as administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the Pennsylvania Department of Banking ("PDB") and the FDIC. The Bank is an independent community-oriented bank with six offices in Wayne County, three offices in Pike County and two offices in Monroe County. The Bank offers a wide variety of personal and business credit services, 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. 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 with eleven in branch locations and one remote service facility. The Company's main office is located at 717 Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455. The Company 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, 2004 (the latest date for which data is available), the Bank had the second largest share of FDIC-insured deposits in both Wayne County and Pike County with approximately 21% and 20%, respectively, and the 14th largest share in Monroe County with 1%. 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, 2004, the Bank had 114 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 as well as 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 certain internal guidelines. Fixed-rate home equity loans are originated on terms up to 180 months, as well as offering a home equity line of credit tied to prime rate. The Bank also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a network of over 30 dealers in Northeast Pennsylvania. 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 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. 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. 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 loan to value positions 2 and personal guaranties. 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 the Bank 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. The Bank seeks to mitigate these risks by only dealing with dealers with whom it has 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. 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 these applicable insurances must be maintained during the full term of the loan. 3 Types of Loans. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the date indicated.
At December 31, --------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 --------------- --------------- --------------- ---------------- --------------- $ % $ % $ % $ % $ % -------- ---- -------- ---- -------- ----- -------- ----- -------- ----- (dollars in thousands) Type of Loans: - -------------- Commercial, Financial and Agricultural.... $ 20,263 7.9% $ 17,022 7.3% $ 15,074 6.9% $ 17,442 8.1% $ 17,102 7.9% Real Estate-Construction.................. 4,890 1.9 5,904 2.5 4,109 1.9 4,642 2.2 2,425 1.1 Real Estate-Mortgage Residential.............. 90,606 35.5 77,459 33.1 69,040 31.6 64,635 30.1 59,517 27.5 Commercial............... 111,164 43.6 96,276 41.1 79,623 36.5 63,609 29.6 56,815 26.2 Lease financing, net of unearned income.. - - 316 .1 1,592 .7 6,126 2.9 13,664 6.3 Consumer Loans to Individuals............. 28,193 11.1 37,219 15.9 48,951 22.4 58,143 27.1 67,286 31.0 -------- ---- -------- ---- -------- ----- -------- ----- -------- ----- 255,116 100.0% 234,196 100.0% 218,389 100.0% 214,597 100.0% 216,789 100.0% ===== ===== ===== ===== ===== Unearned income and deferred fees......... (359) (463) (419) (403) (312) Allowance for loan losses................. (3,448) (3,267) (3,146) (3,216) (3,300) -------- -------- ------- ------ ------ $251,309 $230,466 $214,824 $210,978 $213,177 ======== ======== ======== ======== ========
4 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, 2004. Scheduled repayments are reported in the maturity category in which payment is due. Less than One to Over One Year Five Years Five Years Total -------- ---------- ---------- ----- (in thousands) Commercial, Financial and Agricultural $8,205 $7,617 $4,441 $20,263 Real Estate-Construction 4,890 -- -- 4,890 ------ ------ ------ ------- Total $13,095 $7,617 $4,441 $25,153 ====== ====== ====== ======= Loans with fixed-rates $3,041 $5,381 $3,455 $11,877 Loans with floating rates 10,054 2,236 986 13,276 ------ ----- ----- ------ Total $13,095 $7,617 $4,441 $25,153 ======= ====== ====== ======= 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, 2004, interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $1,500 of which $1,000 was collected. 5
At December 31, --------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (dollars in thousands) Non-accrual loans: Commercial and all other ...................................... $ -- $ -- $ -- $ 64 $ 64 Real estate ................................................... 32 125 213 597 518 Consumer ...................................................... 8 -- 3 11 -- ---- ---- ---- ---- ---- Total ...................................................... 40 125 216 672 582 Accruing loans which are contractually past- due 90 days or more: Commercial and all other ..................................... -- -- -- -- -- Real estate .................................................. 5 -- -- -- 34 Consumer ..................................................... 22 18 5 11 64 ---- ---- ---- ---- ---- Total ...................................................... 27 18 5 11 98 ---- ---- ---- ---- ---- Total non-performing loans ...................................... 67 143 221 683 680 Foreclosed real estate .......................................... -- -- 21 54 27 ---- ---- ---- ---- ---- Total non-performing assets ..................................... $ 67 $143 $242 $737 $707 ==== ==== ==== ==== ==== Total non-performing loans to total loans ....................... .03% .06% .10% .32% .31% Total non-performing loans to total assets ...................... .02% .04% .06% 20% .21% Total non-performing assets to total assets ..................... .02% .04% .07% .21% .22%
The recorded investment in impaired loans, not requiring an allowance for loan losses was $-0- and $263,000 at December 31, 2004 and 2003, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2004 and 2003. The related allowance for loan losses associated with these loans was $-0- at December 31, 2004 and 2003. For the years, ended December 31, 2004, 2003 and 2002, the average recorded investment in these impaired loans was $-0-, $337,000 and $262,000 and the interest income recognized on these impaired loans was $-0-, $30,000 and $23,000, respectively. Potential Problem Loans. As of December 31, 2004, 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. 6 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:
Years Ended December 31, --------------------------------------------------------------- 2004 2003 2002 2001 2000 ------- ------- ------- ------- ------- (dollars in thousands) Total loans receivable net of unearned income ........... $ 254,757 $ 233,733 $ 217,970 $ 214,194 $ 216,477 Average loans receivable ................................ 245,783 225,680 213,814 214,905 211,174 ======= ======= ======= ======= ======= Allowance balance at beginning of period ................ $ 3,267 $ 3,146 $ 3,216 $ 3,300 $ 3,344 Charge-offs: Commercial and all other .............................. (19) (121) (34) (12) -- Real Estate ........................................... (10) -- (122) (11) (9) Consumer .............................................. (342) (478) (608) (711) (589) Leases ................................................ (11) (36) (30) (152) (170) ------- ------- ------- ------- ------- Total .............................................. (382) (635) (794) (886) (768) Recoveries: Commercial and all other .............................. 13 5 -- 8 54 Real Estate ........................................... 8 24 13 1 73 Consumer .............................................. 78 64 72 85 88 Leasing ............................................... 9 3 9 29 ------- ------- ------- ------- ------- Total .............................................. 108 96 94 107 244 Net Charge-offs ......................................... (274) (539) (700) (779) (524) Provision Expense ....................................... 455 660 630 695 480 ------- ------- ------- ------- ------- Allowance balance at end of period ...................... $ 3,448 $ 3,267 $ 3,146 $ 3,216 $ 3,300 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding ............................................. 1.35% 1.40% 1.44% 1.50% 1.52% Net loans charged off as a percent of average loans outstanding ............................................. .11% .24% .33% .36% .25%
7 Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated. 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.
At December 31, -------------------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------- --------------- ---------------- ----------------- ----------------- % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (dollars in thousands) Commercial, financial and $ 337 7.9% $ 291 7.3% $ 265 6.9% $ 426 $ 345 7.9% agricultural 8.1% Real estate - construction 20 1.9 27 2.5 21 1.9 70 2.2 40 1.1 Real estate - mortgage 2,480 79.1 2,222 74.2 1,926 68.1 1,421 59.7 1,314 53.7 Consumer loans to individuals 483 11.1 634 15.9 788 22.4 715 27.1 719 31.0 Lease Financing -- -- 9 .1 24 .7 92 2.9 118 6.3 General Risk Allocation 128 -- 84 -- 122 -- 492 -- 764 -- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $3,448 100.0% $3,267 100.0% $3,146 100.0% $3,216 100.0% $3,300 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
8 INVESTMENT ACTIVITIES - --------------------- General. The Company maintains a portfolio of investment securities consisting principally of obligations of the U.S. Government and its agencies and obligations of states, counties and municipalities including school districts. The Company considers its investment portfolio a source of earnings and liquidity. Securities Portfolio. Carrying values of securities at the dates indicated are as follows: At December 31, ---------------------------------- (in thousands) 2004 2003 2002 -------- -------- -------- Securities (carrying value) U.S. Treasury Securities ......... $ 2,014 $ 2,065 $ -- U.S. Government Agencies ......... 47,151 47,632 33,197 State and political subdivision... 24,256 24,678 21,364 Corporate obligations ............ 15,308 13,665 11,403 Mortgage-backed securities ....... 32,060 40,508 53,358 Equity securities ................ 1,868 2,023 1,725 -------- -------- -------- Total securities ............. $122,657 $130,571 $121,047 ======== ======== ======== Fair value of securities ............. $122,811 $130,798 $121,347 ======== ======== ======== 9 Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company's securities portfolio as of December 31, 2004. 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."
After One After Five Total Investment One Year Or Less Through Five Years Through Ten Years After Five Years Securities ------------------- ------------------ ----------------- ----------------- ----------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average (dollars in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- U.S. Treasuries $ -- -- $ 2,014 2.39% $ -- -- $ -- -- $ 2,014 2.39% U.S. Government Agencies 1,994 2.09% 44,184 2.80% 973 3.55% -- -- 47,151 2.79% State and political subdivision 411 3.48% 7,892 3.71% 4,372 6.80% 11,581 8.03% 24,256 6.33% Mortgage-backed Securities (1) -- --% 4,281 3.73% 9,303 3.66% 18,476 3.75% 32,060 3.72% Corporate Obligations 506 1.40% 13,813 3.29% 989 2.72% -- -- 15,308 3.19% Equity Securities (2) 1,868 2.24% -- -- -- -- -- 1,868 2.24% ------ ---- ------- ---- ------- ---- ------- ---- -------- ---- Total Investment Securities $4,779 2.20% $72,184 3.04% $15,637 4.47% $30,057 5.40% $122,657 3.77% ====== ==== ======= ==== ======= ==== ======= ==== ======== ====
10 Deposit Activities. General. The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to 5 years for retail 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 ATM network. Internet banking is offered through the website at www.waynebank.com. The following table sets forth information regarding deposit categories of the Company.
Years Ended December 31, --------------------------------------------------------------- 2004 2003 2002 -------------------- ------------------ ------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------- -------- (dollars in thousands) Non-interest bearing demand $ 47,399 -- $ 39,119 -- $33,966 -- Interest-bearing demand 42,385 .10% 41,139 .17% 38,178 .26% Money Market 47,466 1.07% 41,457 1.12% 36,518 1.72% Savings 58,243 .47% 55,055 .78% 48,361 1.34% Time 118,512 2.31% 127,995 2.87% 127,571 3.73% -------- -------- -------- Total $314,005 $304,765 $284,594 ========= ========= ========
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, 2004. (dollars in thousands) Certificates of Maturity Period Deposit - --------------- ------- Within three months.................................... $13,416 Over three through six months.......................... 6,272 Over six through twelve months......................... 4,779 Over twelve months..................................... 8,816 ------- $33,283 ======= 11 Short-Term Borrowings The following table sets forth information concerning short-term borrowings (those maturing within one year) which consist principally of federal funds purchased, securities sold under agreements to repurchase, Federal Home Loan Bank advances and U.S. Treasury demand notes, that the Company had during the periods indicated.
(dollars in thousands) Years ended December 31, ------------------------------ 2004 2003 2002 ---- ---- ---- Short term borrowings: Average balance during the year......................... $12,965 $ 9,081 $ 9,552 Maximum month-end during the year....................... 22,982 12,859 15,168 Average interest rate during the year................... 1.17% 1.09% 1.84% Total short-term borrowings at end of the year.......... $22,982 $12,859 $ 9,016 Weighted average interest rate at the end of the year... 1.83% .99% 1.32%
Trust Activities The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers. As of December 31, 2004, the Bank acted as trustee for $83.4 million of assets compared to $74.0 million as of December 31, 2003. Subsidiary Activities The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. (NIC), incorporated in 1996, a Pennsylvania licensed insurance agency, is a wholly-owned subsidiary of the Bank. NIC's business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. The securities are offered through Invest Financial a registered broker/dealer. NIC had sales volume of $12.1 million in 2004, generating gross revenues for the Company of $154,000, included in Other Income. WCB Realty Corp. 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. 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, 2004 and 2003. Norwood Settlement Services, LLC was established in 2004 to provide title and settlement service to bank customers and non-customers. The subsidiary is a Pennsylvania Limited Liability Company, 70% owned by Wayne Bank and 30% owned by Title Strategies, LLC. Gross revenues for 2004 totaled $17,000. 12 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 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 ompany, 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 13 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 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 Bank Holding Company Act. The Federal Reserve's capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation. See "Regulation of the Bank-Regulatory Capital Requirements." Regulation of the Bank General. As a Pennsylvania chartered, 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. 14 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 BIF 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 administers two separate insurance funds, the BIF, which generally insures commercial bank and state savings bank deposits, and the Savings Insurance Fund ("SAIF"), which generally insures savings association deposits. The Bank is a member of the BIF and its deposit accounts are insured by the FDIC, up to prescribed limits. The FDIC is authorized to establish separate annual deposit insurance assessment rates for members of the BIF and the SAIF, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of either insurance fund. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. The FDIC has set the deposit insurance assessment rates for BIF-member institutions for the first six months of 2005 at 0% to .027% of insured deposits on an annualized basis, with the assessment rate for most institutions set at 0%. 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, 2004, 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, 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. 15 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, 2004. 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 and federal 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. As of December 31, 2004, the Bank's loans-to-one-borrower limitation was $7 million and the Bank was in compliance with such limitation. 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., 16 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, 2004, 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, 2004, 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 2. Properties - ------------------- The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and ten additional branch offices. The Bank's total investment in office property and equipment is $11.8 million with a net book value of $5.5 million as of December 31, 2004. The Bank currently operates automated teller machines at all eleven of its facilities and one automated teller machine only location. The Bank leases three of its locations with minimum lease commitments of $2,215,000 through 2029. The three 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. 17 Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ None. 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 "Market and Dividend Information" in the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2004 ("Annual Report") and is incorporated herein by reference.
Issuer Purchases of Equity Securities ------------------------------------- Maximum number -------------- of shares (or ------------- approximate ----------- Total number of dollar value) that --------------- ------------------ shares purchased may yet ---------------- ------- Total number Average price as part of publicly be purchased ------------ ------------- -------------------- ------------- of shares paid per announced plans under the plans --------- -------- --------------- --------------- purchased share or programs or programs --------- ----- ----------- ----------- October 1-October 31, 2004 - - - - November 1-November 30, 2004 - - - - December 1-December 31, 2004 1,017(1) $ 22.83 - - --------- ------------ -------- -------- Total 1,017 $ 22.83 - - ======= ============ ======== ========
(1) Purchases relate to the Company's Employee Stock Ownership Plan related to forfeitures of shares by participants and purchase of shares from participants. Item 6. Selected Financial Data - -------------------------------- The above-captioned information appears under "Summary of Operations" in the Annual Report, and is incorporated herein by reference. 18 Item 7. Management's Discussion and Analysis of Financial Conditions and Results - -------------------------------------------------------------------------------- of Operations ------------- The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------- The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- 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 Item 9A. 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. 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 19 PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I -- Election of Directors" in the Proxy Statement for the 2005 Annual Meeting of Stockholders 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 and Chief Financial Officer, Norwood Financial Corp., 717 Main Street, Honesdale, PA 18431. Item 11. Executive Compensation - -------------------------------- The information contained under the section captioned "Director and Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the Section captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" of the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" and "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. 20 (d) Equity Compensation Plan Information
(a) (b) (c) Number of securities remaining available for future issuance Number of Securities Weighted average under equity To be issued upon exercise price of compensation plans Exercise of outstanding (excluding securities Outstanding options, options, warrants reflected in Warrants and rights and rights column(a)) ------------------- ---------- ---------- Equity Compensation plans approved by shareholders Stock Option Plan. . . . . . . 128,853 $19.19 515,920 Equity compensation plans not approved by shareholders -- -- -- 1999 Directors Stock Compensation Plan. . . . . 14,001 $18.90 -- ------- ------ ------- 142,854 $19.16 515,920 ======= ====== =======
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 - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned "Certain Relationships and Related Transactions". 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 Accountants." 21 PART IV Item 15. Exhibits, Financial Statements 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, 2004 and 2003, 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, 2004, together with the related notes and the report of independent registered public accounting firm of Beard Miller Company LLP, independent accountants. 2. Schedules omitted as they are not applicable. 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** 10.4+ Consulting Agreement with Russell L. Ridd*** 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***** 13 Annual Report to Stockholders for the fiscal year ended December 31, 2004 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 or arrangement. 22 * 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. 0-28366. ** 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. 0-28366. *** Incorporated by reference into this document from the Exhibit to the Registrant's Form 10-K filed with the Commission on March 31, 1997, File No. 0-28366 **** 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. 0-28366. 23 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 21, 2005 By: /s/William W. Davis, Jr. -------------------------------- William W. Davis, Jr. President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 21, 2005 by the following persons on behalf of the Registrant and in the capacities indicated.
By: /s/William W. Davis, Jr. By: Lewis J. Critelli -------------------------------------- -------------------------------------------- William W. Davis, Jr. Lewis J. Critelli President, Chief Executive Officer Executive Vice President and Chief Financial Officer and Director (Principal Financial and Accounting (Principal Executive Officer) Officer) By: By: -------------------------------------- -------------------------------------------- Charles E. Case John E. Marshall Director Director By: /s/Daniel J. O'Neill By: /s/Dr. Kenneth A. Phillips -------------------------------------- -------------------------------------------- Daniel J. O'Neill Dr. Kenneth A. Phillips Director Director By: /s/Gary P. Rickard By: /s/Russell L. Ridd -------------------------------------- -------------------------------------------- Gary P. Rickard Russell L. Ridd Director Director By: By: /s/Richard L. Snyder -------------------------------------- -------------------------------------------- Ralph A. Matergia Richard L. Snyder Director Director
24 EX-13 2 ex13.txt EXHIBIT 13 Two Thousand and Four NORWOOD FINANCIAL CORP. Annual Report to Shareholders [GRAPHIC OMITTED] WE'RE NOT SIMPLY ABOUT IMPROVING HOMES, RETIREMENTS AND BUSINESSES, WE'RE ABOUT IMPROVING LIVES Summary of Operations NORWOOD FINANCIAL CORP Selected Financial Data (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended Dec. 31, 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------------------- Net interest income $14,012 $ 13,322 $ 13,951 $ 13,554 $ 13,067 Provision for loan losses 455 660 630 695 480 ----------------------------------------------------------------------------------------------- Other income 3,088 2,801 2,577 2,590 2,454 Net realized gains on sales of securities 458 692 427 212 35 Other expense 10,090 9,808 10,349 9,858 9,712 ----------------------------------------------------------------------------------------------- Income before income taxes 7,013 6,347 5,976 5,803 5,364 Income tax expense 2,003 1,694 1,623 1,601 1,504 Net Income $ 5,010 $ 4,653 $ 4,353 $ 4,202 $ 3,860 ----------------------------------------------------------------------------------------------- Net income per share-Basic $ 1.89 $ 1.79 $ 1.70 $ 1.67 $ 1.55 Net income per share-Diluted $ 1.85 $ 1.75 $ 1.68 $ 1.65 $ 1.54 Cash dividends declared* $ 0.69 $ 0.65 $ 0.60 $ 0.55 $ 0.47 Dividend pay-out ratio 36.5% 36.3% 35.3% 32.9% 30.3% ----------------------------------------------------------------------------------------------- Return on average assets 1.27% 1.22% 1.21% 1.25% 1.21% Return on average equity 11.39% 11.24% 11.60% 12.54% 13.75% ----------------------------------------------------------------------------------------------- BALANCES AS OF YEAR-END Total assets $411,626 $387,483 $367,468 $346,029 $326,731 Loans receivable 254,757 233,733 217,970 214,194 216,477 Allowance for loan losses 3,448 3,267 3,146 3,216 3,300 Total deposits 318,645 306,669 291,852 274,923 252,959 Shareholders' equity 45,685 42,831 40,125 35,116 31,370 Trust assets under management 83,397 73,991 60,102 57,533 54,542 ----------------------------------------------------------------------------------------------- Book value per share $ 16.95 $ 15.96 $ 15.09 $ 13.37 $ 11.99 Tier 1 Capital to risk-adjusted assets 15.91 15.58% 15.06% 13.78% 12.78% Total Capital to risk-adjusted assets 17.34% 17.09% 16.57% 15.30% 14.27% Allowance for loan losses to total loans 1.35% 1.40% 1.44% 1.50% 1.52% Non-performing assets to total assets 0.02% 0.04% 0.07% 0.21% 0.22% -----------------------------------------------------------------------------------------------
2004 ANNUAL REPORT NORWOOD FINANCIAL CORP AN INTRODUCTION Happiness is greasing the wheels of joy for every one of your customers. At Wayne Bank, we strive to go beyond meeting the basic needs of our account holders. We treat each of our customers as an individual. We address their dreams of home ownership, an expanded business, a comfortable retirement, and we help them to make those dreams a reality. No matter which of the counties we serve or which type of account an individual holds, Wayne Bank gives each customer prompt, knowledgeable service, high-quality products and the friendliness that turns a customer into a customer for life. In this year's Annual Report, Wayne Bank would like to introduce you to some of the people we are proud to call customers and friends. [GRAPHIC OMITTED] PRESIDENT'S LETTER 2-3 HOME IMPROVEMENT 4-5 FINANCIAL SERVICES 6-7 COMMERCIAL LOANS 8-9 NEWEST BRANCH 10 AREA MAP 11 BOARD OF DIRECTORS 12 FINANCIAL SECTION 13-44 NORWOOD FINANCIAL CORP ANNUAL REPORT 2004: THREE COUNTIES, THREE TYPES OF CUSTOMERS, ONE MESSAGE. AT WAYNE BANK, EVERY CUSTOMER COUNTS In this report you will meet Tom and Ben Hogan of Hogan Homes, a father-son team who produce beautifully crafted homes in the fast-growing Milford area of Pike County, and who like to direct their buyers to Wayne Bank for a good mortgage. Meet Justin and Marilyn O'Donnell, who planned their estate and set up trust accounts with Wayne Bank as part of their retirement on wild, pristine Lake Underwood in Wayne County. Meet Dr. Mahesh Chhabria and Dr. James Kerrigan of Neurology Associates of Monroe County, who secured a commercial loan from Wayne Bank to build state of the art medical offices, which in turn allowed them to expand the services they offer to patients. Wayne Bank is proud to be a part of the communities we serve. We believe that our internal atmosphere of good communication, service and a desire to do well by one another shows through to the community. Those traits are what the people you will meet in this report mean when they say Wayne Bank treats them the way they should be treated -- like people. 1 [GRAPHIC OMITTED]
SENIOR MANAGEMENT TEAM NORWOOD FINANCIAL CORP FROM LEFT TO RIGHT Joseph A. Kneller William W. Davis, Jr. Lewis J. Critelli Senior Vice President President & Chief Executive Officer Executive Vice President & Chief Financial Officer John H. Sanders Wayne D. Wilcha Edward C. Kasper Senior Vice President Senior Vice President & Trust Officer Senior Vice President
2 A LETTER TO OUR SHAREHOLDERS We are extremely pleased to report to you that your Company surpassed two milestones in 2004. We passed $400,000,000 in total assets for the first time. Even more importantly, our net income for the year exceeded the $5,000,000 mark for the first time. Norwood Financial Corp and its subsidiary Wayne Bank earned $5,010,000 for the year ended December 31, 2004, which represents a 7.7% increase over the $4,653,000 earned in 2003. Earnings per share on a fully diluted basis were $1.85 in 2004 compared to $1.75 in 2003. Cash dividends declared in 2004 totaled $.69 per share, an increase of 6.2% over the $.65 per share declared in the prior year. The return on average assets for the year was a strong 1.27%, with a return on average equity of 11.39%. Total assets as of December 31, 2004, were $411.6 million, with loans receivable of $254.8 million, deposits of $318.6 million and shareholders' equity of $45.7 million. Total assets have increased $24.1 million when compared to December 31, 2003. Loans receivable increased $21 million, or 9% from the prior year. We had another year of strong commercial real estate growth, with the portfolio increasing over 15%. We also had a very successful home equity loan campaign conducted throughout our branch network. In fact, home equity outstandings grew over 50% in 2004. The growth in these types of loans was partially offset by the continued planned decline in indirect auto lending as we are focusing more on real estate lending through our branch network. Asset quality ratios are excellent. We had a lower level of non-performing loans for the year and, even more importantly, our net charge-offs in 2004 declined 49% to $274,000 compared to the $539,000 charged off in 2003. Net interest income on a fully taxable equivalent basis for the year totaled $14,653,000, an increase of 5.1% over 2003. The net interest margin for 2004 increased five basis points to 3.91%. This growth in net interest was due to the increase in short-term interest rates in 2004, and an improvement in asset mix, as we had more loans on the balance sheet in 2004. Other income, excluding gains on sales of securities, totaled $3,088,000 in 2004 compared to $2,801,000. Our Wealth Management and Trust Division had a record year with over $300,000 in revenue. We introduced our popular Overdraft Manager program in the third quarter, which has also increased our revenue. Operating expenses increased 2.9% to $10,090,000 for the year. We liquidated the final vehicles from our leasing portfolio in September, and we are now completely out of the automobile leasing business.We would ask that you read the financial section for a complete report on our 2004 results. We had a very productive year. Our Marshalls Creek branch had its grand opening in August. The staff is busy meeting many new customers, as well as servicing existing customers. Our new title insurance company, Norwood Settlement Services, made a positive contribution to our net income. In July, we introduced the Overdraft Manager Service, which has quickly become very popular with our customers. During the year, we also redecorated our Milford Branch lobby and did outside work at our Willow, Lords Valley and Waymart offices. Technology strategies employed in recent years have enabled Wayne Bank to grow, improve service quality and increase competitiveness while containing costs. Service enhancements, new products, and growth in service facilities achieved in 2004 exemplify the leveraging of our technology resources. Our 2003 project to convert paper files to digital form for retention and retrieval efficiencies continued throughout 2004. With this technology, all community offices can retrieve accurate reproductions of transactions through our data network in a fraction of the time and effort that was required in the past. Customers using our Direct Link Internet Banking service are enjoying the convenience of viewing paid check images 24 hours a day, 7 days a week. In 1996, Wayne Bank initiated conversion of checks to digital images to improve customer service and add efficiencies to daily operations. Wayne Bank was a pioneer in the conversion of checks to digital images which has received widespread acceptance over time. Recognizing nationwide benefits in digital imaging technology, Congress enacted the "Check 21" Act on October 28, 2004, which will bring the check payments system to a whole new level of electronic clearing and settlement. Wayne Bank, due to its early efforts, is experienced and well positioned for this new era of nationwide electronic check clearing. It is particularly pleasing to note that during the past year the following employees were promoted: John Carmody to Vice President of Commercial Lending; The Community Office Manager of our Milford Office and Regional Branch Coordinator of our Pike County Offices, Mary Alice Petzinger was promoted to Vice President. Karen Gasper was named Internal Auditor and Assistant Vice President. Marianne Glamann was appointed Assistant Manager of our new office in Marshalls Creek. Two new managers joined our staff in 2004. Renee Wyant was named Stroud Mall Office Manager and also the Regional Branch Coordinator for all Monroe County offices. Sandra Cella is responsible for managing both the Lords Valley and Shohola Offices. It also should be noted that Ralph Matergia joined the Norwood Financial Corp and Wayne Bank Boards of Directors in 2004. Ralph brings to our Board a wide range of business experience, as well as legal expertise and an in-depth knowledge of Monroe County. He's been an attorney in the Monroe County area for over 25 years and is the founding partner of the law firm, Matergia and Dunn. We look forward to 2005 and plan to continue to look for ways to enhance your investment in Norwood Financial. We sincerely appreciate your support, and as always, we welcome any comments or suggestions you may have on how to enhance your investment. And, thank you for also being a customer of Wayne Bank.
Sincerely yours, /s/ William W. Davis, Jr. /s/ Russell L. Ridd William W. Davis, Jr., President and Chief Executive Officer Russell L. Ridd, Chairman of the Board
3 [GRAPHIC OMITTED] 4 Happiness is Handing the New Owners THE KEYS TO A BEAUTIFUL HOME That You Built for Them. The bright, spacious house is almost finished. After seven months of work, weather, sourcing an unusual countertop material, obtaining permits, and precise attention to detail in every area, the 3,000 square foot home is just a few days away from completion. Ben's crew will complete the mantel over the fireplace and finish painting the hallway. Tom will call the buyers and make sure they have wrapped up the last details of the closing. There are plenty of variables in completing and closing on a house, but the Hogans know at least one thing is certain: the bank will be ready and have the details right. They know it because they have worked with Wayne Bank for years. [GRAPHIC OMITTED] "I ONLY BUILD HOUSES FOR PEOPLE I LIKE," SAYS TOM HOGAN. "AND BECAUSE I LIKE THEM, I SEND THEM TO WAYNE BANK FOR THEIR MORTGAGE, BECAUSE I KNOW THEY'LL BE TREATED RIGHT THERE." "WE ALWAYS SEND OUR BUYERS TO WAYNE BANK, BECAUSE WE KNOW BILL MURPHY WILL GIVE THEM A FAIR DEAL. WE DO OUR OWN BANKING WITH WAYNE BANK, SO WE KNOW THEY ARE INFINITELY MORE FRIENDLY THAN OTHER BANKS, AND THEY REALLY DO THINK OF YOU AS PEOPLE, NOT JUST AN ACCOUNT NUMBER." The father and son team at Hogan Homes builds fifteen to twenty houses a year. Tom started the business in 1967 because he liked to work outdoors, and he enjoyed tools. His oldest son, Ben, took to the work too and has become the supervisor of the construction crews. Located in the rapidly growing town of Milford, in Pike County, Hogan Homes is a family business connecting the wave of new residents to the community's already strong roots in institutions like Wayne Bank. What do the Hogans and the bank have in common? Craftsmanship, attention to detail, a strong work ethic and an understanding that communities are made of real people. "I only build houses for people I like," says Tom Hogan, whose crisp shirt with a handful of pens in the breast pocket speaks of quick energy and readiness to get down to business. "And because I like them, I send them to Wayne Bank for their mortgage. Because I know they'll be treated right there. I tell my buyers, `Building a home can be a great experience. You have to approach it with the right mindset.' Bill Murray, the lending officer, and Mary Alice Petzinger at the Milford Branch understand that." Tom turns philosophical for a moment. "When you build a home, you have to pay attention to detail. You have to do things right. Back when Pike County was quiet, we were doing things right, and now that we're in the middle of this growth, we're still doing things right. You have to be patient and get the details right. That's what we're about. Not slapping things together and rushing on to the next thing. Doing it right." It's not hard to see why the Hogans work well with Wayne Bank. They share the values of quality service, quality products and treating each customer as an individual and a real person. It's natural that they should work together to build their community. "You can't blame people for wanting to live here!" Tom exclaims. "It's pretty and it was a nice place to raise my kids. Of course everybody wants that. They feel safe here, and they can build a beautiful house like this...." He looks around at the new home, and Ben nods with satisfaction. It's a job well done, and the Hogans know it. They will be happy to hand the keys to the new owners next Wednesday, and even though they do it twenty times a year, when they see how excited the new residents are, the Hogans will smile. 5 [GRAPHIC OMITTED] 6 Happiness is Marilyn, A BUCKET FULL OF PUPPIES, and Otters in Your Lake. Justin O'Donnell comes into the sun room and puts a square bucket on the slate floor. Four Brittany Spaniel puppies climb over each other to get out. In half a minute, they are everywhere, under the furniture, wandering over to look at the fireplace, headed for Marilyn's fresh-baked cherry cake in the kitchen. Justin chuckles. The little bird dogs will grow up learning to hunt in the woods around Lake Underwood in Wayne County, where Justin trained their parents and where he raises his own quail to host hunts for friends. Otters frolic in the pristine waters just behind the house, and maroon-headed mergansers dive under the water and reappear farther down the lake. [GRAPHIC OMITTED] LAKE UNDERWOOD COULD NOT HAVE A MORE APPRECIATIVE AUDIENCE THAN MARILYN AND JUSTIN O'DONNELL. WE STILL HAD ACCOUNTS IN VIRGINIA, AND IT WAS INCONVENIENT TO SAY THE LEAST. PLUS WHEN YOU'RE DEALILNG WITH A BIG BANK, YOU'RE JUST ANOTHER CUSTOMER. WHEN YOU DEAL WITH WAYNE BANK, THEY LET YOU KNOW YOU'RE IMPORTANT TO THEM. WITH ALL MY YEARS IN BANKING, I KNOW THE DIFFERENCE BETWEEN GOOD SERVICE AND...NOT GOOD SERVICE. AND WAYNE BANK GIVES US GREAT SERVICE. Justin says, "I started to come up here with a friend to hunt and fish. Then a piece of land became available. I brought Marilyn up to see it. It was an early summer morning, and the mountain laurel was in bloom. The kids decided to take their first swim. Marilyn said, `This would be a great place to retire.'" He continues, "I started to build a hunting camp, and Marilyn took one look at the foundation and said, `That's not big enough for the family!' I said, `It's supposed to be a hunting camp...' but she just shook her head." Justin laughs. "So I expanded it. We came up here every long weekend. Then when we wanted a house with fewer steps to climb, Marilyn designed what she wanted, and I built it myself." Justin now divides his time between hunting and running a small excavation business he started as a hobby. In addition to making their home beautiful with antiques and lovely photographs of their seven children and thirteen grandchildren, Marilyn says she keeps busy with a local sewing group. "And the telephone," Justin adds. "You won't see any children around here today, but she's always mothering people over the telephone." With a modest smile Marilyn says, "Our children have all done so well. We've been blessed." And how did the O'Donnells come to Wayne Bank? Justin says, "I spent thirty-five years as a banker and retired as CEO of First Virginia Bank. When we moved here, we decided to move our accounts to Wayne Bank because they had a branch here in Lakewood. I called to congratulate Bill Davis when he became president of the Bank, and he introduced me to Wayne Wilcha, the Trust Officer. I've been impressed with the bank from a quality standpoint. Then too, I think well of Bill and Wayne. Wayne is very professional, very attentive. He helped us revise our wills and prepare an estate plan. Set up some trust accounts." Justin smiles fondly at his wife. "People think we're strange, wanting to be up here. All our friends are in Florida! But we prefer the weather here, prefer the scenery." Marilyn nods in agreement and smiles back at him. "Yes." At the same time, they both add, "We're very comfortable here, it's paradise." 7 [GRAPHIC OMITTED] 8 Happiness is No Steps, DOUBLING YOUR MRI CAPABILITIES and Optimum Space for Your Staff. A fountain murmurs soothingly in the lobby of Neurology Associates of Monroe County. As patients arrive for their consultations, the water provides a refreshing sound and sight: the gentle splashing brings a moment of peace to minds sometimes suffering the turmoil of illness. The fountain is just one example of how Dr. Mahesh Chhabria and Dr. James Kerrigan's medical practice embraces patients, staff and doctors as individual people with needs beyond basic space and survival. Every aspect of the doctors' new facility in Monroe County has been designed with the benefit of the user in mind: comfort for patients and an efficient and pleasant space for staff members. [GRAPHIC OMITTED] DR. CHHABRIA SAYS, "WE HAVE DEPOSIT ACCOUNTS AND OUR LOAN WITH WAYNE BANK, AND WE FIND THE PEOPLE AT THE BANK EXCELLENT IN ALL POSSIBLE WAYS." WITH A COMMERCIAL LOAN FROM WAYNE BANK, DRS. CHHABRIA AND KERRIGAN BUILT A STATE OF THE ART MEDICAL OFFICE. THEIR NEW SPACE ALLOWED THEM TO ADD THREE PHYSICIANS TO THE PRACTICE, AS WELL AS DOUBLE THEIR MRI CAPABILITIES. THE NEW FACILITY SEES MORE THAN 10,000 PATIENTS A YEAR. Dr. Kerrigan says, "We interviewed several banks in the process of building the new center. The officers at Wayne Bank -- Bill Henigan at Stroudsburg, Bill Davis and Ed Kasper -- were notably personable, accommodating and easy to work with." Dr. Chhabria concurs. "The people at Wayne Bank went out of their way to customize our loan to meet our needs, and their rates were very attractive. We also have deposit accounts with Wayne Bank, and we find the people at the bank excellent in all possible ways." Neurology Associates draws most of its patient base from a substantial portion of the area served by Wayne Bank: Monroe and Pike Counties. Patients also travel from Carbon and Northhampton Counties and from New Jersey. The new facility rewards their trip. In addition to the five doctors in the practice, expanded space in the new building has permitted the group to add a physician's assistant and a neuroradiologist. The facility provides ample space for other members of the staff to enjoy a pleasant work space designed for efficiency. "It's a significant improvement over our old facilities," says Dr. Kerrigan. "It's like night and day." Dr. Chhabria notes that the facility has inspired new dreams for the physicians. "We are planning both a Sleep Center and a Pain Center here, fueled by the abilities of the new doctors we have been able to add since our move. We will be able to serve patients in exciting new ways." Dr. Kerrigan adds, "We chose this location because there are many other doctors' offices nearby, which is very convenient for our patients. Even apparently small things like good parking mean a lot. Many people have commented how much they like having no steps to climb when they come to see us!" "We have the largest neurology practice in the area," Dr. Chhabria says reflectively. "That was possible because Wayne Bank was so receptive, so willing to help us." 9 A Steaming Cup of Coffee A PLATE OF WARM MUFFINS AND A Steady Flow of New Accounts At Marshalls Creek. Since the railroad first connected Monroe County to New York City in 1856, people from the metropolitan area have been coming to the Poconos. They come first to visit, but when they encounter the natural beauty and the hometown atmosphere, many decide to stay. Recent growth in Monroe County has been fueled by people moving west from the New York City area to settle in the mountains. [GRAPHIC OMITTED] [GRAPHIC OMITTED] MONROE COUNTY IS THE SECOND MARSHALL'S CREEK IS WAYNE BANK'S FASTEST GROWING COUNTY IN PENNSYLVANIA NEWEST COMMUNITY OFFICE The Marshalls Creek branch of Wayne Bank opened on July 19, 2004. Located in fast-growing Middle Smithfield Township in Monroe County, the Marshalls Creek branch serves a growing community with a full complement of banking services, including checking and savings accounts, CDs, mortgages and home equity loans. Marianne Glamann, assistant manager of the Marshalls Creek office, reports that most of their customers moved to the area within the past two years. "We're seeing a lot of new customers who have switched from other banks because they were not happy with all the fees there, and they felt like just a number. When they come in here, we make them feel at home. We have three tellers, one customer service representative, and me. We are all friendly and knowledgeable and caring, and people really respond to that. The other day I was helping someone open a new account, and we had cups of coffee and some muffins from Perkins. People love that personal touch." A steady and growing flow of business attests to the success of Marianne's approach. In addition to the excellent banking products and quality customer service, Marianne says the bank appeals strongly to the growing Hispanic community in the area, because many of the staff speak Spanish. "If people can come in and do their banking in Spanish, that makes them feel very comfortable." The personal touch starts at the top at Wayne Bank. CEO Bill Davis drops in to say hello whenever he's passing through the area, and Marianne says she can always email him with a question and expect to hear back soon. "I've been with the bank ten years, first as a customer service representative at the Milford branch, and now as assistant manager here. We're a different kind of bank. I have customers come in all the time and tell me they like Wayne Bank because we treat them like people, the way they should be treated." 10 [MAP OF WAYNE, PIKE & MONROE COUNTIES, PENNSYLVANIA SHOWING BRANCH LOCATIONS APPEARS HERE]
OUR BRANCH LOCATIONS ADMINISTRATIVE OFFICE: Belmont & Water Streets Route 370 & Lake Como Road 717 Main Street Waymart, PA 18472 Lakewood, PA 18439 P.O. Box 269 Honesdale, PA 18431 Route 6 Stroud Mall Hawley, PA 18428 Stroudsburg, PA 18360 COMMUNITY OFFICES: 111 West Harford Street Route 739, 717 Main Street Milford, PA 18337 Lords Valley Shopping Plaza Honesdale, PA 18431 Lords Valley, PA 18428 Weis Market, Route 590 245 Willow Avenue Hamlin, PA 18427 Route 209 Honesdale, PA 18431 5165 Milford Road Richardson Avenue Marshalls Creek, PA 18335 Shohola, PA 18458
11 [GRAPHIC OMITTED]
OUR BOARD OF DIRECTORS NORWOOD FINANCIAL CORP FROM LEFT TO RIGHT Dr. Kenneth A. Phillips Russell L. Ridd Gary P. Rickard Member since 1988 Chairman of the Board Member since 1978 Member since 1980 Charles E. Case Richard L. Snyder John E. Marshall Member since 1970 Member since 2000 Secretary of the Board Member since 1983 Ralph A. Matergia William W. Davis, Jr. Daniel J. O'Neill Member since 2004 President & Chief Executive Officer Member since 1985 Member since 1996
12 NORWOOD FINANCIAL CORP - --------------------------------------------------------------------- CONSOLIDATED FINANCIAL REPORTS 04 - --------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS 15-30 BALANCE SHEETS 31 STATEMENTS OF INCOME 32 STATEMENTS OF STOCKHOLDERS' EQUITY 34 STATEMENTS OF CASH FLOWS 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36-55 INVESTOR INFORMATION 56 [PAGE INTENTIONALLY LEFT BLANK] 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, 2004 and 2003, and for the three years in the period ended December 31, 2004. This section should be read in conjunction with the consolidated financial statements and related footnotes. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words believes, anticipates, contemplates, expects, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES Note 2 to the Company's consolidated financial statements (incorporated by reference in Item 8 of the 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. The most significant estimates in the preparation of the Company's financial statements are for the allowance for loan losses and accounting for stock options. 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. The Company accounts 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 is 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. [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - $3,860 2001 - $4,202 2002 - $4,353 2003 - $4,653 2004 - $5,010] NET INCOME ($000) RESULTS OF OPERATION - SUMMARY Net income for the Company for the year 2004 was $5,010,000 compared to $4,653,000 for the year 2003. This represents an increase of $357,000 or 7.7% over the prior year. Basic and diluted earnings per share for 2004 were $1.89 and $1.85 respectively, increasing from $1.79 and $1.75, respectively, in 2003. The return on average assets (ROAA) for the year ended December 31, 2004 was 1.27%, with a return on average equity (ROAE) of 11.39%. 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 $14,653,000 in 2004, compared to $13,945,000 in 2003, an increase of $708,000 or 5.1%. The Company was able to decrease its provision for loan losses to $455,000 for the year ending December 31, 2004 from $660,000 for the prior year. The decrease was due to a lower level of net charge-offs in 2004, $274,000, declining from $539,000 in 2003. Also, non-performing loans decreased from .06% of total loans to .03% as of December 31, 2004. 15 Loans receivable increased $21.1 million to total $254.8 million as of December 31, 2004. The growth was principally in commercial and residential real estate loans. This growth in loans was funded by a $12.0 million growth in deposits, and a $7.9 million decrease in the securities available for sale portfolio. Other income for 2004 was $3,546,000, an increase of $53,000 over 2003. The Company had a lower level of gains on sales of securities and loans in 2004, $525,000 compared to $884,000 in 2003. This was offset by a $276,000 increase in service charges and fees and $51,000 increase in income from fiduciary activities. Other income, excluding gains on sales of securities, represented 17.4% of total revenues in 2004, improving from 16.7% in 2003. Other expenses totaled $10,090,000 in 2004 compared to $9,808,000 in 2003, an increase of $282,000 or 2.9%. The increase was primarily due to costs related to a new branch opened in July 2004 and an increase in employee benefits plan costs. [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - $1.54 2001 - $1.65 2002 - $1.68 2003 - $1.75 2004 - $1.85] DILUTED EARNINGS PER SHARE Net income for the Company for the year 2003 was $4,653,000 compared to $4,353,000 for the year 2002. This represents an increase of $300,000 or 6.9% over the prior year. Basic and diluted earnings per share for 2003 were $1.79 and $1.75 respectively, increasing from $1.70 and $1.68, respectively, in 2002. The return on average assets (ROAA) for the year ended December 31, 2003 was 1.22%, with a return on average equity (ROAE) of 11.24%. The increase in earnings was principally attributable to growth in other income and a lower level of operating expenses, offsetting a decline in net interest income. Net interest income, on a fully taxable equivalent basis (fte), totaled $13,945,000 in 2003, compared to $14,479,000 in 2002. The decline in net interest income was due to a decrease in earning asset yields as a result of an increase in cash flows in the investment portfolio and refinancings in the loan portfolio with the proceeds reinvested at lower yields. This was partially offset by a $21.4 million increase in average earning assets. Loans receivable increased $15.7 million to total $233.7 million as of December 31, 2003. The growth was principally in commercial and residential real estate loans. This growth in loans was funded by a $14.8 million growth in deposits. Credit quality remained strong with lower a level of non-performing assets and net charge-offs for the year ended December 31, 2003 as compared to a prior year. Other income for 2003 was $3,493,000, an increase of $489,000 or 16.3% over 2002. The increase was due in part to an increase in gains on sales of securities which totaled $692,000 in 2003, compared to $427,000 in 2002. The gains were principally in equity holdings of other financial institutions, corporate bonds and mortgage-backed securities. Other income, excluding gains on the sales of securities, represented 16.7% of total revenues in 2003, improving from 15.1% in 2002. Other expenses totaled $9,808,000 in 2003 compared to $10,349,000 in 2002, a decrease of $541,000 or 5.2%. The decrease in expenses was principally due to a lower level of losses on lease residuals, $50,000 in 2003 compared to $870,000 in 2002. The decrease was due to the significantly lower number of vehicles in the leasing portfolio. [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - $327 2001 - $346 2002 - $367 2003 - $387 2004 - $412] TOTAL ASSETS (IN MILLIONS) FINANCIAL CONDITION TOTAL ASSETS Total assets at December 31, 2004, were $411.6 million compared to $387.5 million at year-end 2003, an increase of $24.1 million or 6.2%. LOANS RECEIVABLE Loans receivable represent the most significant percentage of the Company's assets at 61.9% of total assets. As of December 31, 2004, total loans receivable were $254.8 million compared to $233.7 million at year-end 2003, an increase of $21.1 million, or 9.0%. Loan growth in commercial and residential real estate was partially offset by a net run-off in indirect automobile financing, which is included in consumer loans to individuals. 16 Residential real estate, which includes home equity lending, totaled $90.6 million as of December 31, 2004, compared to $77.5 million as of year-end 2003. This increase of $13.1 million is net of prepayments, refinancing activity and sales of mortgage loans into the secondary market. In the relatively low interest rate environment of 2004, fixed rate mortgage products were preferred by customers and accounted for the majority of the activity. The Company sells a portion of its long-term fixed rate residential loan production for interest rate risk management, with $4.1 million of 30 year fixed rate loans sold into the secondary market during 2004 at a gain of $67,000, included in other income. The Company holds the majority of its fifteen and twenty year fixed rate residential mortgage production in its portfolio. The Company had significant growth in home equity lending in 2004, as a result of a promotional campaign. Home equity outstandings included in residential real estate increased $13.2 million to $36.8 million as of December 31, 2004. The Company's indirect lending portfolio (included in consumer loans to individuals) declined $8.2 million to $20.2 million as of December 31, 2004. A portion of the net decrease may be attributable to the significant financing incentives offered by the automakers throughout 2004, and increased competition from other banks. In addition, the Company is focusing its efforts on increasing direct and real estate lending through its branch network and, as a result, anticipates a decrease in indirect financing again in 2005. During the third quarter of 2004, the Company liquidated its final leased vehicles. Losses on lease residuals (included in other expense) totaled $90,000 in 2004. The Company anticipates no further leasing activity. 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 and commercial real estate loans totaled $131.4 million as of December 31 2004, increasing from $113.3 million as of December 31, 2003, an increase of $18.1 million or 16.0%. The majority of the increase was in loans secured by real estate with adjustable rates based on a spread to the prime rate. The growth in commercial lending was centered in the Pike and Monroe County market areas. [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - 0.22% 2001 - 0.21% 2002 - 0.07% 2003 - 0.04% 2004 - 0.02%] NPAS TO ASSETS 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, 2004, non-performing loans totaled $67,000 and represented .03% of total loans receivable compared to $143,000 and .06% as of year-end 2003. Total non-performing assets, which includes foreclosed real estate totaled $67,000 and represented .02% of total assets, declining from $143,000 and .04% as of December 31, 2003. As of December 31, 2004 and 2003, the Company had no foreclosed real estate. The non-performing loans as of December 31, 2004 consist principally of loans secured by residential real estate. The Company does not anticipate any significant losses related to these loans. The allowance for loan losses totaled $3,448,000 as of December 31, 2004 and represented 1.35% of total loans receivable compared to $3,267,000 and 1.40% of total loans as of year-end 2003. Net charge-offs for 2004 were $274,000, consisting principally of losses on the sale of repossessed automobiles, compared to net charge-offs of $539,000 in 2003. In 2004, the Company sold a block of charged-off automobile loans and leases for a recovery of $39,000. The provision for loan losses for 2004 was $455,000, compared to $660,000 in 2003. 17 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 an historical review of losses. Other factors considered in the analysis include; concentration of credit in specific industries in the commercial portfolio; the local and regional economic condition; trends in delinquencies, large dollar exposures and growth in the portfolio. As of December 31, 2004, the Company considered its concentration of credit risk profile to be moderate. The local economy was stable in 2004, with no significant change in the unemployment rate in its primary market area of Wayne, Pike and Monroe Counties. The Company has modestly increased its number of large commercial credits and has had double digit growth in real estate related loans. As a result of its analysis, after applying these factors, management considers the allowance as of December 31, 2004, 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. The following table sets forth information with respect to the Company's allowance for loan losses at the dates indicated:
YEAR-ENDED DECEMBER 31, -------------------------------------------------------- (IN THOUSANDS) 2004 2003 2002 2001 2000 -------------------------------------------------------- Allowance balance at beginning of period $ 3,267 $ 3,146 $ 3,216 $ 3,300 $ 3,344 Charge-Offs: Commercial and all other (19) (121) (34) (12) -- Real Estate (10) -- (122) (11) (9) Consumer (342) (478) (608) (711) (589) Lease Financing (11) (36) (30) (152) (170) -------------------------------------------------------- Total (382) (635) (794) (886) (768) -------------------------------------------------------- Recoveries: Commercial and all other 13 5 -- 8 54 Real Estate 8 24 13 1 73 Consumer 78 64 72 85 88 Lease Financing 9 3 9 13 29 -------------------------------------------------------- Total 108 96 94 107 244 -------------------------------------------------------- Provision expense 455 660 630 695 480 -------------------------------------------------------- Allowance balance at end of period $ 3,448 $ 3,267 $ 3,146 $ 3,216 $ 3,300 ======================================================== Allowance for loan losses as a percent of total loans outstanding 1.35% 1.40% 1.44% 1.50% 1.52% Net loans charged off as a percent of average loans outstanding .11% .24% .33% .36% .25% Allowance coverage of non-performing loans 51.5x 22.8x 14.2x 4.7x 4.8x
18 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, 2004, the Company has no impaired or collateral dependent loans.
AS OF DECEMBER 31, ------------------------------------ (IN THOUSANDS) 2004 2003 2002 2001 2000 ------------------------------------ Non-accrual loans: Commercial and all other $ -- $ -- $ -- $ 64 $ 64 Real estate 32 125 213 597 518 Consumer 8 -- 3 11 -- ------------------------------------ Total 40 125 216 672 582 Accruing loans which are contractually past due 90 days or more 27 18 5 11 98 ------------------------------------ Total non-performing loans 67 143 221 683 680 Foreclosed real estate -- -- 21 54 27 ------------------------------------ Total non-performing assets $ 67 $143 $242 $737 $707 ==================================== Non-performing loans to total loans .03% .06% .10% .32% .31% Non-performing loans to total assets .02% .04% .06% .20% .21% Non-performing assets to total assets .02% .04% .07% .21% .22%
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#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, 2004, the HTM portfolio totaled $5.7 million 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 recorded as an adjustment to capital and reported in the equity section of the balance sheet as accumulated other comprehensive income. As of December 31, 2004, $116.9 million in securities were so classified and carried at their fair market value, with unrealized appreciation, net of tax, of $333,000, included in Accumulated other comprehensive income in stockholders' equity. As of December 31, 2004, the average life of the portfolio was 2.6 years compared to 2.1 years as of the prior year-end. The Company has maintained a relatively short average life in the portfolio in order to generate cash flow to fund loan growth. Total purchases for the year were $43.3 million with securities called, maturities and cash flow of $37.8 million and sales of $11.7 million. The purchases were funded principally by cash flow from the portfolio. The Company had overnight federal funds sold of $13.1 million as of December 31, 2004 and no such balance as of December 31, 2003. As of December 31, the carrying value of the Company's securities portfolio (HTM and AFS) totaled $122.7 million with the mix as follows: 19
2004 2003 ------------------------------------------ (DOLLARS IN THOUSANDS) CARRYING % OF CARRYING % OF VALUE PORTFOLIO VALUE PORTFOLIO ------------------------------------------ US Treasury Securities $ 2,014 1.6% $ 2,065 1.6% US Government agencies 47,151 38.5% 47,632 36.5% States & political subdivisions 24,256 19.8% 24,678 18.9% Corporate obligations 15,308 12.5% 13,665 10.5% Mortgage-backed securities 32,060 26.1% 40,508 31.0% Equity securities 1,868 1.5% 2,023 1.5% ------------------------------------------ Total $122,657 100.0% $130,571 100.0% ==========================================
The portfolio had $13.2 million of floating rate instruments, principally adjustable rate mortgage backed securities as of December 31, 2004. 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 Federal Home Loan Bank callable notes with final maturities of generally less than five years. The mortgage backed securities are pass-through bonds with Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corp (Freddie Mac), and Guaranteed National Mortgage Association (GNMA). During 2004, the Company reduced its exposure to mortgage-backed securities issued by FNMA and Freddie Mac. DEPOSITS The Company, through the eleven 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 (CD) 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. Total deposits as of December 31, 2004, were $318.6 million increasing from $306.7 million as of year-end 2003, an increase of $11.9 million or 3.9%. The increase was principally in core transaction accounts. The Company's money market deposit accounts increased $4.6 million, or 10%, to $51.1 million. In addition, savings deposit products increased $4.2 million, or 7.5%, to $60.1 million. Time deposits over $100,000, which consist principally of school district and other public funds, with maturities generally less than one year, were $33.3 million as of December 31, 2004, compared to $29.4 million at year-end 2003. 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 relative cost of other funding sources. As of December 31, 2004, non-interest bearing demand deposits totaled $44.4 million, increasing $4.9 million or 12.5% from the prior year-end. This growth is partially attributable to an increase in commercial deposits, related to the increase in the commercial loan portfolio. In addition, a portion of the growth is due to the Bank's "Simply Free" retail checking product. The Company also has $11.9 million of cash management accounts included in short-term borrowings. These balances represent commercial customers' funds invested in over-night securities. The Company considers these accounts as a source of core funding. The Company believes a portion of its deposit growth over the prior three years may be due in part to the relatively weak stock market performance since March 2000 and a low interest rate environment which offered limited opportunities to earn higher yields. Bank deposit growth did slow in 2004, as the stock market became more attractive to investors and competition for deposits increased among banks. However, the Company 20 believes it can continue to increase its core deposits by establishing new commercial loan relationships, and by seeking new branch locations in high growth areas. BORROWINGS Short-term borrowings totaled $23.0 million as of December 31, 2004 compared to $12.9 million as of the prior year-end. The increase of $11.1 million was principally due to $8 million of short-term advances from the FHLB. Long-term borrowings were $23 million as of December 31, 2004 and 2003. MARKET RISK Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates. Net interest income, which is the primary source of the Company's earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of December 31, 2004, the level of net interest income at risk in a 200 basis points change in interest rates was within the Company's policy limits. The Company's policy allows for a decline of no more 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, 2004, the Bank had a positive 90 day interest sensitivity gap of $32.5 million or 7.9% of total assets. A positive gap means that rate-sensitive assets are greater 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 day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long term fixed rate mortgages. The Company analyzes and measures the time periods in which rate sensitive assets (RSA) and rate sensitive liabilities (RSL) will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Interest rates may change at different rates changing the shape of the yield curve. In 2004, short-term interest rates increased to a greater extent than long term rates. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. The operating results of the Company are not subject to foreign currency exchange or commodity price risk. 21 The following table displays interest-sensitivity as of December 31, 2004 (in thousands):
3 MONTHS 3-12 GREATER THAN OR LESS MONTHS 1-3 YEARS 3 YEARS TOTAL --------------------------------------------------------------- Federal funds sold and interest bearing deposits $ 13,178 $ -- $ -- $ -- $ 13,178 Securities 9,687 18,507 71,898 22,565 122,657 Loans receivable 93,054 42,717 58,803 60,183 254,757 --------------------------------------------------------------- Total Rate Sensitive Assets (RSA) $ 115,919 $ 61,224 $ 130,701 $ 82,748 $ 390,592 =============================================================== Non-maturity interest bearing deposits $ 26,640 $ 34,272 $ 91,613 $ -- $ 152,525 Time deposits 29,492 46,103 36,363 9,802 121,760 Borrowings 27,287 12,581 6,114 -- 45,982 --------------------------------------------------------------- Total Rate Sensitive Liabilities (RSL) $ 83,419 $ 92,956 $ 134,090 $ 9,802 $ 320,267 =============================================================== Interest sensitivity gap $ 32,500 $ (31,732) $ (3,389) $ 72,946 $ 70,325 Cumulative gap 32,500 768 (2,621) 70,325 RSA/RSL-Cumulative 139.0% 100.4% 99.2% 122.0% As of December 31, 2003 Interest sensitivity gap $ 30,202 $ (10,656) $ (21,015) $ 62,826 $ 61,357 Cumulative gap 30,202 19,546 (1,469) 61,357 RSA/RSL-Cumulative 141.0% 111.9% 99.5% 120.2%
Securities and loans receivable are included in the period in which interest rates are next scheduled to adjust or in which they are due. Prepayment speeds are based on historical experience and management judgment. Non-maturity deposits are generally subject to immediate withdrawal. However, based on retention experience in various interest rate environments, management considers deposits to have longer effective maturities. LIQUIDITY Liquidity can be viewed as the ability to fund customers' borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company's primary sources of liquidity include deposit generation, asset maturities, and cash flow from payments on loans and securities. As of December 31, 2004, the Company had cash and cash equivalents of $20.7 million in the form of cash, due from banks, federal funds sold and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $116.9 million, which could be used for liquidity needs. This totals $137.6 million and represents 33.4% of total assets compared to $134.0 million and 34.6% of total assets as of December 31, 2003. The Company also monitors other liquidity measures, all of which were within the Company's policy guidelines as of December 31, 2004. 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 approximate borrowing capacity from FHLB was $142.3 million. As of year-end 2004, the Company had $23 million in long-term borrowings and $8 million of short-term borrowings from the FHLB. 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 22 December 31, 2004 totaled $48,150,000. This consisted of $15,748,000 in commercial real estate, construction and land developments loans, $9,140,000 in home equity lines of credit, $1,791,000 in standby letters of credit and the remainder in other unused commitments. 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. The following table represents the aggregate on and off balance sheet contractual obligations to make future payments.
CONTRACTUAL OBLIGATIONS DECEMBER 31, 2004 ---------------------------------------------------- LESS THAN OVER TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS ---------------------------------------------------- (in thousands) Time deposits $121,670 $75,595 $36,278 $ 9,802 $ -- Long term debt 23,000 5,000 5,000 10,000 3,000 Operating leases 2,215 187 268 168 1,592 ---------------------------------------------------- $146,885 $80,782 $41,541 $19,970 $4,592 ----------------------------------------------------
RESULTS OF OPERATION [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - $13,424 2001 - $14,014 2002 - $14,479 2003 - $13,945 2004 - $14,653] NET INTEREST INCOME (FTE) (000) NET INTEREST INCOME Net interest income is the difference between income earned on loans and securities and interest paid on deposits and borrowings. For the year ended December 31, 2004, net interest income on a fully taxable equivalent basis (fte) totaled $14,653,000, an increase of $708,000 or 5.1%, compared to $13,945,000 in 2003. The resulting fte net interest spread and net interest margin for 2004 were 3.60% and 3.91%, respectively, increasing from 3.51% and 3.86%, respectively, in 2003. Interest income (fte) for the year ended December 31, 2004 totaled $19,647,000 compared to $19,968,000 in 2003. The yield (fte) on earning assets for 2004 was 5.25% declining from 5.53% in 2003. The decrease in yield is due in part to the cumulative effect of lower rate assets that have been put on the balance sheet over the last three years. This has been partially offset by the recent increase in short-term interest rates with the Federal Funds rate increasing from 1.00% on January 1, 2004 to 2.25% as of December 31, 2004, and the prime rate increasing from 4.00% to 5.25% over the same time period. The decrease in the earning asset yield was also partially offset by growth in average earning assets of $13.6 million. In addition, the mix of earning assets improved, with loans representing 65.6% of average earning assets compared to 62.5% in 2003. Interest income (fte) earned on loans totaled $14,912,000 for 2004, an increase of $333,000 over the $14,579,000 earned in 2003. An increase in average volume of $20.1 million to $245.8 million for 2004 offset a 39 basis point decline in yield to 6.07%. Securities available for sale averaged $118.3 million with fte net interest income of $4,159,000 and a yield of 3.52% compared to $120.5 million, $4,711,000 and 3.91%, respectively in 2003. Total cash flow from maturities, calls and principal reductions on mortgage-backed securities totaled $37.8 million in 2004 compared to $72.9 million in 2003. In addition, there was $11.7 million in proceeds from sales of securities compared to $22.5 million in 2003. These amounts were generally re-invested in short-term callable US Government agency securities, municipal obligations and corporate debt. Proceeds were also used to fund loan growth. 23 Interest expense for the year ended December 31, 2004 totaled $4,994,000, declining from $6,023,000 in 2003. The average cost of interest-bearing liabilities declined 37 basis points to 1.65% in 2004 from 2.02% in 2003. The Company was able to reduce its cost of interest-bearing deposits to 1.33% in 2004 from 1.75% in 2003, with decreases in each category. The cost of deposits was also favorably impacted by a change in deposit mix, with a higher percentage of lower-costing transaction and savings accounts in 2004. Average transaction accounts (including non-interest bearing demand deposits) and savings accounts to total average deposits was 62.3% in 2004 compared to 58.0% in 2003. For 2004, Federal Funds sold averaged $4.6 million at a yield of 1.46% compared to $8.4 million at a yield of 1.12% in 2003. The decrease in Federal Funds sold was used to fund loan growth. For the year ended December 31, 2003, net interest income on a fully taxable basis (fte) was $13,945,000, a decrease of $534,000 or 3.7%, compared to $14,479,000 in 2002. The resulting fte net interest spread and net interest margin for 2003 were 3.51% and 3.86%, respectively, compared to 3.82% and 4.26%, respectively, in 2002. Interest income (fte) for the year ended December 31, 2003 totaled $19,968,000 compared to $22,092,000 in 2002. The decrease was principally due to lower interest rates in 2003, with an average prime rate of 4.12% and Federal Funds target rate of 1.12%, compared to 4.67% and 1.67%, respectively, on average, for 2002. As a result of the lower interest rates, the yield on earning assets declined 98 basis points, to 5.53% in 2003. The earning asset yield was also unfavorably impacted by increased cash flows and maturities in the investment portfolio, which were reinvested at lower yields. The reinvestment purchases were also relatively short-term instruments with average lives of less than three years. Loan yields were also unfavorably impacted by increased refinancing activity and cash flows. This was partially offset by an improvement in the earning asset mix with an increase in the securities available for sale portfolio of $16.9 million funded in part by a reduction in Federal Funds sold of $7.2 million. Interest income earned on loans totaled $14,579,000 with a yield of 6.46% in 2003, decreasing from $15,651,000 with a yield of 7.32% in 2002. The decline in the yield was due in part to the lower interest rate environment with an average prime rate of 4.12% in 2003 compared to 4.67% in 2002. Loans averaged $225.7 million in 2003, compared to $213.8 million in 2002. Securities available for sale averaged $120.5 million in 2003 with an fte interest income of $4,711,000 and a yield of 3.91% compared to $103.6 million, $5,634,000 and 5.44%, respectively, in 2002. During 2003, cash flows on mortgage-backed securities increased as a result of mortgage refinancing activity in the continued low interest rate environment. Total cash flow from maturities and principal reductions on mortgage-backed securities were $72.9 million in 2003 compared to $46.3 million in 2002. In addition, there was $22.5 million in proceeds from sales compared to $6.5 million. These amounts were generally reinvested in lower coupon mortgage-backed securities, callable US Government agency securities and short-term tax-exempt municipal obligations. The yields on the reinvestments were typically 125 basis points less than the cash flow yield. The Company reinvested in short-term securities in anticipation of an increase in rates in late 2004. Interest expense for the year-ended December 31, 2003 totaled $6,023,000, declining from $7,613,000 in 2002. The average cost of interest-bearing liabilities in 2003 was 2.02%, a decrease of 67 basis points from 2.69% in 2002. The Company was able to reduce its cost of interest bearing deposits to 1.75% from 2.45% in 2002. For 2003, Federal Funds sold averaged $8.4 million at a yield of 1.12% compared to $15.6 million and 1.66% in 2002. The decrease was used to fund securities available for sale, typically at yields of 150 basis points higher than the federal funds rate. 24 The net interest margin for 2003 was also unfavorably impacted by a decrease in the loan to deposit ratio, which averaged 74.0% in 2003 compared to 75.1% in 2002. OTHER INCOME Other income totaled $3,546,000 for the year-ended December 31, 2004 compared to $3,493,000 in 2003. Service charges and fees were $2,122,000 in 2004 compared to $1,846,000 in 2003, an increase of $276,000 or 15%. The increase was principally due to a higher level of overdraft (nsf) fees as a result of the Overdraft Manager Service introduced in July 2004. Overdraft fees increased $293,000, to $892,000 for 2004. Income from fiduciary activities totaled $301,000 in 2004, increasing from $250,000 in 2003. In 2004, there was a higher level of estate fees collected. Also, the market value of trust accounts was higher, at $83.4 million as of December 31, 2004 compared to $74.0 million as of December 31, 2003. Commissions on sales of annuities and mutual funds totaled $154,000 in 2004 increasing from $112,000 in 2003, principally due to an increase in volume sold. Earnings on the cash surrender value (CSV) of Bank-owned Life Insurance (BOLI, included in other assets) was $316,000 in 2004 compared to $271,000 in 2003. The increase was due to the full effect in 2004 of the purchase of $2.55 million in BOLI during the third quarter of 2003. The proceeds were used to fund employee benefit plans. The Company had a lower level of net realized gains on sales of securities in 2004, $458,000, declining from $692,000 in 2003. Total securities sold in 2004 were $11.7 million compared to $22.5 million. Total gains on sales of mortgage loans, included in Other, were $67,000 in 2004, declining from $192,000 in 2003. The Company sold a lower level of fixed rate loans in 2004, $4.1 million, compared to $7.1 million in 2003. The loans sold were principally 30 year fixed rate mortgages with coupons above the current market rate and the sales were for interest rate management, to reduce the Company's exposure in long-term fixed rate assets. Other income totaled $3,493,000 in 2003, an increase of $489,000 or 16.3% over the $3,004,000 in 2002. Other income represented 16.7% of total revenues increasing from 15.1% in 2002. Service charges and fees were $1,846,000 in 2003 compared to $1,788,000 in 2002, an increase of $58,000. The increase is due in part to loan documentation fees, which increased $48,000 to $286,000 due to volume, and debit card activity, which generated $180,000 in revenues, increasing from $166,000 in 2002. These items were partially offset by a $23,000 decrease in retail checking fees as a result of more customers opting for the Bank's "Simply Free" non-interest bearing checking account. In addition, fees related to non-sufficient funds (nsf) in checking accounts increased $28,000 to $599,000 due to a lower percentage of fees waived in 2003. Income from fiduciary activities was $250,000 in 2003 compared to $236,000 in 2002. The increase was principally due to higher market value of trust accounts in 2003 which was $74.0 million as of December 31, 2003, compared to $60.1 million at the end of 2002. In 2003, the Company sold $7.1 million of residential mortgages into the secondary market at a gain of $192,000 compared to $5.4 million of loans sold, at a gain of $82,000 in 2002. The loans sold were principally 30-year mortgages with coupons above the current market rate, and the sales were done for interest rate management, to reduce the Company's exposure in long term fixed rate assets. The Company had net gains on sales of securities of $692,000 compared to $427,000 in 2002. The Company sold selected equity holdings of other financial institutions, which appeared attractively priced, 25 corporate bonds and fast paying underperforming mortgage-backed securities. The proceeds of the sales, which were $22.5 million, were reinvested in available for sale securities. Earnings on the CSV of BOLI, were $271,000 in 2003, increasing from $203,000 in 2002. The increase was principally due to the purchase of an additional $2.55 million in BOLI, during the third quarter of 2003, the proceeds of which were used to fund employee benefit plans. The Company's merchant processing net revenue decreased in 2003 to $61,000 from $88,000 in 2002. The decrease is due in part to a reduction in margin received by the bank from Visa and MasterCard. Other Income (dollars in thousands) For the year-ended December 31 2004 2003 2002 ---------------------------- Service charges on deposit accounts $ 375 $ 409 $ 415 ATM Fees 219 202 187 NSF Fees 892 599 571 Merchant card processing 35 61 88 Loan related service fees 324 286 254 Visa Check Card 213 180 166 Fiduciary activities 301 250 236 Mutual funds & annuities 154 112 136 Gain on sales of mortgage loans 67 192 82 CSV on life insurance 316 271 203 Other income 192 239 239 ---------------------------- 3,088 2,801 2,577 Net realized gains on sales of securities 458 692 427 ---------------------------- Total $3,546 $3,493 $3,004 ============================ OTHER EXPENSES Other expenses totaled $10,090,000 in 2004, an increase of $282,000 or 2.9%, over the $9,808,000 for 2003. Salaries and employee benefits, which represented 50.9% of total other expenses, were $5,133,000 in 2004, an increase of $217,000, or 4.4%, over $4,916,000 in 2003. The increase was principally due to increasing costs related to the Company's Employee Stock Ownership Plan, which increased $102,000 due to appreciation in Company stock price and health insurance premiums which increased $51,000. Furniture and equipment costs declined to $542,000 from $602,000 in 2003. The decrease was partially due to a lower level of depreciation expense, $324,000 in 2004 compared to $387,000 in 2003. This was the result of equipment which was fully depreciated in 2003. Data processing related expenses increased $49,000 to $598,000 in 2004. The increase was due in part to contractual rate with the Company's primary data processing provider, Fiserv, and new products and services. Professional fees and services totaled $323,000 in 2004 compared to $277,000 in 2003. The increase was principally due to consulting services related to profitability analysis and loan processing. Losses on lease residuals totaled $90,000 in 2004 compared to $50,000. The final leased vehicles were disposed of in 2004 and the Company does not anticipate any lease expense in 2005. Other expenses totaled $9,808,000 in 2003, a decrease of $541,000 or 5.2% from $10,349,000 in 2002. Salaries and employee benefit costs, which represented 50.1% of total other expense, were $4,916,000, for 2003, an increase of $69,000 or 1.4%. The increase was principally due to increasing costs of retirement plans and health insurance. Losses on lease residuals were $50,000 in 2003, decreasing significantly from $870,000 in 2002. The decrease was principally due to the lower number of cars liquidated in 2003 compared to 2002. 26 These losses were partially offset by lease termination fee income, included in other income, of $16,000 in 2003 and $36,000 in 2002. Furniture and equipment expense for 2003 totaled $602,000, increasing from $517,000. The increase was due in part to a full year of maintenance costs on the item processing system installed in 2002. Professional fees were $277,000 in 2003 compared to $178,000 in 2002. The increase was due in part to $45,000 of legal expenses related to the resolution of a problem credit and for general corporate matters. Also consulting expense, included in professional fees, increased $28,000 due to a project related to loan processing and investment banking fees. INCOME TAXES Income tax expense for the year 2004 was $2,003,000 for an effective tax rate of 28.6% compared to an expense of $1,694,000 and an effective tax rate of 26.7% in 2003. The increase in effective tax rate is due in part to the expiration of low-income housing tax credit of $58,000 in 2003 with no such credit available in 2004. Income tax expense for the year 2003 was $1,694,000 for an effective tax rate of 26.6%, compared to an expense of $1,623,000 and an effective rate of 27.2% in 2002. The decrease in the effective tax rate is principally due to higher levels of interest income on municipal securities, and the cash surrender value of life insurance, which is not subject to Federal Income Tax. [BAR GRAPH WITH FOLLOWING DATA POINTS: 2000 - $11.99 2001 - $13.37 2002 - $15.09 2003 - $15.96 2004 - $16.95] BOOK VALUE PER SHARE CAPITAL AND DIVIDENDS Total stockholders' equity as of December 31, 2004, was $45.7 million, compared to $42.8 million as of year-end 2003. The increase was principally due to retention of earnings of $3,180,000 after cash dividends declared of $1,830,000. This was partially offset by a $1,098,000 decrease in accumulated other comprehensive income due to market value changes in the Company's AFS securities portfolio principally as a result of changing interest rates. As of December 31, 2004 the Company had a leverage capital ratio of 10.52%, Tier 1 risk-based capital of 15.53% and total risk-based capital of 17.06% compared to 10.52%, 15.53% and 17.06%, respectively, in 2003. The average equity to average asset ratio for 2004, 2003 and 2002 was 11.15%, 10.86% and 10.45% respectively. The Company's stock is traded on the Nasdaq market under the symbol, NWFL. As of December 31, 2004, there were approximately 1,300 shareholders based on transfer agent mailings. The following table sets forth the price range and cash dividends declared per share regarding common stock for the period indicated: CLOSING PRICE RANGE ------------------------ CASH DIVIDEND HIGH LOW PAID PER SHARE -------------------------------------------- Year 2004 First Quarter $ 30.50 $ 26.15 $ .17 Second Quarter 32.00 26.87 .17 Third Quarter 31.00 27.55 .17 Fourth Quarter 35.35 29.37 .18 Year 2003 First Quarter $ 20.83 $ 19.39 $ .16 Second Quarter 24.20 19.84 .16 Third Quarter 29.70 23.47 .16 Fourth Quarter 27.59 24.88 .17 The book value of the common stock was $16.95 as of December 31, 2004 compared to $15.96 as of December 31, 2003. As of year-end 2004, the stock price was $35.35, compared to $26.15 as of December 31, 2003. 27 NORWOOD FINANCIAL CORP SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands, except per share amounts) 2004 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ---------------------------------------------- Interest income $4,940 $4,782 $4,595 $4,689 Interest expense 1,299 1,224 1,215 1,256 ---------------------------------------------- Net interest income 3,641 3,558 3,380 3,433 Provision for loan losses 65 100 165 125 Other income 829 820 678 761 Net realized gains on sales of securities 145 51 84 178 Other expense 2,542 2,509 2,444 2,595 ---------------------------------------------- Income before income taxes 2,008 1,820 1,533 1,652 Income tax expense 645 500 406 452 ---------------------------------------------- NET INCOME $1,363 $1,320 $1,127 $1,200 ============================================== Basic earnings per share $ 0.51 $ 0.50 $ 0.43 $ 0.46 ============================================== Diluted earnings per share $ 0.50 $ 0.49 $ 0.42 $ 0.45 ============================================== 2003 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ---------------------------------------------- Interest income $4,844 $4,760 $4,816 $4,925 Interest expense 1,347 1,461 1,568 1,647 ---------------------------------------------- Net interest income 3,497 3,299 3,248 3,278 Provision for loan losses 165 165 165 165 Other income 648 729 679 745 Net realized gains on sales of securities 150 156 243 143 Other expense 2,450 2,417 2,475 2,466 ---------------------------------------------- Income before income taxes 1,680 1,602 1,530 1,535 Income tax expense 453 408 408 425 ---------------------------------------------- NET INCOME $1,227 $1,194 $1,122 $1,110 ============================================== Basic earnings per share $ 0.47 $ 0.46 $ 0.43 $ 0.43 ============================================== Diluted earnings per share $ 0.46 $ 0.45 $ 0.42 $ 0.42 ==============================================
28 NORWOOD FINANCIAL CORP CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES (Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31 2004 2003 --------------------------------------------------------------------- AVERAGE AVE AVERAGE AVE BALANCE(2) INTEREST(1) RATE BALANCE(2) INTEREST(1) RATE --------------------------------------------------------------------- ASSETS Interest Earning Assets: Federal funds sold $ 4,468 $ 68 1.46% $ 8,369 $ 94 1.12% Interest bearing deposits with banks 120 2 1.67 154 1 0.65 Securities held to maturity 5,732 506 8.83 6,165 583 9.47 Securities available for sale Taxable 100,180 3,127 3.12 103,506 3,677 3.55 Tax-exempt 18,080 1,032 5.71 17,025 1,034 6.07 ------------------- ------------------ Total securities available for sale 118,260 4,159 3.52 120,531 4,711 3.91 Loans receivable (3,4) 245,783 14,912 6.07 225,680 14,579 6.46 ------------------- ------------------ Total interest earning assets 374,543 19,647 5.25 360,890 19,968 5.53 Non-interest earning assets: Cash and due from banks 8,542 9,364 Allowance for loan losses (3,376) (3,273) Other assets 14,846 13,982 -------- -------- Total non-interest earning assets 20,012 20,073 -------- -------- TOTAL ASSETS $394,555 $380,963 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liablities: Interest-bearing demand and money market $ 89,851 549 0.61 $ 82,596 532 0.64 Savings 58,243 273 0.47 55,055 428 0.78 Time 118,512 2,733 2.31 127,995 3,678 2.87 ------------------- ------------------ Total interest-bearing deposits 266,606 3,555 1.33 265,646 4,638 1.75 Short-term borrowings 12,965 151 1.16 9,081 99 1.09 Long term debt 23,000 1,288 5.60 23,000 1,286 5.59 ------------------- ------------------ Total interest bearing liabilities 302,571 4,994 1.65 297,727 6,023 2.02 ------- ------- Non-interest bearing liabilities Non-interest bearing demand deposits 47,399 39,119 Other liabilities 596 2,729 -------- -------- Total non-interest bearing liabilities 47,995 41,848 -------- -------- Stockholders' equity 43,989 41,388 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $394,555 $380,963 ======== ======== Net interest income (tax-equivalent basis) 14,653 3.60% 13,945 3.51% ==== ==== Tax-equivalent basis adjustment (641) (623) ------- ------- Net Interest Income $14,012 $13,322 ======= ======= Net Interest margin(tax-equivalent basis) 3.91% 3.86% ==== ==== Year Ended December 31 2002 ---------------------------------- AVERAGE AVE BALANCE(2) INTEREST(1) RATE ---------------------------------- ASSETS Interest Earning Assets: Federal funds sold $ 15,573 $ 258 1.66% Interest bearing deposits with banks 346 5 1.45 Securities held to maturity 6,212 545 8.77 Securities available for sale Taxable 89,956 4,623 5.14 Tax-exempt 13,616 1,010 7.42 ------------------ Total securities available for sale 103,572 5,633 5.44 Loans receivable (3,4) 213,814 15,651 7.32 ------------------ Total interest earning assets 339,517 22,092 6.51 Non-interest earning assets: Cash and due from banks 8,452 Allowance for loan losses (3,228) Other assets 14,093 -------- Total non-interest earning assets 19,317 -------- TOTAL ASSETS $358,834 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liablities: Interest-bearing demand and money market $ 74,696 730 0.98 Savings 48,361 648 1.34 Time 127,571 4,761 3.73 ------------------ Total interest-bearing deposits 250,628 6,139 2.45 Short-term borrowings 9,550 176 1.84 Long term debt 23,230 1,298 5.59 ------------------ Total interest bearing liabilities 283,408 7,613 2.69 ------- Non-interest bearing liabilities Non-interest bearing demand deposits 33,966 Other liabilities 3,949 -------- Total non-interest bearing liabilities 37,915 -------- Stockholders' equity 37,511 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $358,834 ======== Net interest income (tax-equivalent basis) 14,479 3.82% ==== Tax-equivalent basis adjustment (528) ------- Net Interest Income $13,951 ======= Net Interest margin(tax-equivalent basis) 4.26% ====
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. 29 RATE/VOLUME ANALYSIS The following table shows fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
INCREASE/(DECREASE) ------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2004 COMPARED TO 2003 2003 COMPARED TO 2002 VARIANCE DUE TO VARIANCE DUE TO ------------------------------------------------------------------------- VOLUME RATE NET VOLUME RATE NET ------------------------------------ --------------------------------- INTEREST EARNING ASSETS: - -------------------------------------------------------------------------------------------------------------------------- Federal funds sold $ (49) $ 23 $ (26) $ (96) $ (68) $ (164) Interest bearing deposits with banks -- 1 1 (2) (2) (4) Securities held to maturity (39) (38) (77) (5) 43 38 Securities available for sale Taxable (115) (435) (550) 626 (1,572) (946) Tax-exempt 62 (64) (2) 227 (203) 24 ------------------------------------------------------------------------- Total securities available for sale (53) (490) (552) 853 (1,775) (922) Loans receivable 1,252 (919) 333 836 (1,908) (1,072) ------------------------------------------------------------------------- Total interest earning assets 1,111 (1,432) (321) 1,586 (3,710) (2,124) INTEREST BEARING LIABLITIES: - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing demand and money market 45 (28) 17 71 (269) (198) Savings 24 (179) (155) 80 (300) (220) Time (258) (687) (945) 16 (1,099) (1,083) ------------------------------------------------------------------------- Total interest- bearing deposits (189) (894) (1,083) 167 (1,668) (1,501) Short-term borrowings 45 7 52 (8) (69) (77) Long term debt -- 2 2 (13) 1 (12) ------------------------------------------------------------------------- Total interest bearing liabilities (144) (885) (1,029) 146 (1,736) (1,590) ------------------------------------------------------------------------- Net interest income (tax-equivalent basis) $1,255 $ (547) $ 708 $ 1,550 $(1,974) $ (534) =========================================================================
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. 30 BEARD MILLER COMPANY LLP - -------------------------------------------- Certified Public Accountants and Consultants REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Norwood Financial Corp. Honesdale, Pennsylvania We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and its subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. /s/ Beard Miller Company LLP Reading, Pennsylvania January 21, 2005 31
CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------- 2004 2003 ---------------------- (In Thousands) ASSETS Cash and due from banks $ 7,488 $ 9,110 Interest bearing deposits with banks 118 64 Federal funds sold 13,060 -- ---------------------- Cash and Cash Equivalents 20,666 9,174 Securities available for sale 116,933 124,823 Securities held to maturity, fair value 2004 $5,878; 2003 $5,975 5,724 5,748 Loans receivable, net of allowance for loan losses 2004 $3,448 2003 $3,267 251,309 230,466 Investment in FHLB stock, at cost 2,225 2,002 Bank premises and equipment, net 5,489 5,596 Accrued interest receivable 1,641 1,783 Other assets 7,639 7,891 ---------------------- TOTAL ASSETS $ 411,626 $ 387,483 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 44,450 $ 39,517 Interest-bearing demand 41,336 40,926 Money market deposit accounts 51,125 46,481 Savings 60,064 55,895 Time 121,670 123,850 ---------------------- Total Deposits 318,645 306,669 Short-term borrowings 22,982 12,859 Long-term debt 23,000 23,000 Accrued interest payable 1,200 1,309 Other liabilities 114 815 ---------------------- TOTAL LIABILITIES 365,941 344,652 ---------------------- STOCKHOLDERS' EQUITY Common stock, par value $.10 per share; authorized 10,000,000 shares; issued 2,705,715 shares 270 270 Surplus 5,336 4,933 Retained earnings 40,222 37,042 Treasury stock, at cost 2004 8,913 shares; 2003 21,318 shares (149) (295) Accumulated other comprehensive income 333 1,431 Unearned Employee Stock Ownership Plan (ESOP) shares (327) (550) ---------------------- Total Stockholders' Equity 45,685 42,831 ---------------------- Total Liabilities and Stockholders' Equity $ 411,626 $ 387,483 ======================
See notes to consolidated financial statements 32
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, --------------------------- 2004 2003 2002 --------------------------- (In Thousands, Except per Share Data) Interest Income Loans receivable, including fees $14,794 $14,506 $15,651 Securities: Taxable 3,127 3,677 4,623 Tax exempt 1,015 1,067 1,027 Other 70 95 263 --------------------------- Total Interest Income 19,006 19,345 21,564 --------------------------- Interest Expense Deposits 3,555 4,638 6,139 Short-term borrowings 151 99 176 Long-term debt 1,288 1,286 1,298 --------------------------- Total Interest Expense 4,994 6,023 7,613 --------------------------- Net Interest Income 14,012 13,322 13,951 Provision for Loan Losses 455 660 630 --------------------------- Net Interest Income after Provision for Loan Losses 13,557 12,662 13,321 --------------------------- Other Income Service charges and fees 2,122 1,846 1,788 Income from fiduciary activities 301 250 236 Net realized gains on sales of securities 458 692 427 Earnings on life insurance policies 316 271 203 Other 349 434 350 --------------------------- Total Other Income 3,546 3,493 3,004 --------------------------- Other Expenses Salaries and employee benefits 5,133 4,916 4,847 Occupancy 813 799 759 Furniture and equipment 542 602 517 Data processing related operations 598 549 556 Losses on lease residuals 90 50 870 Advertising 156 170 168 Professional fees 323 277 178 Postage and telephone 471 465 425 Taxes, other than income 276 256 222 Amortization of intangible assets 52 83 178 Other 1,636 1,641 1,629 --------------------------- Total Other Expenses 10,090 9,808 10,349 --------------------------- Income before Income Taxes 7,013 6,347 5,976 Income Tax Expense 2,003 1,694 1,623 --------------------------- Net Income $ 5,010 $ 4,653 $ 4,353 =========================== Earnings per Share Basic $ 1.89 $ 1.79 $ 1.70 =========================== Diluted $ 1.85 $ 1.75 $ 1.68 ===========================
See notes to consolidated financial statements 33 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 ------------------------------------------------------------------------------------------------- ACCUMULATED NUMBER OF OTHER UNEARNED SHARES COMMON RETAINED TREASURY COMPREHENSIVE ESOP ISSUED STOCK SURPLUS EARNINGS STOCK INCOME SHARES TOTAL ------------------------------------------------------------------------------------------------- (Dollars in Thousands) BALANCE - DECEMBER 31, 2001 1,803,824 $180 $4,687 $31,265 $(1,066) $1,002 $(952) $35,116 -------- Comprehensive income: Net income - - - 4,353 - - - 4,353 Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects - - - - - 1,489 - 1,489 -------- Total Comprehensive Income 5,842 -------- Cash dividends declared, $.60 per share - - - (1,536) - - - (1,536) Stock options exercised - - (78) - 434 - - 356 Tax benefit of stock options exercised - - 5 - - - - 5 Acquisition of treasury stock - - - - (8) - - (8) Release of earned ESOP shares, net - - 148 - - - 202 350 ------------------------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2002 1,803,824 180 4,762 34,082 (640) 2,491 (750) 40,125 -------- Comprehensive income: Net income - - - 4,653 - - - 4,653 Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects - - - - - (1,060) - (1,060) -------- Total Comprehensive Income 3,593 -------- Cash dividends declared, $.65 per share - - - (1,693) - - - (1,693) Three-for-two stock split in the form of a 50% stock dividend 901,891 90 (91) - - - - (1) Stock options exercised - - (24) - 358 - - 334 Tax benefit of stock options exercised - - 20 - - - - 20 Acquisition of treasury stock - - - - (46) - - (46) Release of treasury stock for ESOP - - 30 - 33 - - 63 Release of earned ESOP shares, net - - 236 - - - 200 436 ------------------------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2003 2,705,715 270 4,933 37,042 (295) 1,431 (550) 42,831 -------- Comprehensive income: Net income - - - 5,010 - - - 5,010 Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects - - - - - (1,098) - (1,098) -------- Total Comprehensive Income 3,912 -------- Cash dividends declared, $.69 per share - - - (1,830) - - - (1,830) Stock options exercised - - (21) - 227 - - 206 Tax benefit of stock options exercised - - 22 - - - 22 Acquisition of treasury stock - - - - (118) - - (118) Release of treasury stock for ESOP - - 40 - 37 - - 77 Release of earned ESOP shares, net - - 362 - - - 223 585 ------------------------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2004 2,705,715 $270 $5,336 $40,222 $ (149) $ 333 $ (327) $45,685 ================================================================================================
See notes to consolidated financial statements. 34 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------- 2004 2003 2002 ----------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,010 $ 4,653 $ 4,353 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 455 660 630 Depreciation 544 611 617 Amortization of intangible assets 52 83 178 Deferred income taxes (81) (249) (1,159) Net amortization of securities premiums and discounts 540 500 233 Net realized gains on sales of securities (458) (692) (427) Net increase in investment in life insurance (283) (247) (183) Gain on sale of bank premises and equipment and foreclosed real estate (12) (20) (49) Gain on sale of mortgage loans (67) (192) (82) Mortgage loans originated for sale (4,101) (7,060) (5,409) Proceeds from sale of mortgage loans 4,168 7,252 5,491 Release of ESOP shares 585 436 350 Decrease in accrued interest receivable and other assets 906 1,335 1,188 Decrease in accrued interest payable and other liabilities (200) (600) (530) ----------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,058 6,470 5,201 ----------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 11,687 22,544 6,455 Proceeds from maturities and principal reductions on mortgage-backed securities 37,779 72,879 46,336 Purchases (43,331) (106,842) (69,393) Securities held to maturity, proceeds from maturities 35 494 30 Increase in investment in FHLB stock (223) (365) (237) Net increase in loans (21,579) (16,912) (5,660) Purchase of life insurance -- (2,550) -- Purchase of bank premises and equipment (445) (221) (572) Proceeds from sales of premises and equipment and foreclosed real estate 42 84 590 ----------------------------------- NET CASH USED IN INVESTING ACTIVITIES (16,035) (30,889) (22,451) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 11,976 14,817 16,929 Net increase in short-term borrowings 10,123 3,843 2,375 Repayments of long-term debt -- -- (2,000) Stock options exercised 206 334 356 ESOP purchase of shares from treasury stock 77 63 -- Acquisition of treasury stock (118) (46) (8) Cash dividends paid (1,795) (1,662) (1,494) ----------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 20,469 17,349 16,158 ----------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,492 (7,070) (1,092) CASH AND CASH EQUIVALENTS - BEGINNING 9,174 16,244 17,336 ----------------------------------- CASH AND CASH EQUIVALENTS - ENDING $ 20,666 $ 9,174 $ 16,244 ===================================
See notes to consolidated financial statements. 35 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, commercial and consumer loans, as well as interest earnings on investment securities and deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. NOTE 2 - SUMMARY OF 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. 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. 36 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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. 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 Company has a portfolio of direct financing leases. These direct financing leases are carried at the Company's net investment, which includes the sum of aggregate rentals receivable and the estimated residual value of the leased automobiles less unearned income. Unearned income is amortized over the leases' terms. 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. 37 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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. 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. 38 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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 and is included in other assets in the amount of $6,959,000 and $6,676,000 at December 31, 2004 and 2003, respectively. 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, 2004 and 2003, the Company had intangible assets of $325,000 and $377,000, net of accumulated amortization of $455,000 and $403,000, 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, $83,000 and $178,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Income Taxes Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiary file a consolidated federal income tax return. Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. Earnings per Share On April 8, 2003, the Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend on common stock outstanding, payable June 16, 2003 to shareholders of record on May 30, 2003. The stock split resulted in the issuance of 901,891 additional common shares. All per share data has been adjusted for the effect of the stock split. 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 The Company accounts 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 39 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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.
YEARS ENDED DECEMBER 31, ----------------------------------- 2004 2003 2002 ----------------------------------- (In Thousands, Except per Share Data) Net income, as reported $ 5,010 $ 4,653 $ 4,353 Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes (143) (50) (74) ----------------------------------- Pro forma net income $ 4,867 $ 4,603 $ 4,279 =================================== Earnings per share (basic): As reported $ 1.89 $ 1.79 $ 1.70 Pro forma $ 1.84 $ 1.77 $ 1.67 Earnings per share (assuming dilution): As reported $ 1.85 $ 1.75 $ 1.68 Pro forma $ 1.80 $ 1.74 $ 1.65
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, ---------------------------- 2004 2003 2002 ---------------------------- Dividend yield 2.61% 2.68% 3.13% Expected life 7 years 8 years 8 years Expected volatility 34.66% 27.97% 11.81% Risk-free interest rate 3.80% 3.97% 3.81% Weighted average fair value of options granted $ 9.97 $ 6.97 $ 2.44 Cash Flow Information For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the years ended December 31, 2004, 2003 and 2002 were $5,103,000, $6,368,000 and $8,285,000, respectively. Cash payments for income taxes for the years ended December 31, 2004, 2003 and 2002 were $1,941,000, $1,802,000 and $3,117,000, respectively. Non-cash investing activities for 2004, 2003 and 2002 included foreclosed mortgage loans transferred to foreclosed real estate and repossession of other assets of $281,000, $610,000 and $1,183,000, 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. 40 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Trust Assets Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements since such items are not assets of the Company. Trust income is reported on the accrual method. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ----------------------------- (In Thousands) Unrealized holding gains (losses) on available for sale securities $(1,204) $ (901) $ 2,690 Reclassification adjustment for gains realized in income 458 692 427 ----------------------------- Net Unrealized Gains (Losses) (1,662) (1,593) 2,263 Income tax (benefit) (564) (533) 774 ----------------------------- Net of Tax Amount $(1,098) $(1,060) $ 1,489 =============================
Segment Reporting The Company acts as an independent community financial service provider and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine network, the Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of safe deposit services. The Company also performs personal, corporate, pension and fiduciary services through its Trust Department. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, mortgage banking and trust operations of the Company. As such, discrete information is not available and segment reporting would not be meaningful. Reclassifications Certain items in the 2003 and 2002 financial statements have been reclassified to conform to the 2004 financial statement presentation format. These reclassifications had no effect on net income. New Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. Statement No. 123(R) will require compensation costs related to share-based 41 NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) payment transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact from this standard on its results of operations and financial position. In March 2004, the SEC released Staff Accounting Bulletin (SAB) No. 105, "Application of Accounting Principles to Loan Commitments." SAB 105 provides guidance about the measurements of loan commitments recognized at fair value under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on our consolidated financial statements. In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality. SOP 03-3 is effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The Company intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a material effect on the Company's consolidated financial statements. NOTE 3 - SECURITIES The amortized cost and fair value of securities were as follows:
DECEMBER 31, 2004 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------------------------------------- (In Thousands) AVAILABLE FOR SALE: U.S. Treasuries $ 2,030 $ -- $ (16) $ 2,014 U.S. Government agencies 47,764 6 (619) 47,151 States and political subdivisions 18,377 234 (79) 18,532 Corporate obligations 15,428 55 (175) 15,308 Mortgage-backed securities 32,269 82 (291) 32,060 --------------------------------------------- 115,868 377 (1,180) 115,065 Equity securities 539 1,329 -- 1,868 --------------------------------------------- $116,407 $1,706 $(1,180) $116,933 ============================================= HELD TO MATURITY: States and political subdivisions $ 5,724 $ 154 $ -- $ 5,878 =============================================
42 NOTE 3 - SECURITIES (CONTINUED)
DECEMBER 31, 2003 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------------------------------------- (In Thousands) AVAILABLE FOR SALE: U.S. Treasuries $ 2,051 $ 14 $ -- $ 2,065 U.S. Government agencies 47,791 157 (316) 47,632 States and political subdivisions 18,578 382 (30) 18,930 Corporate obligations 13,374 291 -- 13,665 Mortgage-backed securities 40,413 359 (264) 40,508 --------------------------------------------- 122,207 1,203 (610) 122,800 Equity securities 428 1,595 -- 2,023 --------------------------------------------- $122,635 $2,798 $(610) $124,823 ============================================= HELD TO MATURITY: States and political subdivisions $ 5,748 $ 227 $ -- $ 5,975 =============================================
The following table shows 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, at December 31, 2004:
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. Treasuries $ 2,014 $ (16) $ -- $ -- $ 2,014 $ (16) U.S. Government agencies 36,349 (421) 6,796 (198) 43,145 (619) States and political subdivisions 5,342 (69) 373 (10) 5,715 (79) Corporate obligations 13,247 (175) -- -- 13,247 (175) Mortgage-backed securities 18,540 (124) 6,496 (167) 25,036 (291) --------------------------------------------------------------------- $ 75,492 $ (805) $ 13,665 $ (375) $ 89,157 $ (1,180) =====================================================================
The Company has 86 securities in an unrealized loss position. 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 securities as of December 31, 2004 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. 43 NOTE 3 - SECURITIES (CONTINUED)
AVAILABLE FOR SALE HELD TO MATURITY ------------------------------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------------------------------------------ (In Thousands) Due in one year or less $ 2,925 $ 2,911 $ -- $ -- Due after one year through five years 68,658 67,902 -- -- Due after five years through ten years 6,127 6,172 162 179 Due after ten years 5,889 6,020 5,562 5,699 ------------------------------------------ 83,599 83,005 5,724 5,878 Mortgage-backed securities 32,269 32,060 -- -- ------------------------------------------ $115,868 $115,065 $5,724 $ 5,878 ==========================================
Gross realized gains and gross realized losses on sales of securities available for sale were $475,000 and $17,000, respectively, in 2004, $723,000 and $31,000, respectively, in 2003, and $432,000 and $5,000, respectively, in 2002. Securities with a carrying value of $45,424,000 and $34,775,000 at December 31, 2004 and 2003, 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. NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The components of loans receivable at December 31 were as follows: 2004 2003 --------------------- (In Thousands) Real estate: Residential $ 90,606 $ 77,459 Commercial 111,164 96,276 Construction 4,890 5,904 Commercial, financial and agricultural 20,263 17,022 Consumer loans to individuals 28,193 37,219 Lease financing, net of unearned income -- 316 --------------------- 255,116 234,196 Unearned income and deferred fees (359) (463) Allowance for loan losses (3,448) (3,267) --------------------- $251,309 $230,466 ===================== The Bank's net investment in direct financing leases at December 31 consists of: 2004 2003 ------------------- (In Thousands) Minimum lease payments receivable $-- $ 24 Estimated unguaranteed residual values -- 297 Unearned income -- (5) ------------------- $-- $ 316 =================== 44 NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The following table presents changes in the allowance for loan losses: YEARS ENDED DECEMBER 31, --------------------------------- 2004 2003 2002 --------------------------------- (In Thousands) Balance, beginning $ 3,267 $ 3,146 $ 3,216 Provision for loan losses 455 660 630 Recoveries 108 96 94 Loans charged off (382) (635) (794) --------------------------------- Balance, ending $ 3,448 $ 3,267 $ 3,146 ================================= The recorded investment in impaired loans, not requiring an allowance for loan losses was $-0- and $263,000 at December 31, 2004 and 2003, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2004 and 2003. For the years ended December 31, 2004, 2003 and 2002, the average recorded investment in these impaired loans was $-0-, $337,000 and $262,000 and the interest income recognized on these impaired loans was $-0-, $30,000 and $23,000, respectively. Loans on which the accrual of interest has been discontinued amounted to $40,000 and $125,000 at December 31, 2004 and 2003, 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 $27,000 and $18,000 at December 31, 2004 and 2003, respectively. NOTE 5 - PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 2004 2003 ------------------------ (In Thousands) Land and improvements $ 925 $ 925 Buildings and improvements 6,897 6,844 Furniture and equipment 3,977 3,650 ------------------------ 11,799 11,419 Accumulated depreciation (6,310) (5,823) ------------------------ $ 5,489 $ 5,596 ======================== Certain facilities are leased under various operating leases. Rental expense for these leases was $147,000, $109,000 and $109,000 for the years ended December 31, 2004, 2003 and 2002. Future minimum rental commitments under noncancellable leases as of December 31, 2004 were as follows(in thousands): 2005 $ 187 2006 149 2007 119 2008 89 2009 79 Thereafter 1,592 ------ $2,215 ====== 45 NOTE 6 - DEPOSITS Aggregate time deposits in denominations of $100,000 or more were $33,283,000 and $29,372,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, the scheduled maturities of time deposits are as follows (in thousands): 2005 $ 75,595 2006 30,895 2007 5,378 2008 6,648 2009 3,154 -------- $121,670 ======== NOTE 7 - BORROWINGS Short-term borrowings at December 31 consist of the following: 2004 2003 ------------------- (In Thousands) Securities sold under agreements to repurchase $13,982 $11,806 Short-term FHLB advances 8,000 420 U.S. Treasury demand notes 1,000 633 ------------------- $22,982 $12,859 =================== The outstanding balances and related information of short-term borrowings are summarized as follows:
Years Ended December 31, ------------------------- 2004 2003 ------------------------- (Dollars in Thousands) Average balance during the year $ 12,965 $ 9,081 Average interest rate during the year 1.17% 1.09% Maximum month-end balance during the year $ 22,982 $ 12,859 Weighted average interest rate at the end of the year 1.83% 0.99%
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 $15,757,000 and $15,495,000 at December 31, 2004 and $12,793,000 and $12,712,000 at December 31, 2003 were pledged as collateral for these agreements. The securities underlying the agreements were under the Company's control. The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires in December 2005. There were no borrowings under this line at December 31, 2004 and $420,000 at December 31, 2003. The Company has a line of credit commitment available from Atlantic Central Bankers Bank for $7,000,000. There were no borrowings under this line of credit at December 31, 2004 and 2003. The Company also has two $4,000,000 short-term advances from the FHLB outstanding as of December 31, 2004 at interest rates of 2.51% and 2.30%. 46 NOTE 7 - BORROWINGS (CONTINUED) Long-term debt consisted of the following at December 31, 2004 and 2003: 2004 2003 -------------------- (In Thousands) Notes with the Federal Home Loan Bank (FHLB): Convertible note due April 2005 at 6.13% $ 5,000 $ 5,000 Convertible note due December 2006 at 6.19% 5,000 5,000 Convertible note due April 2009 at 4.83% 5,000 5,000 Convertible note due April 2009 at 5.07% 5,000 5,000 Convertible note due January 2011 at 5.24% 3,000 3,000 -------------------- $23,000 $23,000 ==================== 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 16 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, 2004 (in thousands): 2005 $ 5,000 2006 5,000 2007 -- 2008 -- 2009 10,000 Thereafter 3,000 ------- $23,000 ======= The Bank's maximum borrowing capacity with the Federal Home Loan Bank was $142,340,000 of which $31,000,000 was outstanding at December 31, 2004. 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 $185,000, $192,000 and $170,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company has a non-qualified supplemental executive retirement plan for the benefit of certain executive officers. At December 31, 2004 and 2003, other liabilities include approximately $580,000 and $450,000 accrued under the Plan. Compensation expense includes approximately $130,000, $124,000 and $110,000 relating to the supplemental executive retirement plan for 2004, 2003 and 2002, 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, 2004 and 2003, the cash value of these policies was $6,959,000 and $6,676,000, respectively. 47 NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED) The Company has a leveraged employee stock ownership plan ("ESOP") for the benefit of employees who meet the eligibility requirements which include having completed one year of service with the Company and having attained age twenty-one. The ESOP Trust purchased shares of the Company's common stock with proceeds from a loan from the Company. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments. The loan bears interest at the prime rate adjusted annually. Interest is payable annually and principal payable in equal annual installments over ten years. The loan is secured by the shares of the stock purchased. As the debt is repaid, shares are released from collateral and allocated to qualified employees based on the proportion of debt service paid in the year. The Company accounts for its leveraged ESOP in accordance with Statement of Position 93-6. Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in the consolidated balance sheets. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and dividends on unallocated ESOP shares are recorded as a reduction of debt. Dividends recorded as a reduction of debt were $34,000 and $44,000 for the years ended December 31, 2004 and 2003, respectively. The total employer contribution was $185,000 and $184,000 for the years ended December 31, 2004 and 2003, respectively. Compensation expense for the ESOP was $530,000, $428,000 and $348,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The status of the ESOP shares at December 31 are as follows: 2004 2003 --------------------------- Allocated shares 132,934 114,083 Shares released from allocation 17,066 15,203 Unreleased shares 31,818 52,532 --------------------------- Total ESOP shares 181,818 181,818 =========================== Fair value of unreleased shares $1,125,000 $1,374,000 =========================== NOTE 9 - INCOME TAXES The components of the provision for federal income taxes are as follows: YEARS ENDED DECEMBER 31, ----------------------------------------- 2004 2003 2002 ----------------------------------------- (In Thousands) Current $ 2,084 $ 1,943 $ 2,782 Deferred (81) (249) (1,159) ----------------------------------------- $ 2,003 $ 1,694 $ 1,623 ========================================= 48 NOTE 9 - INCOME TAXES (CONTINUED) 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, ------------------------ 2004 2003 2002 ------------------------ Tax at statutory rates 34.0% 34.0% 34.0% Tax exempt interest income, net of interest expense disallowance (5.6) (6.0) (5.8) Low-income housing tax credit -- (0.9) (1.0) Earnings on life insurance (1.4) (1.4) (1.1) Other 1.6 1.0 1.1 ------------------------ 28.6% 26.7% 27.2% ========================
The income tax provision includes $156,000, $235,000 and $145,000 of income taxes relating to realized securities gains for the years ended December 31, 2004, 2003 and 2002, 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: 2004 2003 ----------------- (IN THOUSANDS) Deferred tax assets: Allowance for loan losses $ 983 $ 900 Deferred compensation 204 166 Intangible assets 146 172 Other 1 -- ----------------- Total Deferred Tax Assets 1,334 1,238 ----------------- Deferred tax liabilities: Net unrealized gain on securities 193 757 Premises and equipment 253 234 Lease financing -- 73 Deferred loan fees 197 128 ----------------- Total Deferred Tax Liabilities 643 1,192 ----------------- Net Deferred Tax Asset $ 691 $ 46 ================= 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, 2004 and 2003 such loans amounted to $2,483,000 and $1,545,000, respectively. During 2004, new loans to such related parties totaled $1,321,000 and repayments and other reductions aggregated $383,000. 49 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, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2004, 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. The Bank's actual capital amounts and ratios are presented in the table:
To be Well Capitalized under For Capital Adequacy Prompt Corrective Actual Purposes Action Provisions -------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------- (Dollars in Thousands) As of December 31, 2004: Total capital (to risk-weighted assets) $47,234 16.81% $=>22,473 =>8.00% $=>28,092 =>10.00% Tier 1 capital (to risk-weighted assets) 43,331 15.42 =>11,237 =>4.00 =>16,855 =>6.00 Tier 1 capital (to average assets) 43,331 10.65 =>16,278 =>4.00 =>20,348 =>5.00 As of December 31, 2003: Total capital (to risk-weighted assets) $43,839 16.97% $=>20,668 =>8.00% $=>25,835 =>10.00% Tier 1 capital (to risk-weighted assets) 40,028 15.49 =>10,334 =>4.00 =>15,501 =>6.00 Tier 1 capital (to average assets) 40,028 10.24 =>15,629 =>4.00 =>19,536 =>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, 2004 and 2003 was approximately $306,000 and $4,386,000, 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, 2004, $37,587,000 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. 50 NOTE 12 - STOCK OPTION PLANS 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. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2004 2003 2002 -------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------------------------------------------------------------------- Outstanding, beginning of year 141,607 $ 16.85 145,830 $ 14.92 155,385 $ 13.40 Granted 19,500 31.50 21,644 25.15 22,500 20.00 Exercised (14,860) 13.80 (25,867) 12.90 (32,055) 11.12 Forfeited (3,393) 16.97 -- N/A -- N/A -------------------------------------------------------------------- Outstanding, end of year 142,854 $ 19.16 141,607 $ 16.85 145,830 $ 14.92 ==================================================================== Exercisable, at end of year 123,354 $ 17.21 ====================
Exercise prices for options outstanding as of December 31, 2004 ranged from $10.88 to $31.50 per share. The weighted average remaining contractual life is 6.5 years. NOTE 13 - EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, ------------------------------------- 2004 2003 2002 ------------------------------------- (In Thousands, Except per Share Data) Numerator, net income $5,010 $4,653 $4,353 ================================== Denominator: Denominator for basic earnings per share, weighted average shares 2,647 2,605 2,556 Effect of dilutive securities, employee stock options 56 47 41 ---------------------------------- Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 2,703 2,652 2,597 ================================== Basic earnings per common share $ 1.89 $ 1.79 $ 1.70 ================================== Diluted earnings per common share $ 1.85 $ 1.75 $ 1.68 ==================================
51 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. A summary of the Bank's financial instrument commitments is as follows: DECEMBER 31, --------------------- 2004 2003 --------------------- (In Thousands) Commitments to grant loans $15,748 $12,197 Unfunded commitments under lines of credit 30,611 26,269 Standby letters of credit 1,791 2,128 --------------------- $48,150 $40,594 ===================== 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, 2004 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. 52 NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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, 2004 and 2003: o For cash and due from banks, interest-bearing deposits with banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. o For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. o The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Disclosure of the fair value of leases receivable is not required and has not been included in the following table. 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. 53 NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------------------------------------- (In Thousands) Financial assets: Cash and due from banks, interest-bearing deposits with banks and federal funds sold $ 20,666 $ 20,666 $ 9,174 $ 9,174 Securities 122,657 122,811 130,571 130,798 Loans receivable, net 251,309 253,369 230,150 236,335 Investment in FHLB stock 2,225 2,225 2,002 2,002 Accrued interest receivable 1,641 1,641 1,783 1,783 Financial liabilities: Deposits 318,645 318,454 306,669 307,339 Short-term borrowings 22,982 22,982 12,859 12,859 Long-term debt 23,000 24,030 23,000 24,960 Accrued interest payable 1,200 1,200 1,309 1,309 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, ----------------- 2004 2003 ----------------- Assets (In Thousands) Cash on deposit in bank subsidiary $ 1,668 $ 1,118 Securities available for sale 744 605 Investment in bank subsidiary 43,792 41,648 Other assets 68 10 ----------------- $46,272 $43,381 ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 587 $ 550 Stockholders' equity 45,685 42,831 ----------------- $46,272 $43,381 =================
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ----------------------------- Income: (In Thousands) Dividends from bank subsidiary $ 1,830 $ 1,693 $ 1,536 Interest income from bank subsidiary 19 29 42 Other interest income 22 16 15 ----------------------------- 1,871 1,738 1,593 Expenses 147 187 144 ----------------------------- 1,724 1,551 1,449 Income tax expense (benefit) (36) (49) (31) ----------------------------- 1,760 1,600 1,480 Equity in undistributed earnings of subsidiary 3,250 3,053 2,873 ----------------------------- Net Income $ 5,010 $ 4,653 $ 4,353 ============================= Statements of CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ----------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,010 $ 4,653 $ 4,353 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (3,250) (3,053) (2,873) Release of ESOP shares 585 436 350 Other, net (40) (56) (28) ----------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,305 1,980 1,802 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in bank subsidiary -- (1,000) -- Purchase of securities available for sale (125) (95) (55) ----------------------------- NET CASH USED IN INVESTING ACTIVITIES (125) (1,095) (55) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Stock options exercised 206 334 356 ESOP purchase of shares from treasury stock 77 63 -- Acquisition of treasury stock (118) (46) (8) Cash dividends paid (1,795) (1,662) (1,494) ----------------------------- NET CASH USED IN FINANCING ACTIVITIES (1,630) (1,311) (1,146) ----------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 550 (426) 601 CASH AND CASH EQUIVALENTS - BEGINNING 1,118 1,544 943 ----------------------------- CASH AND CASH EQUIVALENTS - ENDING $ 1,668 $ 1,118 $ 1,544 =============================
55 INVESTOR INFORMATION STOCK LISTING Norwood Financial Corp stock is traded on the Nasdaq Market under the symbol NWFL. The following firms are known to make a market in the Company's stock: FERRIS BAKER WATTS F.J. MORRISSEY & Co, INC. Baltimore, MD West Conshohocken, PA 410-659-4616 800-842-8928 LEGG MASON WOOD WALKER, INC. JANNEY MONTGOMERY SCOTT, LLC Scranton, PA 18507 Scranton, PA 18503 570-346-9300 800-638-4417 RYAN BECK & CO. BOENNING & SCATTERGOOD, INC. Livingston, NJ West Conshohoken, PA 800-395-7926 800-496-1170 TRANSFER AGENT Illinois Stock Transfer Company, 209 West Jackson Blvd., Suite 903, Chicago, IL 60606. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at 312-427-2953 DIVIDEND CALENDAR Dividends on Norwood Financial Corp common stock, if approved by the Board of Directors are customarily paid on or about February 1, May 1, August 1 and November 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into Norwood stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. Shareholders do not incur brokerage commissions for the transactions. Please contact the transfer agent or Lewis J. Critelli for additional information. SEC REPORTS AND ADDITIONAL INFORMATION A copy of the Company's report on Form 10-K for its fiscal year ended December 31, 2004 including financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission may be obtained upon written request of any stockholder, investor or analyst by contacting Lewis J. Critelli, Executive Vice President and Chief Financial Officer, Norwood Financial Corp, 717 Main Street, PO Box 269, Honesdale, PA 18431, 570-253-1455 56
DIRECTORY OF OFFICERS NORWOOD FINANCIAL CORP Russell L. Ridd Chairman of the Board Kelly J. Lalley Assistant VIce President & Assistant Secretary William W. Davis, Jr. President & Chief Executive Jennifer M. Witowic Assistant Vice President Officer Manager Lewis J. Critelli Executive Vice President & Laurie J. Bishop Assistant Community Office Manager Chief Financial Officer Edward C. Kasper Senior Vice President Sandra Cella Community Office Manager John H. Sanders Senior Vice President Denise Finagan Assistant Community Office Manager Joseph A. Kneller Senior Vice President Lorraine M. Gallik Commercial Loan Administration Manager John E. Marshall Secretary Renee Gilbert Community Office Manager Marianne Glamann Assistant Community Office Manager WAYNE BANK Russell L. Ridd Chairman of the Board Gary D. Henry Consumer Lending Officer William W. Davis, Jr. President & Chief Executive Annette A. Jurkowski Trust Operations Manager Officer Lewis J. Critelli Executive Vice President & Thomas Kowalski Resource Recovery Manager Chief Financial Officer Edward C. Kasper Senior Vice President & Jill Melody Assistant Community Office Manager Senior Loan Officer/ Corporate Bank John H. Sanders Senior Vice President/Retail William E. Murray Mortgage Originator Bank Joseph A. Kneller Senior Vice President Sarah J. Rapp Human Resources Officer Wayne D. Wilcha Senior Vice President & Diane L. Richter Assistant Community Office Manager Trust Officer John E. Marshall Secretary Toni M. Stenger Assistant Community Office Manager Robert J. Behrens, Jr. Vice President Doreen A. Swingle Residential Mortgage Lending Officer John F. Carmody Vice President Nancy M. Worobey Community Office Manager Carolyn K. Gwozdziewycz Vice President Renee Wyant Community Office Manager Nancy A. Hart Vice President, Controller & Assistant Secretary NORWOOD INVESTMENT CORP William J. Henigan, Jr. Vice President William W. Davis, Jr. President & Chief Executive Officer William R. Kerstetter Vice President Lewis J. Critelli Executive Vice President Mary Alice Petzinger Vice President Scott C. Rickard Investment Representative, Invest Financial Corporation Barabara A. Ridd Vice President Eli T. Tomlinson Vice President MONROE COUNTY ASSOCIATE BOARD James D. Dyson Assistant Vice President Michael J. Baxter James H. Ott JoAnn Fuller Assistant Vice President Sara Cramer Ron Sarajian Karen R. Gasper Internal Auditor & Andrew Forte Ray Price Assistant Vice President Ralph A. Matergia, Esq. Marvin Papillon Raymond C. Hebden Assistant Vice President Randy R. Motts Robert L. Weseloh, CPA Katherine A. Horan Assistant Vice President Norma J. Kuta Assistant Vice President
NORWOOD FINANCIAL CORP VISIT US AT: WWW.WAYNEBANK.COM EX-23 3 ex-23.txt CONSENT Exhibit 23 Consent of Independent Registered Public Accounting Firm We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-61487) of Norwood Financial Corp. of our report dated January 21, 2005, relating to the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated by reference in this Annual Report on Form 10-K. /s/ Beard Miller Company LLP Reading, Pennsylvania March 21, 2005 EX-31 4 ex31-1.txt CERTIFICATION - SECTION 302 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 and 15d-14) 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 annual report is being prepared; (b) 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 (c) 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 21, 2005 /s/William W. Davis, Jr. ------------------------------------- William W. Davis, Jr. President and Chief Executive Officer EX-31 5 ex31-2.txt CERTIFICAITON - SECTION 302 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 and 15d-14) 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 annual report is being prepared; (b) 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 (c) 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 21, 2005 /s/Lewis J. Critelli ---------------------------------------------------- Lewis J. Critelli Executive Vice President and Chief Financial Officer EX-32 6 ex-32.txt CERTIFICATION - SECTION 906 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 period ending December 31, 2004 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 and Chief Financial Officer
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