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Title: |
Annual Report to Shareholders |
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Entities: |
Freddie Mac; Legg Mason Wood Walker, Inc.; Norwood Financial Corp.; TOTAL SA; Federal National Mortgage Association |
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Date: |
2005 |
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$89 |
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#822998 |
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Summary of Operations
NORWOOD FINANCIAL CORP
Selected Financial Data
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
{TABLE}
{CAPTION}
For the years ended Dec. 31, 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------------
{S} {C} {C} {C} {C} {C}
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%
-----------------------------------------------------------------------------------------------
{/TABLE}
{PAGE}
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
{PAGE}
[GRAPHIC OMITTED]
{TABLE}
{CAPTION}
SENIOR MANAGEMENT TEAM NORWOOD FINANCIAL CORP
FROM LEFT TO RIGHT
{S} {C} {C}
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
{/TABLE}
2
{PAGE}
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.
{TABLE}
{CAPTION}
Sincerely yours,
{S} {C}
/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
{/TABLE}
3
{PAGE}
[GRAPHIC OMITTED]
4
{PAGE}
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
{PAGE}
[GRAPHIC OMITTED]
6
{PAGE}
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
{PAGE}
[GRAPHIC OMITTED]
8
{PAGE}
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
{PAGE}
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
{PAGE}
[MAP OF WAYNE, PIKE & MONROE COUNTIES, PENNSYLVANIA
SHOWING BRANCH LOCATIONS APPEARS HERE]
{TABLE}
{CAPTION}
OUR BRANCH LOCATIONS
{S} {C} {C}
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
{/TABLE}
11
{PAGE}
[GRAPHIC OMITTED]
{TABLE}
{CAPTION}
OUR BOARD OF DIRECTORS NORWOOD FINANCIAL CORP
{S} {C} {C}
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
{/TABLE}
12
{PAGE}
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}
[PAGE INTENTIONALLY LEFT BLANK]
{PAGE}
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
{PAGE}
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
{PAGE}
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
{PAGE}
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:
{TABLE}
{CAPTION}
YEAR-ENDED DECEMBER 31,
--------------------------------------------------------
(IN THOUSANDS)
2004 2003 2002 2001 2000
--------------------------------------------------------
{S} {C} {C} {C} {C} {C}
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
{/TABLE}
18
{PAGE}
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.
{TABLE}
{CAPTION}
AS OF DECEMBER 31,
------------------------------------
(IN THOUSANDS)
2004 2003 2002 2001 2000
------------------------------------
{S} {C} {C} {C} {C} {C}
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%
{/TABLE}
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
{PAGE}
{TABLE}
{CAPTION}
2004 2003
------------------------------------------
(DOLLARS IN THOUSANDS)
CARRYING % OF CARRYING % OF
VALUE PORTFOLIO VALUE PORTFOLIO
------------------------------------------
{S} {C} {C} {C} {C}
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%
==========================================
{/TABLE}
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
{PAGE}
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.
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