NORWOOD FINANCIAL CORP / 2003 ANNUAL REPORT
[GRAPHIC OMITTED]
A MAIN STREET BANK 03
NORWOOD FINANCIAL CORP SUMMARY OF OPERATIONS
Summary of Selected Financial Data (dollars in thousands, except per share data)
For the years ended December 31, 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------
Net interest income $ 13,322 $ 13,951 $ 13,554 $ 13,067 $ 12,134
Provision for loan losses 660 630 695 480 470
-----------------------------------------------------------------------------------------------
Other income 3,493 3,004 2,802 2,489 1,954
Other expense 9,808 10,349 9,858 9,712 8,596
-----------------------------------------------------------------------------------------------
Income before income taxes 6,347 5,976 5,803 5,364 5,022
Income tax expense 1,694 1,623 1,601 1,504 1,514
Net Income $ 4,653 $ 4,353 $ 4,202 $ 3,860 $ 3,508
-----------------------------------------------------------------------------------------------
Net income per share-Basic* $ 1.79 $ 1.70 $ 1.67 $ 1.55 $ 1.39
Net income per share-Diluted* $ 1.75 $ 1.68 $ 1.65 $ 1.54 $ 1.39
Cash dividends declared* 0.65 $ 0.60 $ 0.55 $ 0.47 $ 0.39
Dividend pay-out ratio 36.3% 35.3% 32.9% 30.3% 28.1%
-----------------------------------------------------------------------------------------------
Return on average assets 1.22% 1.21% 1.25% 1.21% 1.19%
Return on average equity 11.24% 11.60% 12.54% 13.75% 12.81%
-----------------------------------------------------------------------------------------------
Balances at Year-End
Total assets $387,483 $367,468 $346,029 $326,731 $314,827
Loans receivable 233,733 217,970 214,194 216,477 205,160
Total deposits 306,669 291,852 274,923 252,959 243,507
Shareholders' equity 42,831 40,125 35,116 31,370 26,654
Trust assets under management 73,991 60,102 57,533 54,542 57,980
-----------------------------------------------------------------------------------------------
Book value per share* $ 15.96 $ 15.09 $ 13.37 $ 11.99 $ 10.19
Tier 1 Capital to risk-adjusted assets . 15.58% 15.06% 13.78% 12.78% 11.98%
Total Capital to risk-adjusted assets .. 17.09% 16.57% 15.30% 14.27% 13.50%
Allowance for loan losses to total loans 1.40% 1.44% 1.50% 1.52% 1.63%
Non-performing assets to total assets .. 0.04% 0.07% 0.21% 0.22% 0.24%
-----------------------------------------------------------------------------------------------
* Per share data has been adjusted to reflect the effect of a three-for-two
stock split in the form of a 50% stock dividend paid on June 16, 2003.
[GRAPHIC OMITTED] A MAIN STREET BANK 03
President's Message - 2-3 -
Branch Managers - 4-5 -
Commercial Managers - 6-7 -
Board of Directors - 8-9 -
Branch locations - 10 -
Financial Report Index - 10 -
[GRAPHIC OMITTED]
LEFT TO RIGHT:
LEWIS J. CRITELLI
Executive Vice President &
Chief Financial Officer
EDWARD C. KASPER
Senior Vice President
WAYNE D. WILCHA
Senior Vice President &
Trust officer
JOSEPH A. KNELLER
Senior Vice President
JOHN H. SANDERS
Senior Vice President
WILLIAM W. DAVIS, JR.
President &
Chief Executive Officer
A Letter to Our Shareholders
When reflecting upon this past year, it is with great pride that we
report 2003 was another record setting year for your Company. Norwood Financial
Corp and its subsidiary, Wayne Bank, announced earnings for the year-ended
December 31, 2003, of $4,653,000, which represented a 6.9% increase over the
$4,353,000 earned in the similar period of 2002. Earnings per share, on a fully
diluted basis, were $1.75 in 2003 compared to $1.68 in 2002. Cash dividends
declared in 2003 were $.65 per share, an increase of 8.3% over the $.60 per
share declared in the prior year. All per share amounts have been adjusted to
reflect the 50% stock dividend which was paid on June 16, 2003. It should be
noted this is the twelfth consecutive year that your Company has increased its
dividend. The return on average assets for the year was a strong 1.22% with a
return on equity of 11.24%.
Total assets as of December 31, 2003, were $387.5 million, with loans
receivable of $233.7 million, deposits of $306.7 million and stockholders'
equity of $42.8 million. Total assets have increased $20.0 million when compared
to December 31, 2002.
Loans receivable totaled $233.7 million as of December 31, 2003, an
increase of $15.8 million, or 7.2%, from December 31, 2002. The growth was
principally in commercial and residential real estate, with both portfolios
showing increases over 10%. The real-estate related growth was partially offset
by a continued decline in indirect automobile lending as the Company has chosen
to de-emphasize this product line. Asset quality ratios remain strong. As of
December 31, 2003, non-performing loans represented .06% of total loans,
declining from .10% at the end of the prior year. Net charge-offs also decreased
in 2003, with $539,000 in net charge-offs, compared to $700,000 in 2002.
Net interest income for the year-ended December 31, 2003, on a fully
taxable equivalent basis, was $13,945,000, declining from $14,479,000 in the
similar period in 2002. The decrease in net interest income was due in part to
the decline in the yield on earning assets in the current low interest rate
environment, a significant amount of loan refinancing activity at lower rates,
and increased cash flow from the securities portfolio reinvested at lower
yields. However, net interest income, fully taxable equivalent, for the fourth
quarter of 2003 totaled $3,629,000 and reflected an increase as compared to
$3,588,000 in the similar period of 2002.
Other income for the current year totaled $3,493,000, an increase of
$489,000 over the $3,004,000 earned in 2002. The year-ended December 31, 2003,
includes $692,000 in gains on sales of securities compared to $427,000 in the
prior year. The gains were principally due to the sale of corporate bonds,
equity holdings of other financial institutions and mortgage-backed securities.
Operating expenses declined $541,000 to $9,808,000 for the year ended December
31, 2003, principally due to a lower level of losses on auto lease residuals.
Our strategic plan to fully utilize digital imaging technology for
records storage was activated early in the year. Our goal is to transform paper
based documentation to computerized images. This technology enables our staff to
immediately retrieve stored document images for customer service and opens
valuable floor space previously devoted to file storage. We will be imaging and
archiving new and existing documents as a routine procedure going forward.
Near year-end, efforts were completed to interface check image archives
to our Internet banking service to deliver images of recently paid checks
directly to users of our "Direct Link" Internet banking product. This
convenience is currently provided free to customers and enables them to view and
print both the front and back of paid checks presented to us daily on their home
computer.
During the course of the year, a lot of time and effort was exerted to
enhance our website, www.waynebank.com. We encourage you to visit the site, as
it now provides many more conveniences. You may apply for a mortgage, car loan,
personal loan and review all our deposit rates offered on savings accounts,
certificates of deposit, etc. This technology is truly wonderful.
We also pursued our plans to continually update our ATM network by
installing a new unit at our Main Office in Honesdale. Subsequent to year-end,
in early January we also installed a new unit at the Ski Big Bear Resort at
Masthope. It is particularly pleasing to report that all approvals have finally
been received and construction has commenced on our new Marshalls Creek office,
which is scheduled to open in April of 2004.
None of this could have been accomplished without the dedication of a
creative and ingenious employee group who strive to make Wayne Bank the bank of
choice in Northeastern Pennsylvania. It is particularly pleasing to note, that
during the past year the following employees were promoted: In the Centralized
Lending area, Ray Hebden was promoted to Assistant Vice President. The Community
Office Manager of our Milford office, Mary Alice Petzinger, was promoted to
Assistant Vice President. Our Retail Loan Operations Manager, Jennifer Witowic
was promoted to Assistant Vice President. Paula Lasky was promoted to Community
Office Manager of the Lords Valley office. Renee Gilbert was promoted to
Community Office Manager of our Hamlin office and Denise Finagan was promoted to
Assistant Community Office Manager of our Waymart Office. In June of 2003, we
were very pleased to hire Elisa Rosario to manage our Stroud Mall office.
One of our Directors, Mr. Harold Shook, has decided not to stand for
re-election and will retire from the Board. While Harold is a man of few words,
over the course of the last fifteen years everyone truly listened when he spoke.
He has great business acumen and knowledge of our marketplace. He will be sorely
missed, while the entire Board wishes him much success and health during his
retirement.
Finally, it is most pleasing to note, that Cohen Bros. & Company has
initiated coverage of Norwood Financial Corp Stock. Cohen Bros. & Co. is a
boutique investment bank and institutional research house specializing in the
financial services industry. Their award winning research analysts focus on
small and mid-cap ideas in the bank, thrift, insurance and specialty finance
sectors. To get a copy of the report, please give us a call at 570-253-8511, or
email william.davis@waynebank.com.
In closing, we look forward to 2004 and plan to continue to look for
ways to enhance your investment in Norwood Financial. Thank you for your
continued support.
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
[GRAPHIC OMITTED]
OUR "PEOPLE LIKE TO DO BUSINESS WITH
BRANCH MANAGERS SOMEONE THEY KNOW"
LIVE, WORK AND
VOLUNTEER IN THEIR
COMMUNITIES.
THEY ARE
BASKETBALL COACHES,
ROTARIANS, CHURCH
VOLUNTEERS AND
EMERGENCY CREW
MEMBERS.
BRANCH MANAGERS:
LEFT TO RIGHT
CAROLYN
GWOZDZIEWYCZ
HAWLEY
o
MARY ALICE
PETZINGER
MILFORD
o
PAULA LASKY
LORDS VALLEY
o
NANCY WOROBEY
LAKEWOOD
o
MELISSA SPEAKER
SHOHOLA
o
KELLEY LALLEY
HONESDALE
o
NORMA KUTA
WAYMART
o
INSET:
ELISA ROSARIO
STROUDSBURG
COMMUNITY BRANCHES, COMMUNITY LEADERS
For Wayne Bank's branch managers, every moment counts. These energetic,
warm-hearted people live in the communities where they work, and they support
and help to lead these communities. Wayne Bank's motto, "Helping the Community
Grow," is second nature to them. It's why the branch managers have come to
embody Wayne Bank for their neighbors.
Carolyn Gwozdziewycz of the Hawley branch is on the board of Wayne
Memorial Extended Care, the assisted living/nursing home division of Wayne
Memorial Hospital, a major regional healthcare provider. She is also Treasurer
of the Board of Wayne County Public Library. Melissa Speaker of Shohola is
involved in her local volunteer fire department. Paula Lasky's Lords Valley
chapter of the Rotary Club recently completed The Dictionary Project, which
donated over 800 books to third graders in Pike County. Kelley Lalley of the
Honesdale branch coaches a children's basketball team and is a member of the
Wayne Economic Development Council, an organization working toward the
completion of a business park in southern Wayne County. Nancy Worobey of
Lakewood is active in the Preston Alumni Society and the women's group at her
church. Mary Alice Petzinger serves on the Board of Directors of the Pike County
Chamber of Commerce and participates with her fellow employees at the Milford
branch in monthly charitable projects, including Toys for Tots, in conjunction
with the Unites States Marine Corps. Norma Kuta of the Waymart branch is active
at the Damascus Community Center, is involved in the Red Cross Bloodmobile, and
serves as a volunteer at the Dorflinger-Suydam historical site. Elisa Rosario of
Stroudsburg helps raise scholarship money for local children through the
Kiwanis, is on the board of Meals on Wheels, and emceed the Balloon Festival for
the Stroudsburg area Chamber of Commerce.
This energetic devotion to the community, admirable in its own right,
also helps to build the bank. "We're all so involved," said Paula Lasky. "It
helps to bring business into the bank, because everyone knows us, and people
like to do business with someone they know."
[GRAPHIC OMITTED]
WE SERVE THREE OF THE FASTEST GROWING COUNTIES IN PENNSYLVANIA.
The area has seen rapid growth in recent years. Said Carolyn
Gwozdziewycz, "The expansion has been phenomenal. We have a wonderful mix of
people coming in, young families and retirees looking for a high quality of
life. We've helped so many people build their dream home."
Melissa Speaker of Shohola agreed. "The main comment when people move
here is that it's a beautiful area. It is, and it's a great place to live. Real
estate sells fast, and we've seen a lot of new construction."
Elisa Rosario of Stroudsburg said, "I'm new to the area myself, so I
relate to our new customers. I welcome them with open arms, and try to meet
their needs. I tell them, `We have all the amenities of a city bank!'"
With so much development, each branch office strives to offer the full
range of banking services a community needs. Said Kelley Lalley of the Honesdale
branch, "We do everything from $1,000 personal loans up to $1,000,000commercial
loans. As a community banker, and someone who grew up here, I know many of the
bank's customers personally. I enjoy helping them meet their goals."
Wayne Bank and the community it serves continue to grow together. As
Carolyn Gwozdziewycz explained, "I have customers who came in for a mortgage or
a checking account, and then they needed other services, and before you know it,
they're inviting you over, and you've become friends."
Paula Lasky concurred. "I like helping young families get started in a
new home. The bank's motto is `Helping the Community Grow.' We really mean that.
We have all different kinds of people here in the community, and there's always
something we can do for them."
Carolyn concluded, "A lot of people who are moving here have no family
or friends in the area. So we at the bank like to make them feel at home, and we
become almost their family here. We are the embodiment of Wayne Bank in our
communities, and we like that."
"OUR ROLE IS TO MAKE PEOPLE COMFORTABLE WITH THEIR LOVED ONES' FINANCIAL
FUTURES. WHEN THEY LEAVE, WE WANT THEM TO SAY, AS ONE RECENT CLIENT DID, "NOW I
KNOW EVERYTHING WILL BE ALRIGHT." GIVING PEOPLE PEACE OF MIND IS VERY
REWARDING."
- - WAYNE WILCHA
SVP TRUST OFFICER
[GRAPHIC OMITTED]
"EVERY LOAN IS IMPORTANT TO US,
EVERY CUSTOMER"
OUR COMMERCIAL GROWTH IS BOOMING AS ENTREPRENEURS JUMP ON NEW OPPORTUNITIES TO
SERVE THE EVER - EXPANDING POPULATIONS OF WAYNE, PIKE AND MONROE COUNTIES.
IN A ONE YEAR PERIOD FROM 2001 TO 2002, PIKE COUNTY'S POPULATION GREW AT AN
ASTONISHING RATE OF 3.8%. THE AREA'S COMMERCIAL GROWTH IS KEEPING PACE EVERY
STEP OF THE WAY.
HELPING THE COMMUNITY GROW STRONG.
Wayne Bank serves an area that has grown steadily for more than a
decade. The past two years have also seen more pronounced growth as the events
of September 11, 2001, began to shift the population of the greater New York
area away from the city. Commerce has scrambled to meet the needs of this new
wave of residents, and Wayne Bank has been flexible and aggressive in helping
the community grow strong.
John Carmody of the Honesdale office said, "We've seen notable
commercial growth in the past few years, and as the national economy rebounds,
we anticipate an additional local uptick. Wayne Bank is positioned to take
advantage of opportunities when they come to the community."
Ed Kasper, Senior Vice President for Commercial Lending, concurred.
"Our commercial lending was up 15-18 million dollars in 2003. We have
contributed significantly to local business growth."
John Carmody added, "Our loans run the gamut, too, from one man
carpentry or plumbing operations to companies with several hundred employees.
Every loan is important to us, every customer."
"The bank is extremely competitive," said Bill Henigan of the
Stroudsburg office. "We have taken a flexible attitude about rates and
structuring. We try to figure out how to make a loan, rather than how to not
make a loan."
This responsiveness to the community is a credo for Wayne Bank's
commercial account managers, in their personal lives as well as their lending.
John Carmody is Director and past President of the Wayne County Builders
Association and recently completed "Leadership Wayne", a program that resulted
in a new local office called SCORE, which stands for the Service Corps of
Retired Executives, a group that provides free business counseling to
entrepreneurs.
[GRAPHIC OMITTED]
WAYNE COUNTY'S GROWTH RATE IS NEARLY 2% A YEAR
"WAYNE BANK EMPHASIZES SERVICE, AND CUSTOMERS ARE DRAWN TO THAT. OUR GROWTH
DEMONSTRATES THE SUCCESS OF THAT APPROACH."
- BILL KERSTETTER
COMMERCIAL MANAGERS:
LEFT TO RIGHT
BILL HENIGAN
STROUDSBURG
o
JOHN CARMODY
HONESDALE
o
ED KASPER
HONESDALE
o
BILL KERSTETTER
MILFORD
Ed Kasper is on the Board of Directors of the Human Resource Center, a
local organization that assists people who have mental and physical
disabilities. With Ed's assistance, the Human Resource Center was able to obtain
a loan to build a workshop for its clients.
Bill Henigan is incoming President of his local chapter of Kiwanis, and
is also active in the Lions and other civic organizations. In addition to
programs for children who need eyeglasses, and for children with Type 1
diabetes, Bill was recently involved in sponsoring the travel of a family with
limited resources whose child needed medical attention in Philadelphia.
Bill Kerstetter of the Milford office serves on the Board of the
Milford-Matamoras Rotary Club, and is a founding member of Pike County United
Way. He is an associate Board member of the Pike County Public Library, a
township supervisor and an elder in his church.
Naturally the lenders' interest in the vitality of their community
helps to shape the loans they make. From smaller projects like a gym that built
a new facility after it outgrew its original quarters, to a large loan for a
conference center that employs dozens of area residents, Wayne Bank attracts and
retains a variety of entrepreneurial customers. Why? The answer is emphatic.
"Service!" exclaimed Bill Kerstetter. "Wayne Bank emphasizes service,
and customers are drawn to that. Our growth demonstrates the success of that
approach."
Bill Henigan elaborated. "With commercial lending, the customer doesn't
just get their loan and ride off into the sunset. You continue to be active with
them - after their initial loan, they'll want to upgrade their phone system or
get new computers. I visit my commercial customers at least quarterly, to see
how they're doing and to see what else they might need. I also ask them if they
have any fellow entrepreneurs who might need our services. We are a community,
and we're all growing together."
[GRAPHIC OMITTED]
OUR BOARD OF DIRECTORS COMPRISES BUSINESS AND CIVIC LEADERS FROM ACROSS OUR
MARKET AREA. THESE CORNERSTONES OF THE COMMUNITY GUIDE OUR BUSINESS AND NURTURE
OUR NEIGHBORHOODS FOR THE BENEFIT OF EVERYONE WHO LIVES HERE.
THE BOARD OF DIRECTORS OF WAYNE BANK
CHARLES E. CASE
Charles is the retired former owner of CR Case and Sons, Inc. of
Honesdale. He is an active supporter of youth sports in Honesdale, and of the
business community of Wayne County.
RUSSELL L. RIDD
Chair of the Board of Directors
He retired as President and Chief Executive Officer of the Bank in
1993. Mr. Ridd has been active in civic and business organizations for over 40
years. Mr. Ridd currently serves as Chair of the Board of Trustees of the
Dorflinger-Suydam Wildlife Sanctuary. During his tenure on the Board of Wayne
Bank, he has always encouraged the Bank's involvement in civic projects.
WILLIAM W. DAVIS, JR.
President & Chief Executive Officer
He is a Past President of the Wayne County Chamber of Commerce. He
serves on the boards of the Wayne County Community Foundation, the Northeastern
Child Care Services, Inc., DBA, Treasure House, Pocono Medical Center, and the
Dorflinger-Suydam Wildlife Sanctuary. Mr. Davis is a founding member of the
Greater Honesdale Partnership.
JOHN E. MARSHALL
Secretary of the Board
John is President of Marshall Machinery, Inc., a farm equipment and
sales company. Mr. Marshall is a strong supporter of youth agricultural
projects, including 4-H and the Wayne County Fair.
[GRAPHIC OMITTED]
BOARD OF DIRECTORS:
LEFT TO RIGHT
CHARLES E. CASE
o
RUSSELL L. RIDD
CHAIRMAN OF THE BOARD
o
WILLIAM W. DAVIS, JR.
PRESIDENT &
CHIEF EXECUTIVE OFFICER
o
JOHN E. MARSHALL
SECRETARY OF THE BOARD
o
HAROLD A. SHOOK
o
DANIEL J. O'NEILL
o
GARY P. RICKARD
o
DR. KENNETH A. PHILLIPS
o
RICHARD L. SNYDER
HAROLD A. SHOOK
Harold is President of Shooky's Distributors in Hawley. Mr. Shook
supports promotional activities for business and tourism in the Hawley-Lake
Wallenpaupack area.
DANIEL J. O'NEILL
Daniel is the retired Superintendent of the Wayne Highlands School
District in Honesdale. He has taken a leadership role in a variety of
fundraisers for civic organizations, and for individuals and groups in need.
Also retired from a distinguished military career, he is a member of many civic
boards, including Wayne County Chamber of Commerce, Greater Honesdale
Partnership, Wayne County Community Foundation and Wayne County Sports Hall of
Fame.
GARY P. RICKARD
Gary is involved in local civic and business organizations, including
agricultural organizations, and opens his dairy farm to tours from area schools.
DR. KENNETH A. PHILLIPS
Kenneth is active in Waymart civic organizations and is a strong
advocate of youth sports. He has supported many fundraisers in the Waymart area,
including that for the children's baseball field. Mr. Phillips is an inductee of
the Wayne County Sports Hall of Fame.
RICHARD L. SNYDER
Richard is a retired executive and certified public accountant. He
served in a number of executive positions with Pricewaterhouse Coopers LLP, Bell
Equipment/Alcom Combustion Company and Phillip Morris Companies. Mr. Snyder
plays a leadership role in the campaign to preserve the heritage of Milford. He
is President of the Milford Enhancement Committee and active in the arts in Pike
County and surrounding areas.
TEN CONVENIENCT LOCATIONS
Administrative Office:
717 Main Street
P.o. Box 269
Honesdale, PA 18431
Community Offices: [MAP OF WAYNE, PIKE AND
MONROE COUNTIES SHOWING
717 Main Street OFFICE LOCATIONS]
Honesdale, PA 18431
254 Willow Avenue
Honesdale, PA 18431
Belmont & Water Streets
Waymart, PA 18472
Route 6
Hawley, PA 18428
111 West Harford Street
Milford, PA 18337
Weis Market, Route 590
Hamlin, PA 18427
Richardson Avenue
Shohola, PA 18458
Route 370 &
Lake Como Road
Lakewood, PA 18439
Stroud Mall & Route 611
Stroudsburg, PA 18360
Route 739,
Lords Valley Shopping Plaza
Lords Valley, PA 18428
Grand Union
Matamoras/Westfall
(ATM only)
NORWOOD
--------------
FINANCIAL CORP
Consolidated Financial Report 03
-----------------------------------------------------
Management's Discussion & Analysis . 13-27 .
Independent Auditor's Report . 28 .
Balance Sheets . 29 .
Statements of Income . 30 .
Statements of Stockholders' Equity . 31 .
Statements of Cash Flow . 32 .
Notes to Consolidated Financial
Statements .33-49 .
Investor Information . 50 .
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
This Management's Discussion and Analysis and related financial data
are presented to assist in the understanding and evaluation of the financial
condition and results of operations for Norwood Financial Corp (The Company) and
its subsidiary Wayne Bank (the Bank) for the years ended December 31, 2003,
2002, and 2001. 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 below. The Company accounts for their 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.
RESULTS OF OPERATION - SUMMARY
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. The decline in
earning assets yields was partially offset by a $21.4 million increase in
average earning assets and a lower cost of funds.
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 a lower level of non-performing
assets and less net charge-offs for the year ended December 31, 2003 as compared
to the prior year.
[BAR GRAPH SHOWING NET INCOME FOR LAST FIVE FISCAL YEARS IN THOUSANDS]
99 - $3,508
00 - $3,860
01 - $4,202
02 - $4,353
03 - $4,653
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 13 -
[BAR GRAPH SHOWING BASIC EARNINGS PER SHARE FOR PAST FIVE FISCAL YEARS]
99 - $1.39
00 - $1.55
01 - $1.67
02 - $1.70
03 - $1.79
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 represented 20.0%
of total revenues in 2003, improving from 17.2% 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
during 2003.
Net income for the Company for the year 2002 was $4,353,000 compared to
$4,202,000 for the year 2001. This represents an increase of $151,000 or 3.6%
over the prior year. Basic and diluted earnings per share for 2002 were $1.70
and $1.68 increasing from $1.67 and $1.65, respectively, in 2001. The return on
average assets (ROAA) for the year ended December 31, 2002 was 1.21%, with a
return on average equity (ROAE) of 11.60%.
The increase in earnings was principally attributable to a higher level
of net interest income and growth in other income. Net interest income, on a
fully taxable equivalent basis (fte), totaled $14,479,000 in 2002, compared to
$14,041,000 in 2001. The improvement in net interest income was due to a $22.1
million growth in average earning assets during 2002, which offset a declining
net interest margin.
Other income for 2002 was $3,004,000, an increase of $202,000 or 7.2%
over 2001. Other income represented 17.2% of total revenues in 2002, improving
16.6% in 2001. Other expenses totaled $10,349,000 in 2002 compared to $9,858,000
in 2001, an increase of $491,000 or 5.0%. The increase in expenses was
principally due to a higher level of losses on lease residuals and increased
cost of various employee benefit plans.
[BAR GRAPH SHOWING TOTAL ASSETS IN MILLIONS AT END OF EACH OF
LAST FIVE FISCAL YEARS]
99 - $315
00 - $327
01 - $346
02 - $367
03 - $387
FINANCIAL CONDITION
TOTAL ASSETS
Total assets at December 31, 2003, were $387.5 million compared to
$367.5 million at year-end 2002, an increase of $20.0 million or 5.4%.
LOANS RECEIVABLE
Loans receivable, represent the most significant percentage of the
Company's assets, at 60.3% of total assets. At December 31, 2003, total loans
receivable were $233.7 million compared to $218.0 million at year-end 2002, an
increase of $15.7 million. Loan growth in commercial and residential real estate
was partially offset by a net run-off in indirect automobile financing, included
in consumer loans to individuals.
Residential real estate, which includes home equity lending, totaled
$77.5 million at December 31, 2003, compared to $69.0 million at year-end 2002.
This increase of $8.5 million is net of prepayments, refinancing activity and
sales into the secondary market. In the low interest rate environment of 2003,
fixed rate mortgage products were preferred by customers and accounted for the
majority of the activity. The Company sells a portion of its longer-term fixed
rate residential loan production for interest rate risk management, with $7.1
million of 30 year fixed rate loans sold into the secondary market during 2003
at a gain of $192,000, 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's indirect lending portfolio (included in consumer loans to
individuals) declined $11.1 million to $28.3 million at December 31, 2003. A
portion of the net decrease may be attributable to the significant financing
incentives offered by the automakers throughout 2003, increased competition from
other banks and a slow down in the market. In addition, the Company is focusing
its efforts on increasing direct and real estate lending through its branch
network and anticipates a decrease in indirect financing again in 2004.
- - 14 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
The Company stopped automobile lease originations during the third
quarter of 1999. This was done to monitor experience in early terminations,
amount of off-lease vehicles returned and the market values of vehicles returned
compared to residual values. As a result, total leases declined $1.3 million in
2003 to $300,000 as of December 31, 2003. Losses on lease residuals (included in
other expense) totaled $50,000 for 2003. The Company maintains a reserve for
residual losses (included in other liabilities), which totaled $66,000 at
December 31, 2003, with a residual value in the remaining portfolio of $297,000
compared to a $213,000 reserve, and $1.3 million of residual value at the prior
year-end. The Company liquidates its returned off-lease vehicles through various
used car dealers and automobile auction centers. As of December 31, 2003, the
Company had an inventory of automobiles to liquidate of $180,000 (included in
other assets). The Company expects all leases to mature and have the majority of
vehicles liquidated by year-end 2004.
Commercial loans consist principally of loans made to small businesses
within the Company's market and are usually secured by real estate and other
assets of the borrower. Commercial and commercial real estate loans totaled
$113.3 million at December 31 2003, increasing from $94.7 million in 2002, an
increase of $18.6 million or 19.6%. The majority of the increase was in loans
secured by real estate with adjustable interest rates based on a spread to the
prime rate. The growth in commercial lending was centered in the Pike and Monroe
County market areas.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
[BAR GRAPH SHOWING NPAS TO ASSETS AT END OF EACH OF LAST FIVE FISCAL YEARS]
99 - 0.24%
00 - 0.22%
01 - 0.21%
02 - 0.07%
03 - 0.40%
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, 2003, non-performing loans totaled $143,000 and
represented .06% of total loans receivable compared to $221,000 and .10% as of
year-end 2002. Total non-performing assets, which includes foreclosed real
estate totaled $143,000 and represented .04% of total assets, declining from
$242,000 and .07% as of December 31, 2002. As of December 31, 2003, the Company
had no foreclosed real estate. The non-performing loans as of December 31, 2003
consist principally of loans secured by residential real estate. The Company
does not anticipate any significant losses, related to these loans due to
collateral values.
The allowance for loan losses totaled $3,267,000 at year-end 2003 and
represented 1.40% of total loans receivable compared to $3,146,000 and 1.44% of
total loans as of year-end 2002. Net charge-offs for 2003 were $539,000,
consisting principally of losses on the sale of repossessed automobiles and a
commercial credit secured by automobiles, compared to net charge-offs of
$700,000 in 2002. The provision for loan losses for 2003 was $660,000, compared
to $630,000 in 2002.
The Company's loan review process assesses the adequacy of the
allowance for loan losses on a quarterly basis. The process includes a review of
the risks inherent in the loan portfolio. It includes an analysis of impaired
loans and a historical review of losses. Other factors considered in the
analysis include; concentration of credit in specific industries in the
commercial portfolio; the local and regional economic conditions; trends in
delinquencies, large dollar exposures and loan growth. As of December 31, 2003,
the Company considered its concentration of credit risk profile to be moderate.
The local economy improved in 2003, with a lower 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, 2003, 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.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 15 -
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)
2003 2002 2001 2000 1999
--------------------------------------------------------
Allowance balance
at beginning of period $ 3,146 $ 3,216 $ 3,300 $ 3,344 $ 3,333
Charge-Offs:
Commercial and all other (121) (34) (12) -- (12)
Real Estate -- (122) (11) (9) (17)
Consumer (478) (608) (711) (589) (419)
Lease Financing (36) (30) (152) (170) (184)
--------------------------------------------------------
Total (635) (794) (886) (768) (632)
Recoveries:
Commercial and all other 5 -- 8 54 74
Real Estate 24 13 1 73 --
Consumer 64 72 85 88 83
Lease Financing 3 9 13 29 16
--------------------------------------------------------
Total 96 94 107 244 173
Provision expense 660 630 695 480 470
--------------------------------------------------------
Allowance balance
at end of period $ 3,267 $ 3,146 $ 3,216 $ 3,300 $ 3,344
========================================================
Allowance for loan losses as a percent
of total loans outstanding 1.40% 1.44% 1.50% 1.52% 1.63%
Net loans charged off as a percent of
average loans outstanding .24% .33% .36% .25% .23%
Allowance for loan losses as a
percent of non-performing loans 2,284.6% 1,423.5% 470.9% 484.6% 508.9%
The following table sets forth information regarding non-performing
assets. The Bank had no troubled debt restructurings as defined in SFAS No. 114.
As of December 31, 2003, the Company has executed judgment and scheduled
foreclosure on a commercial real estate credit with a balance of $213,000. The
loan is considered impaired and collateral dependent. However, due to collateral
values, the Company does not anticipate any loss.
As of December 31,
---------------------------------------
(in thousands)
2003 2002 2001 2000 1999
---------------------------------------
Non-accrual loans:
Commercial and all other $ -- $ -- $ 64 $ 64 $ 64
Real estate 125 213 597 518 513
Consumer -- 3 11 -- 19
Total 125 216 672 582 596
Accruing loans which are contractually
past due 90 days or more 18 5 11 98 61
Total non-performing loans 143 221 683 680 657
Foreclosed real estate -- 21 54 27 110
Total non-performing assets $143 $242 $737 $707 $767
Non-performing loans to total loans .06% .10% .32% .31% .32%
Non-performing loans to total assets .04% .06% .20% .21% .21%
Non-performing assets to total assets .04% .07% .21% .22% .24%
- - 16 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
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 SFAS#115 "Accounting for
Certain Investments in Debt and Equity Securities" the Company classifies its
investments into two categories: held to maturity (HTM) and available for sale
(AFS). The Company does not have a trading account. Securities classified as HTM
are those in which the Company has the ability and the intent to hold the
security until contractual maturity. As of December 31, 2003, the HTM portfolio
totaled $5.7 million and consisted of longer-term 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
other comprehensive income. As of December 31, 2003, $124.8 million in
securities were so classified and carried at their fair market value, with
unrealized appreciation; net of tax, of $1,431,000, included in Accumulated
other comprehensive income in stockholders' equity.
As of December 31, 2003, the average life of the portfolio was 2.1
years compared to 2.3 years at the prior year-end. The decrease was due to
increased cash flow from the mortgage-backed securities, which was impacted by
the low interest rate environment in 2003 and the purchase of short-term
securities. Total purchases for the year were $106.8 million with securities
called, maturities and cash flow of $72.9 million and sales of $22.5 million.
The purchases were funded principally by cash flow from the portfolio and a
reduction in Federal Funds sold. The Company had overnight federal funds sold of
$6.4 million as of December 31, 2002 and -$0- as of December 31, 2003.
As of December 31, 2003, the Company's securities portfolio (HTM and
AFS) totaled $130.6 million with the mix as follows: U.S. Treasuries, 1.6%; U.S.
Government agencies 36.4%; mortgage-backed securities, 31.0%; municipal
obligations, 18.9%; corporate debt securities, 10.5% and equity securities of
other financial institutions 1.6%. The portfolio had $14.5 million of floating
rate instruments, principally adjustable rate mortgage backed securities as of
December 31, 2003. 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 less than 5 years The mortgage backed securities are
pass-through bonds with the Federal National Mortgage Association (FNMA),
Federal Home Loan Mortgage Corp (Freddie Mac), and Guaranteed National Mortgage
Association (GNMA).
DEPOSITS
The Company, through the ten 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 at December 31, 2003, were $306.7 million increasing
from $291.9 million as of year-end 2002, an increase of $14.8 million or 5.1%.
The increase was principally in core transaction accounts. The Company's money
market accounts which include the premium product Investor Account, increased
$7.6 million, or 19.5% to $46.5 million. In addition, savings deposit products
increased $4.3 million, or 8.3%, to $55.9 million.
Time deposits over $100,000, which consist principally of school
district and other public funds, with maturities generally less than one year,
were $29.3 million as of December 31, 2003, compared to $29.5 million at
year-end 2002. 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.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 17 -
As of December 31, 2003, non-interest bearing demand deposits totaled
$39.5 million, increasing $6.1 million or 18.1% from the prior year-end. These
are principally commercial deposits, and have increased due to growth in the
commercial loan portfolio. In addition, the Company has $7.5 million of cash
management accounts included in short-term borrowings. These balances represent
commercial customers' excess funds invested in overnight securities. The Company
considers these accounts as a source of core funding.
The Company believes a portion of its deposit growth over the prior two
years may be due in part to the relatively weak stock market performance since
March 2000. Bank deposit growth may slow in 2004, as the stock market becomes
more attractive to investors. However, the Company 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.
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, 2003, the level of net interest income at
risk in a 200 basis points increase or decrease was within the Company's policy
limits, of a decline 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, 2003, the Bank had a positive 90 day interest
sensitivity gap of $30.2 million or 7.8% of total assets compared to 8.6% as of
December 31,2002. A positive gap means that rate-sensitive assets are greater
than rate-sensitive liabilities at the time interval. This would indicate that
in a declining rate environment, the yield on interest-earning assets may
decrease faster than the cost of interest-bearing liabilities in the 90 day time
frame. The Company has experienced a decline in its net interest margin, in
part, due to the asset-sensitive position. 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
longer term mortgages.
The Company analyzes and measures the time periods in which rate
sensitive assets (RSA) and rate sensitive liabilities (RSL) will mature or
reprice in accordance with their contractual terms and assumptions. Management
believes that the assumptions used are reasonable. The interest rate sensitivity
of assets and liabilities could vary substantially if differing assumptions were
used or if actual experience differs from the assumptions used in the analysis.
For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in differing degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates. Further,
in the event of a significant change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed.
Finally, the ability of borrowers to
- - 18 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
service their adjustable-rate debt may decrease in the event of an interest rate
increase. The operating results of the Company are not subject to foreign
currency exchange or commodity price risk.
The following table displays interest-sensitivity as of December 31, 2003
(dollars in thousands)
3 Months 3 through 1 through Greater Than
or Less 12 Months 3 Years 3 Years Total
---------------------------------------------------------------
Federal funds sold and
interest bearing deposits $ 64 $ -- $ -- $ -- $ 64
Securities (1) 15,387 35,006 44,589 35,589 130,571
Loans receivable (1) 88,471 44,981 55,371 44,910 233,733
---------------------------------------------------------------
Total rate sensitive assets
(RSA) $ 103,922 $ 79,987 $ 99,960 $ 80,499 $ 364,368
===============================================================
Non-maturity interest
bearing deposits(2) $ 25,032 $ 32,384 $ 85,886 $ -- $ 143,302
Time deposits 29,967 54,343 29,867 9,673 123,850
Other 18,721 3,916 5,222 8,000 35,859
---------------------------------------------------------------
Total rate sensitive liabilities
(RSL) $ 73,720 $ 90,643 $ 120,975 $ 17,673 $ 303,011
===============================================================
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%
As of December 31, 2002
Interest sensitivity gap $ 31,726 ($ 28,105) ($ 12,184) $ 63,830 $ 55,267
Cumulative gap 31,726 3,621 ( 8,563) 55,267
RSA/RSL-cumulative 142.3% 102.1% 96.9% 119.0%
<FN>
(1) Included in the period in which interest rates are next scheduled to adjust
or in which they are due. Prepayment speeds are based on historical
experience and management judgment.
(2) Non-maturity deposits are generally subject to immediate withdrawal.
However, based on retention experience in various interest rate
environments, management considers the deposits to have longer effective
maturities.
</FN>
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, 2003, the Company had cash and cash equivalents of
$9.2 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 $124.8 million, which could be used for
liquidity needs. This totals $134.0 million and represents 34.6% of total assets
compared to $131.0 million and 35.7% of total assets as of December 31, 2002.
The Company also monitors other liquidity measures, all of which were within the
Company's policy guidelines as of December 31, 2003. 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 $120.7 million. As of year-end 2003, the
Company had $23 million in long-term borrowings from the FHLB, and $420,000 of
short-term, overnight borrowings.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 19 -
The Company's financial statements do not reflect various commitments
that are made in the normal course of business, which may involve some liquidity
risk. These commitments consist mainly of unfunded loans and letters of credit
made under the same standards as on-balance sheet instruments. Unused
commitments, as of December 31, 2003 totaled $40,594,000. This consisted of
$12,197,000 in commercial real estate, construction and land developments loans,
$5,829,000 in home equity lines of credit, $2,128,000 in standby letters of
credit and the remainder in other unused commitments. Because these instruments
have fixed maturity dates and because a portion 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
Payments due by period
---------------------------------------------------------
December 31, 2003
---------------------------------------------------------
Less than
Total 1 Year 1-3 Years 4-5 Years Over 5 Years
---------------------------------------------------------
(in thousands)
Time deposits $123,850 $ 84,310 $ 29,867 $ 9,673 $ --
Long-term debt 23,000 -- 10,000 10,000 3,000
Operating leases 1,915 139 236 144 1,396
---------------------------------------------------------
$148,765 $ 84,449 $ 40,103 $ 19,817 $ 4,396
=========================================================
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between income earned on loans
and securities and interest paid on deposits and borrowings. 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.
[BAR GRAPH SHOWING FTE NET INTEREST INCOME FOR
PAST FIVE FISCAL YEARS IN THOUSANDS]
99 - $12,475
00 - $13,424
01 - $14,041
02 - $14,479
03 - $13,945
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 lower yielding 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.
- - 20 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
Securities available for sale averaged $120.5 million in 2003 with fte
interest income of $4,711,000 and a yield of 3.91% compared to $103.6 million,
$5,633,000 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 was $72.9
million in 2003 compared to $46.3 million in 2002. In addition, there was $22.5
million in proceeds from sales in 2003 compared to $6.5 million in 2002. 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 yield on cash flow. The Company reinvested in short-term
securities in anticipation of an increase in rates in late 2004.
Interest expense for the year-end 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 by lowering rates paid on all types of deposits.
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.
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.
For the year ended December 31, 2002, net interest income on a fully
taxable basis (fte) was $14,479,000 an increase of $438,000 or 3.1% over 2001.
The resulting fte net interest spread and net interest margin for 2002 were
3.82% and net interest margin for 2002 were 3.82% and 4.26%, respectively,
compared to 3.76% and 4.26%, respectively, in 2001.
Interest income (fte) for the year ended December 31, 2002 totaled
$22,092,000 compared to $24,251,000 in 2001. The decrease was principally due to
lower interest rates in 2002, with an average prime rate of 4.67% and Federal
Funds target rate of 1.67%, compared to 6.86% and 3.86%, respectively, on
average, for 2001. As a result of the lower interest rates, the yield on earning
assets declined 113 basis points, to 6.51% in 2002.
The earning asset yield was also unfavorably impacted by a change in
the asset mix, as a result of deposits increasing more than loans. On average in
2002 loans represented 63.0% of earning assets compared to 67.7% in 2001. The
offset was an increase in lower yielding Federal Funds sold, 4.6% of average
earning assets compared to 2.6% in 2001, and AFS securities, 31.1% of average
earning assets, increasing from 27.5%.
Interest income earned on loans totaled $15,651,000 with a yield of
7.32% in 2002 decreasing from $17,934,000 with a yield of 8.35% in 2001. The
decline in the yield was due in part to the lower interest rate environment with
an average prime rate of 4.67% in 2002 compared to 6.86% in 2001. Loans averaged
$213.8 million in 2002, compared to $214.9 million in 2001.
Securities available for sale averaged $103.6 million in 2002 with fte
interest income of $5,634,000 and a yield of 5.44% compared to $87.2 million,
$5,450,000 and 6.25%, respectively, in 2001. The decrease in yield was
principally due to the lower interest rate environment in 2002. During 2002,
cash flows on mortgage-backed securities increased in the lower interest rate
environment. These amounts were generally reinvested in the lower coupon
mortgage-backed securities, callable U.S. Government agency securities and
short-term tax-exempt municipal obligations.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 21 -
Interest expense for the year-end December 31, 2002 totaled $7,613,000,
declining from $10,210,000 in 2001. The average cost of interest-bearing
liabilities in 2002 was 2.69%, a decrease of 119 basis points from 3.88% in
2001. In the lower rate environment of 2002, the Company was able to reduce its
cost of interest bearing deposits to 2.45% from 3.65% in 2001.
Federal Funds sold, which represents overnight investments of
liquidity, increased in 2002, as deposit growth exceeded loan activity. For
2002, Federal Funds averaged $15.6 million at a yield of 1.65% compared to $8.3
million and 3.15% in 2001.
OTHER INCOME
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 20.0% of total
revenues increasing from 17.2% 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 was due in part to loan
documentation fees, which increased $48,000 to $286,000 due to volume, and to
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, with the increase principally due to higher market value of
trust accounts in 2003 which totaled $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 to 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, 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 cash surrender value (CSV) of Bank-Owned Life Insurance
(BOLI, included in other assets), 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 totaled $3,004,000 in 2002, an increase of $202,000 or
7.2% over the $2,802,000 in 2001. Other income represented 17.2% of total
revenues increasing from 16.6% in 2001.
Service charges and fees were $1,788,000 in 2002 compared to $1,661,000
in 2001, an increase of $127,000. The increase is due in part to growth in
fee-based retail deposit accounts, with service charges increasing $66,000, and
debit card activity, which generated $166,000 in revenues, increasing from
$134,000 in 2001. In addition, fees related to non-sufficient funds (nsf) in
checking accounts increased $64,000 due to increased volume.
- - 22 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
Income from fiduciary activities was $236,000 in 2002 compared to
$256,000 in 2001, with the decrease principally due to a lower level of estate
fees in 2002. Commissions on sales of annuities and mutual funds were $136,000
on sales of $4.9 million in 2002, declining from revenues of $267,000 on sales
of $9.2 million in 2001. In 2002, the Company sold $5.4 million of residential
mortgages into the secondary market at a gain of $82,000 compared to $2.2
million of loans sold, at a gain of $48,000 in 2001. The loans sold were
principally 30-year mortgages with coupons above the current market rate.
The Company had net gains on sales of securities of $427,000 in 2002
compared to $212,000 in 2001. The Company sold selected equity holdings of other
financial institutions, which appeared attractively priced and corporate bonds.
Other Income (dollars in thousands)
For the year-ended December 31 2003 2002 2001
----------------------------
Service charges on deposit accounts $ 409 $ 415 $ 358
ATM Fees 202 187 167
NSF Fees 599 571 507
Merchant card processing 61 88 111
Loan related service fees 286 254 240
Visa check card 180 166 134
Fiduciary activities 250 236 256
Mutual funds & annuities 112 136 267
Gain on sales of mortgage loans 192 82 48
CSV on life insurance 271 203 199
Other income 239 239 303
----------------------------
2,801 2,577 2,590
Net realized gains on sales of securities 692 427 212
----------------------------
Total $3,493 $3,004 $2,802
============================
OTHER EXPENSES
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. 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 and document imaging 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.
Other expenses totaled $10,349,000 in 2002, an increase of $491,000 or
5.0% over $9,858,000 in 2001. Salaries and employee benefit costs, which
represented 46.8% of total other expense, were $4,847,000 for 2002, an increase
of $205,000 or 4.4%. The increase was principally due to increasing costs of
health insurance and other benefit plans.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 23 -
Losses on lease residuals were $870,000 in 2002 increasing from
$630,000 in 2001. The increase was principally due to higher number of cars
liquidated in 2002 and a soft used car market. The scheduled lease terminations
for 2003 are 66, significantly less than the 259 scheduled in 2002. These losses
were partially offset by lease termination fee income, included in other income,
of $36,000 in 2002 and $64,000 in 2001. Professional fees were $186,000 in 2002
compared to $211,000 in 2001, with the decrease due to lower consulting and
legal fees.
INCOME TAXES
Income tax expense for the year 2003 was $1,694,000 for an effective
tax rate of 26.7%, 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.
Income tax expense for the year 2002 was $1,632,000 for an effective
tax rate of 27.2%, compared to an expense of $1,601,000 and an effective rate of
27.6% in 2001. The decrease in the effective tax rate is principally due to
higher levels of interest income on municipal securities, which is not subject
to Federal Income Tax.
CAPITAL AND DIVIDENDS
Total stockholders' equity as of December 31, 2003, was $42.8 million,
compared to $40.1 million as of year-end 2002. The increase was principally due
to retention of earnings of $2,960,000 after cash dividends declared of
$1,693,000. This was partially offset by a $1,060,000 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, 2003 the Company had a leverage capital ratio of 10.52%, Tier 1
risk-based capital of 15.58% and total risk-based capital of 17.09% compared to
10.13%, 15.06% and 16.57%, respectively, in 2002.
The Company's stock is traded on the Nasdaq market under the symbol,
NWFL. As of December 31, 2003, there were approximately 1,200 shareholders based
on transfer agent mailings.
[BAR GRAPH SHOWING BOOK VALUE PER SHARE AT END OF EACH LAST FIVE FISCAL YEARS]
99 - $10.49
00 - $11.99
01 - $13.37
02 - $15.09
03 - $15.96
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 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
Year 2002
- ---------
First Quarter $ 18.00 $ 17.00 $ .1467
Second Quarter 19.67 17.40 .1467
Third Quarter 20.27 18.87 .1467
Fourth Quarter 20.17 18.90 .16
The book value of the common stock was $15.96 as of December 31, 2003
compared to $15.09 as of December 31, 2002. As of year-end 2003, the stock price
was $26.15, compared to $19.86 as of December 31, 2002.
- - 24 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
NORWOOD FINANCIAL CORP
Summary of Quarterly Results (unaudited)
(Dollars in thousands, except per share amounts)
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
=================================================
2002
December 31 September 30 June 30 March 31
-------------------------------------------------
Interest Income $5,272 $5,387 $5,423 $5,482
Interest Expense 1,793 1,859 1,929 2,032
-------------------------------------------------
Net interest income 3,479 3,528 3,494 3,450
Provision for loan losses 150 150 150 180
Other income 620 672 598 687
Net realized gains on sales of securities -- 83 333 11
Other expense 2,385 2,540 2,856 2,568
-------------------------------------------------
Income before income taxes 1,564 1,593 1,419 1,400
Income tax expense 435 439 378 371
-------------------------------------------------
NET INCOME $1,129 $1,154 $1,041 $1,029
=================================================
Basic earnings per share $ 0.44 $ 0.45 $ 0.41 $ 0.41
=================================================
Diluted earnings per share $ 0.43 $ 0.44 $ 0.40 $ 0.40
=================================================
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 25 -
Norwood Financial Corp. Consolidated Average Balance
Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31 2003 2002
---------------------------------------------------------------------
Average Average Average Average
Balance(2) Interest(1) Rate Balance(2) Interest(1) Rate
---------------------------------------------------------------------
ASSETS
Interest Earning Assets:
Federal funds sold $ 8,369 $ 94 1.12% $ 15,573 $ 258 1.66%
Interest bearing deposits with banks 154 1 0.65 346 5 1.45
Securities held to maturity 6,156 583 9.47 6,212 545 8.77
Securities available for sale
Taxable 103,506 3,677 3.55 89,956 4,623 5.14
Tax-exempt 17,025 1,034 6.07 13,616 1,010 7.42
------------------- ------------------
Total securities available
for sale 120,531 4,711 3.91 103,572 5,633 5.44
Loans receivable (3,4) 225,680 14,579 6.46 213,814 15,651 7.32
------------------- ------------------
Total interest earning assets 360,890 19,968 5.53 339,517 22,092 6.51
Non-interest earning assets:
Cash and due from banks 9,364 8,452
Allowance for loan losses (3,273) (3,228)
Other assets 13,982 14,093
-------- --------
Total non-interest earning
assets 20,073 19,317
-------- --------
TOTAL ASSETS $380,963 $358,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liablities:
Interest-bearing demand
and money market $ 82,596 532 0.64 $ 74,696 730 0.98
Savings 55,055 428 0.78 48,361 648 1.34
Time 127,995 3,678 2.87 127,571 4,761 3.73
------------------- ------------------
Total interest-bearing
deposits 265,646 4,638 1.75 250,628 6,139 2.45
Short-term borrowings 9,081 99 1.09 9,550 176 1.84
Long term debt 23,000 1,286 5.59 23,230 1,298 5.59
------------------- ------------------
Total interest bearing
liabilities 297,727 6,023 2.02 283,408 7,613 2.69
------- -------
Non-interest bearing liabilities
Non-interest bearing demand deposits 39,119 33,966
Other liabilities 2,729 3,949
-------- --------
Total non-interest bearing
liabilities 41,848 37,915
-------- --------
Stockholders' equity 41,388 37,511
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $380,963 $358,834
======== ========
Net interest income
(tax-equivalent basis) 13,945 3.51% 14,479 3.82%
==== ====
Tax-equivalent basis adjustment (623) (528)
------- -------
Net Interest Income $13,322 $13,951
======= =======
Net Interest margin(tax-equivalent basis) 3.86% 4.26%
==== ====
Year Ended December 31 2001
-------------------------------
Average Average
Balance(2) Interest(1) Rate
-------------------------------
ASSETS
Interest Earning Assets:
Federal funds sold $ 8,322 $ 262 3.15%
Interest bearing deposits with banks 162 6 3.70
Securities held to maturity 6,822 599 8.78
Securities available for sale
Taxable 76,139 4,646 6.10
Tax-exempt 11,086 804 7.25
-------------------
Total securities available
for sale 87,225 5,450 6.25
Loans receivable (3,4) 214,905 17,934 8.35
-------------------
Total interest earning assets 317,436 24,251 7.64
Non-interest earning assets:
Cash and due from banks 7,559
Allowance for loan losses (3,268)
Other assets 14,264
--------
Total non-interest earning
assets 18,555
--------
TOTAL ASSETS $335,991
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liablities:
Interest-bearing demand
and money market $ 66,101 1,298 1.96
Savings 42,631 792 1.86
Time 122,161 6,329 5.18
-------------------
Total interest-bearing
deposits 230,893 8,419 3.65
Short-term borrowings 7,781 295 3.79
Long term debt 24,450 1,496 6.12
-------------------
Total interest bearing
liabilities 263,124 10,210 3.88
-------
Non-interest bearing liabilities
Non-interest bearing demand deposits 31,407
Other liabilities 7,942
--------
Total non-interest bearing
liabilities 39,349
--------
Stockholders' equity 33,518
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $335,991
========
Net interest income
(tax-equivalent basis) 14,041 3.76%
====
Tax-equivalent basis adjustment (487)
-------
Net Interest Income $13,554
=======
Net Interest margin(tax-equivalent basis) 4.42
====
1. Interest and yields are presente on a tax-equivalent basis using a marginal
tax rate of 34%.
2. Average balances have been calculated based on daily balances.
3. Loan balances include non-accrual loans and are net of unearned income.
4. Loan yields include the effect of amortization of deferred fees net of
costs.
- - 26 - NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT
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) 2003 compared to 2002 2002 compared to 2001
Variance due to Variance due to
-------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------ ---------------------------------
INTEREST EARNING ASSETS:
- --------------------------------------------------------------------------------------------------------------------------
Federal funds sold $ (96) $ (68) $ (164) $ 158 $ (162) $ (4)
Interest bearing deposits with banks (2) (2) (4) 4 (5) (1)
Securities held to maturity (5) 43 38 (54) -- (54)
Securities available for sale
Taxable 626 (1,572) (946) 772 (795) (23)
Tax-exempt 227 (203) 24 186 20 206
-------------------------------------------------------------------------
Total securities available for sale 853 (1,775) (922) 958 (775) 183
Loans receivable (3,4) 836 (1,908) (1,072) (91) (2,192) (2,283)
-------------------------------------------------------------------------
Total interest earning assets 1,586 (3,710) (2,124) 975 (3,134) (2,159)
INTEREST BEARING LIABLITIES:
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing demand and money market 71 (269) (198) 151 (719) (568)
Savings 80 (300) (220) 97 (241) (144)
Time 16 (1,099) (1,083) 270 (1,838) (1,568)
-------------------------------------------------------------------------
Total interest- bearing deposits 167 (1,668) (1,501) 518 (2,798) (2,280)
Short-term borrowings (8) (69) (77) 56 (175) (119)
Long term debt (13) 1 (12) (72) (126) (198)
-------------------------------------------------------------------------
Total interest bearing liabilities 146 (1,736) (1,590) 502 (3,099) (2,597)
Net interest income (tax-equivalent basis) $1,439 $(1,973) $ (534) $ 473 $ (35) $ 438
=========================================================================
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.
NORWOOD FINANCIAL CORP | 2003 ANNUAL REPORT - 27 -
[BEARD MILLER COMPANY LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Norwood Financial Corp.
Honesdale, Pennsylvania
We have audited the accompanying consolidated balance sheets of Norwood
Financial Corp. and its subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norwood
Financial Corp. and its subsidiary as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/BEARD MILLER COMPANY LLP
Harrisburg, Pennsylvania
January 23, 2004
- - 28 - NORWOOD FINANCIAL CORP / 2003 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
December 31,
2003 2002
-----------------------------
(In Thousands)
ASSETS
Cash and due from banks $ 9,110 $ 9,579
Interest bearing deposits with banks 64 230
Federal funds sold - 6,435
-----------------------------
Cash and Cash Equivalents 9,174 16,244
Securities available for sale 124,823 114,843
Securities held to maturity, fair value 2003 $5,975; 2002 $6,504 5,748 6,204
Loans receivable, net of allowance for loan losses 2003 $3,267; 2002 $3,146 230,466 214,824
Investment in FHLB stock, at cost 2,002 1,637
Bank premises and equipment, net 5,596 5,986
Accrued interest receivable 1,783 1,799
Other assets 7,891 5,931
-----------------------------
Total Assets $387,483 $367,468
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 39,517 $ 33,453
Interest-bearing demand 40,926 40,407
Money market deposit accounts 46,481 38,908
Savings 55,895 51,629
Time 123,850 127,455
-----------------------------
Total Deposits 306,669 291,852
Short-term borrowings 12,859 9,016
Long-term debt 23,000 23,000
Accrued interest payable 1,309 1,654
Other liabilities 815 1,821
-----------------------------
Total Liabilities 344,652 327,343
-----------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share; authorized 10,000,000 shares; 270 180
issued 2003: 2,705,715 shares; 2002: 1,803,824 shares
Surplus 4,933 4,762
Retained earnings 37,042 34,082
Treasury stock, at cost 2003 21,318 shares; 2002 31,506 shares (295) (640)
Accumulated other comprehensive income 1,431 2,491
Unearned Employee Stock Ownership Plan (ESOP) shares (550) (750)
-----------------------------
Total Stockholders' Equity 42,831 40,125
-----------------------------
Total Liabilities and Stockholders' Equity $387,483 $367,468
=============================
See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP / 2003 ANNUAL REPORT - 29 -
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
(In Thousands, Except per Share Data)
INTEREST INCOME
Loans receivable, including fees $14,506 $15,651 $17,924
Securities:
Taxable 3,677 4,623 4,646
Tax exempt 1,067 1,027 926
Other 95 263 268
----------------------------------------------------
Total Interest Income 19,345 21,564 23,764
----------------------------------------------------
INTEREST EXPENSE
Deposits 4,638 6,139 8,419
Short-term borrowings 99 176 295
Long-term debt 1,286 1,298 1,496
----------------------------------------------------
Total Interest Expense 6,023 7,613 10,210
----------------------------------------------------
Net Interest Income 13,322 13,951 13,554
PROVISION FOR LOAN LOSSES 660 630 695
----------------------------------------------------
Net Interest Income after Provision for Loan Losses 12,662 13,321 12,859
----------------------------------------------------
OTHER INCOME
Service charges and fees 1,846 1,788 1,661
Income from fiduciary activities 250 236 256
Net realized gains on sales of securities 692 427 212
Earnings on life insurance policies 271 203 199
Other 434 350 474
----------------------------------------------------
Total Other Income 3,493 3,004 2,802
----------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 4,916 4,847 4,642
Occupancy 799 759 796
Furniture and equipment 602 517 525
Data processing related operations 549 556 521
Losses on lease residuals 50 870 630
Advertising 170 168 131
Professional fees 277 178 211
Postage and telephone 465 425 431
Taxes, other than income 256 222 287
Amortization of intangible assets 83 178 178
Other 1,641 1,629 1,506
----------------------------------------------------
Total Other Expenses 9,808 10,349 9,858
----------------------------------------------------
Income before Income Taxes 6,347 5,976 5,803
INCOME TAX EXPENSE 1,694 1,623 1,601
----------------------------------------------------
Net Income $ 4,653 $ 4,353 $ 4,202
=====================================================
EARNINGS PER SHARE
Basic $ 1.79 $ 1.70 $ 1.67
=====================================================
Diluted $ 1.75 $ 1.68 $ 1.65
=====================================================
See notes to consolidated financial statements.
- - 30 - NORWOOD FINANCIAL CORP / 2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
-------------------------------------------------------------------------------------------------
Accumulated
Number of Other Unearned
Shares Common Retained Treasury Comprehensive ESOP
Issued Stock Surplus Earnings Stock Income (Loss) Shares Total
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
BALANCE - DECEMBER 31, 2000 1,803,824 $180 $4,629 $28,441 $(1,213) $488 $(1,155) $31,370
----------
Comprehensive income:
Net income - - - 4,202 - - - 4,202
Change in unrealized gains on
securities available for sale,
net of reclassification
adjustment and tax effects - - - - - 514 - 514
----------
Total Comprehensive Income 4,716
----------
Cash dividends declared,
$.55 per share - - - (1,378) - - - (1,378)
Stock options exercised - - (22) - 147 - - 125
Release of earned ESOP
shares, net - - 80 - - - 203 283
-------------------------------------------------------------------------------------------------
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
================================================================================================
See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP / 2003 ANNUAL REPORT - 31 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,653 $ 4,353 $ 4,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 660 630 695
Depreciation 611 617 613
Amortization of intangible assets 83 178 178
Deferred income taxes (249) (1,159) (1,485)
Net amortization of securities premiums and discounts 500 233 99
Net realized gains on sales of securities (692) (427) (212)
Net increase in investment in life insurance (247) (183) (179)
Gain on sale of bank premises and equipment and
foreclosed real estate (20) (49) -
Gain on sale of mortgage loans (192) (82) (48)
Mortgage loans originated for sale (7,060) (5,409) (2,172)
Proceeds from sale of mortgage loans 7,252 5,491 2,220
Tax benefit of stock options exercised 20 5 -
Release of ESOP shares 436 350 283
Decrease in accrued interest receivable and other assets 1,315 1,183 1,813
Decrease in accrued interest payable and other liabilities (570) (530) (1,010)
---------------------------------------------------
Net Cash Provided by Operating Activities 6,500 5,201 4,997
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 22,544 6,455 14,632
Proceeds from maturities and principal reductions on
mortgage-backed securities 72,879 46,336 31,302
Purchases (106,842) (69,393) (63,787)
Securities held to maturity, proceeds from maturities 494 30 1,275
(Increase) decrease in investment in FHLB stock (365) (237) 1,181
Net (increase) decrease in loans (16,912) (5,660) 77
Purchase of life insurance (2,550) - (240)
Purchase of bank premises and equipment (221) (572) (445)
Proceeds from sales of premises and equipment and foreclosed
real estate 84 590 121
---------------------------------------------------
Net Cash Used in Investing Activities (30,889) (22,451) (15,884)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 14,817 16,929 21,964
Net increase (decrease) in short-term borrowings 3,843 2,375 (1,219)
Repayments of long-term debt - (2,000) (8,000)
Proceeds from long-term debt - - 5,000
Stock options exercised 334 356 125
Proceeds from (acquisition of) treasury stock, net (13) (8) -
Cash dividends paid (1,662) (1,494) (1,341)
---------------------------------------------------
Net Cash Provided by Financing Activities 17,319 16,158 16,529
---------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (7,070) (1,092) 5,642
CASH AND CASH EQUIVALENTS - BEGINNING 16,244 17,336 11,694
---------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 9,174 $16,244 $17,336
===================================================
See notes to consolidated financial statements.
- - 32 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
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.
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.
Securities
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movement in interest rates,
changes in maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains and losses are
reported in other comprehensive income, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of the specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest income using a method which approximates the interest method over
the term of the security.
Bonds, notes and debentures for which the Company has the positive intent
and ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the term of the security.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date.
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 33 -
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Federal law requires a member institution of the Federal Home Loan Bank
system to hold stock of its district Federal Home Loan Bank according to a
predetermined formula. The 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 by methods that approximate the interest method.
The accrual of interest is generally discontinued when the contractual
payment of principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on nonaccrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses. Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
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.
- - 34 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
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.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value less cost to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of its carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other expenses. Foreclosed real estate is included in other assets.
Bank Owned Life Insurance
The Company invests in bank owned life insurance ("BOLI") as a source of
funding for employee benefit expenses. BOLI involves the purchasing of life
insurance by the Bank on a chosen group of employees. The Company is the owner
and beneficiary of the policies. This life insurance investment is carried at
the cash surrender value of the underlying policies and is included in other
assets in the amount of $6,676,000 and $3,879,000 at December 31, 2003 and 2002,
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 are included in other assets and are being amortized over
periods from seven to fifteen years. Annual assessments of the carrying values
and remaining amortization periods of intangible assets are made to determine
possible carrying value impairment and appropriate adjustments, as deemed
necessary. At December 31, 2003, the Company had intangible assets with a net
book value of $377,000, which will continue to be amortized.
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 35 -
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 901,912 additional common shares, including 21
fractional shares paid in cash. 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 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,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
(In Thousands, Except per Share Data)
Net income, as reported $4,653 $4,353 $4,202
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes (50) (74) (45)
-----------------------------------------
Pro forma net income $4,603 $4,279 $4,157
=========================================
Earnings per share (basic):
As reported $1.79 $1.70 $1.67
Pro forma $1.77 $1.67 $1.65
Earnings per share (assuming dilution):
As reported $1.75 $1.68 $1.65
Pro forma $1.74 $1.65 $1.63
- - 36 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Cash Flow Information
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-bearing deposits with banks and
federal funds sold.
Cash payments for interest for the years ended December 31, 2003, 2002 and
2001 were $6,368,000, $8,285,000 and $11,012,000, respectively. Cash payments
for income taxes for the years ended December 31, 2003, 2002 and 2001 were
$1,802,000, $3,117,000 and $3,225,000, respectively. Non-cash investing
activities for 2003, 2002 and 2001 included foreclosed mortgage loans
transferred to foreclosed real estate and repossession of other assets of
$610,000, $1,183,000 and $1,427,000, respectively.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit, letters of credit and commitments to sell loans. Such financial
instruments are recorded in the balance sheets when they become receivable or
payable.
Trust Assets
Assets held by the Company in a fiduciary capacity for customers are not
included in the financial statements since such items are not assets of the
Company. Trust income is reported on the accrual method.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
--------------------------------
2003 2002 2001
--------------------------------
(In Thousands)
Unrealized holding gains (losses) on available for sale
securities $ (901) $2,690 $976
Reclassification adjustment for gains realized in income 692 427 212
-----------------------------
Net Unrealized Gains (Losses) (1,593) 2,263 764
Income tax (benefit) (533) 774 250
-----------------------------
Net of Tax Amount $(1,060) $1,489 $514
=============================
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.
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 37 -
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, mortgage banking and trust
operations of the Company. As such, discrete information is not available and
segment reporting would not be meaningful.
New Accounting Standards
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. Under FIN 45, the Company
does not issue any guarantees that would require liability recognition or
disclosure, other than its standby letters of credit, as discussed in Note 14.
Adoption of FIN 45 did not have a significant impact on the Company's financial
condition or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 was revised in December 2003. This
Interpretation provides new guidance for the consolidation of variable interest
entities (VIEs) and requires such entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among parties
involved. The Interpretation also adds disclosure requirements for investors
that are involved with unconsolidated VIEs. The disclosure requirements apply to
all financial statements issued after December 31, 2003. The consolidation
requirements apply to companies that have interests in special-purpose entities
for periods ending after December 15, 2003. Consolidation of other types of VIEs
is required in financial statements for periods ending after March 15, 2004. The
adoption of this Interpretation did not have and is not expected to have an
impact on the Company's financial condition or results of operations.
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement No. 149, "Amendment of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities." This Statement clarifies the definition of
a derivative and incorporates certain decisions made by the Board as part of the
Derivatives Implementation Group process. This Statement is effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003 and should be applied prospectively. The provisions of the
Statement that relate to implementation issues addressed by the Derivatives
Implementation Group that have been effective should continue to be applied in
accordance with their respective dates. Adoption of this standard did not have
an impact on the Company's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003. The adoption of this standard
did not have an impact on the Company's financial condition or results of
operations.
- - 38 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 3 - SECURITIES
The amortized cost and fair value of securities were as follows:
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
==================================================================
December 31, 2002
------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Government agencies $ 32,974 $ 223 $ - $ 33,197
States and political subdivisions 14,835 329 (4) 15,160
Corporate obligations 11,102 394 (93) 11,403
Mortgage-backed securities 51,836 1,526 (4) 53,358
------------------------------------------------------------------
110,747 2,472 (101) 113,118
Equity securities 315 1,410 - 1,725
------------------------------------------------------------------
$111,062 $3,882 $(101) $114,843
==================================================================
HELD TO MATURITY:
States and political subdivisions $ 6,204 $ 300 $ - $ 6,504
==================================================================
The following table shows the Company's investments' gross unrealized
losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003:
Less than 12 Months 12 Months or More Total
--------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------------------------------------------------------------------------------------
(In Thousands)
U.S. Government agencies $18,677 $(316) $ - $ - $18,677 $(316)
States and political
subdivisions 3,542 (30) - - 3,542 (30)
Mortgage-backed securities 20,509 (262) 773 (2) 21,282 (264)
--------------------------------------------------------------------------------------
$42,728 $(608) $773 $ (2) $43,501 $(610)
======================================================================================
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.
The amortized cost and fair value of securities as of December 31, 2003 by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
--------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------
(In Thousands)
Due in one year or less $ 2,592 $ 2,634 $ 35 $ 35
Due after one year through five years 58,662 58,912 - -
Due after five years through ten years 11,669 11,634 - -
Due after ten years 8,871 9,112 5,713 5,940
------------------------------------------------------------------
81,794 82,292 5,748 5,975
Mortgage-backed securities 40,413 40,508 - -
------------------------------------------------------------------
$122,207 $122,800 $5,748 $5,975
==================================================================
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 39 -
NOTE 3 - SECURITIES (CONTINUED)
Gross realized gains and gross realized losses on sales of securities
available for sale were $723,000 and $31,000, respectively, in 2003, $432,000
and $5,000, respectively, in 2002, and $216,000 and $4,000, respectively, in
2001.
Securities with a carrying value of $34,775,000 and $28,663,000 at December
31, 2003 and 2002, 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:
2003 2002
-------------------------
(In Thousands)
Real estate:
Residential $ 77,459 $ 69,040
Commercial 96,276 79,623
Construction 5,904 4,109
Commercial, financial and agricultural 17,022 15,074
Consumer loans to individuals 37,219 48,951
Lease financing, net of unearned income 316 1,592
-------------------------
234,196 218,389
Unearned income and deferred fees (463) (419)
Allowance for loan losses (3,267) (3,146)
-------------------------
$230,466 $214,824
=========================
The Bank's net investment in direct financing leases at December 31
consists of:
2003 2002
---------------------
(In Thousands)
Minimum lease payments receivable $ 24 $ 325
Estimated unguaranteed residual values 297 1,347
Unearned income (5) (80)
---------------------
$316 $1,592
=====================
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In Thousands)
Balance, beginning $3,146 $3,216 $3,300
Provision for loan losses 660 630 695
Recoveries 96 94 107
Loans charged off (635) (794) (886)
-----------------------------------------
Balance, ending $3,267 $3,146 $3,216
=========================================
The recorded investment in impaired loans, not requiring an allowance for
loan losses was $263,000 and $256,000 at December 31, 2003 and 2002,
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $-0- at December 31, 2003 and 2002. For the years ended
December 31, 2003, 2002 and 2001, the average recorded investment in these
impaired loans was $337,000, $262,000 and $694,000 and the interest income
recognized on these impaired loans was $30,000, $23,000 and $22,000,
respectively.
Loans on which the accrual of interest has been discontinued amounted to
$125,000 and $216,000 at December 31, 2003 and 2002, 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 $18,000 and $5,000 at
December 31, 2003 and 2002, respectively.
- - 40 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 5 - PREMISES AND EQUIPMENT
Components of premises and equipment at December 31 are as follows:
2003 2002
-------------------------
(In Thousands)
Land and improvements $ 925 $ 924
Buildings and improvements 6,844 6,957
Furniture and equipment 3,650 3,583
-------------------------
11,419 11,464
Accumulated depreciation (5,823) (5,478)
-------------------------
$ 5,596 $ 5,986
=========================
NOTE 6 - DEPOSITS
Aggregate time deposits in denominations of $100,000 or more were
$29,372,000 and $29,533,000 at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time deposits are as
follows (in thousands):
2004 $ 84,310
2005 18,208
2006 11,659
2007 3,729
2008 5,944
--------
$123,850
========
NOTE 7 - BORROWINGS
Short-term borrowings at December 31 consist of the following:
2003 2002
------------------------
(In Thousands)
Securities sold under agreements to repurchase $11,806 $8,016
Short-term FHLB advances 420 -
U.S. Treasury demand notes 633 1,000
------------------------
$12,859 $9,016
========================
The outstanding balances and related information of short-term borrowings
are summarized as follows:
Years Ended December 31,
----------------------------------------
2003 2002
----------------------------------------
(Dollars in Thousands)
Average balance during the year $ 9,081 $ 9,552
Average interest rate during the year 1.09 % 1.84 %
Maximum month-end balance during the year $12,859 $15,168
Weighted average interest rate at the end of the year 0.99 % 1.32 %
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 $12,793,000 and $12,712,000 at December 31, 2003 and $10,303,000
and $10,388,000 at December 31, 2002 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 2004. There was $420,000 outstanding under this line at December 31,
2003 and no borrowings at December 31, 2002. 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, 2003 and 2002.
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 41 -
NOTE 7 - BORROWINGS (CONTINUED)
Long-term debt consisted of the following at December 31, 2003 and 2002:
2003 2002
------------------------
(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.
The Bank's maximum borrowing capacity with the Federal Home Loan Bank was
$120,708,000 of which $23,420,000 was outstanding at December 31, 2003. 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 $192,000, $170,000 and $166,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
The Company has a leveraged employee stock ownership plan ("ESOP") for the
benefit of employees who meet the eligibility requirements which include having
completed one year of service with the Company and having attained age
twenty-one. The ESOP Trust purchased shares of the Company's common stock with
proceeds from a loan from the Company. The Bank makes cash contributions to the
ESOP on an annual basis sufficient to enable the ESOP to make the required loan
payments. The loan bears interest at the prime rate adjusted annually. Interest
is payable annually and principal payable in equal annual installments over ten
years. The loan is secured by the shares of the stock purchased. Interest
incurred was $28,000 and $42,000 for the years ended December 31, 2003 and 2002,
respectively.
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
$44,000 and $51,000 for the years ended December 31, 2003 and 2002,
respectively. The total employer contribution was $184,000 and $191,000 for the
years ended December 31, 2003 and 2002, respectively.
Compensation expense for the ESOP was $428,000, $348,000 and $269,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
- - 42 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the ESOP shares at December 31 are as follows:
2003 2002
-------------------------------
Allocated shares 114,083 102,911
Shares released from allocation 15,203 9,573
Unreleased shares 52,532 69,334
-------------------------------
Total ESOP shares 181,818 181,818
===============================
Fair value of unreleased shares $1,374,000 $1,377,000
===============================
NOTE 9 - INCOME TAXES
The components of the provision for federal income taxes are as follows:
Years Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In Thousands)
Current $1,943 $2,782 $3,086
Deferred (249) (1,159) (1,485)
-----------------------------------------
$1,694 $1,623 $1,601
=========================================
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,
-----------------------------------------------
2003 2002 2001
Tax at statutory rates 34.0 % 34.0 % 34.0 %
Tax exempt interest income, net of interest expense
disallowance (6.0) (5.8) (4.9)
Low-income housing tax credit (0.9) (1.0) (1.0)
Earnings on life insurance (1.4) (1.1) (1.2)
Other 1.0 1.1 0.7
-----------------------------------------------
26.7 % 27.2 % 27.6 %
===============================================
The income tax provision includes $235,000, $145,000 and $72,000 of income
taxes relating to realized securities gains for the years ended December 31,
2003, 2002 and 2001, respectively.
The net deferred tax liability included in other liabilities in the
accompanying balance sheets includes the following amounts of deferred tax
assets and liabilities:
2003 2002
-----------------------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 900 $ 847
Deferred compensation 166 126
Intangible assets 172 187
Other - 9
-----------------------
Total Deferred Tax Assets 1,238 1,169
-----------------------
Deferred tax liabilities:
Net unrealized gain on securities 757 1,290
Premises and equipment 234 160
Lease financing 73 362
Other 128 93
-----------------------
Total Deferred Tax Liabilities 1,192 1,905
-----------------------
Net Deferred Tax Asset (Liability) $ 46 $ (736)
=======================
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 43 -
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, 2003 and 2002
such loans amounted to $1,545,000 and $1,693,000, respectively. During 2003, new
loans to such related parties totaled $203,000 and repayments aggregated
$351,000.
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 2003, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 2003, 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, 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
As of December 31, 2002:
Total capital (to risk-weighted
assets) $39,477 16.31% $=>19,358 =>8.00% $=>24,198 =>10.00%
Tier 1 capital (to risk-weighted
assets) 35,891 14.83 => 9,679 =>4.00 =>14,519 =>6.00
Tier 1 capital (to average assets) 35,891 9.82 =>14,614 =>4.00 =>18,268 =>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, 2003 and 2002 was approximately $4,386,000 and
$3,845,000, respectively.
- - 44 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED)
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, 2003, $34,336,000 of retained earnings were available
for dividends without prior regulatory approval, subject to the regulatory
capital requirements discussed above. Under Federal Reserve regulations, the
Bank is limited as to the amount it may lend affiliates, including the Company,
unless such loans are collateralized by specific obligations.
NOTE 12 - STOCK OPTION PLANS
The Company 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:
2003 2002 2001
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------------------------
Outstanding, beginning of year 145,830 $14.92 155,385 $13.40 144,495 $12.53
Granted 21,644 25.15 22,500 20.00 23,250 17.83
Exercised (25,867) 12.90 (32,055) 11.12 (10,860) 11.55
Forfeited - N/A - N/A (1,500) 10.88
-------------------------------------------------------------------------------------------
Outstanding, end of year 141,607 $16.85 145,830 $14.92 155,385 $13.40
===========================================================================================
Exercisable, at end of year 119,963 $15.36
============================
Exercise prices for options outstanding as of December 31, 2003 ranged from
$10.88 to $25.15 per share. The weighted average remaining contractual life is
6.8 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended December 31,
----------------------------------------
2003 2002 2001
----------------------------------------
Dividend yield 2.68% 3.13% 3.55%
Expected life 8 years 8 years 8 years
Expected volatility 27.97% 11.81% 19.39%
Risk-free interest rate 3.97% 3.81% 4.97%
Weighted average fair value of options granted $6.97 $2.44 $3.51
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 45 -
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
Years Ended December 31,
-------------------------------------------------
2003 2002 2001
-------------------------------------------------
(In Thousands, Except per Share Data)
Numerator, net income $4,653 $4,353 $4,202
=================================================
Denominator:
Denominator for basic earnings per share, weighted
average shares 2,605 2,556 2,522
Effect of dilutive securities, employee stock options 47 41 21
-------------------------------------------------
Denominator for diluted earnings per share, adjusted weighted
average shares and assumed conversions 2,652 2,597 2,543
=================================================
Basic earnings per common share $1.79 $1.70 $1.67
=================================================
Diluted earnings per common share $1.75 $1.68 $1.65
=================================================
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,
----------------------------
2003 2002
----------------------------
(In Thousands)
Commitments to grant loans $12,197 $10,438
Unfunded commitments under lines of credit 26,269 21,765
Standby letters of credit 2,128 1,298
----------------------------
$40,594 $33,501
============================
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
- - 46 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 14 - OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (CONTINUED)
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, 2003 for guarantees under standby letters of credit issued is not
material.
NOTE 15 - 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.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates indicated.
The estimated fair value amounts have been measured as of their respective year
ends and have not been re-evaluated or updated for purposes of these
consolidated financial statements subsequent to those respective dates. As such,
the estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year end.
The following information should not be interpreted as an estimate of the
fair value of the entire Company since a fair value calculation is only provided
for a limited portion of the Company's assets and liabilities. Due to a wide
range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company's financial instruments at December
31, 2003 and 2002:
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.
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 47 -
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
o The fair value of long-term debt is estimated using discounted cash flow
analyses based upon the Company's current borrowing rates for similar types
of borrowing arrangements.
o The fair value of commitments to extend credit and for outstanding letters
of credit is estimated using the fees currently charged to enter into
similar agreements.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 2003 December 31, 2002
-----------------------------------------------------------
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 $ 9,174 $ 9,174 $ 16,244 $ 16,244
Securities 130,571 130,798 121,047 121,347
Loans receivable, net 233,417 239,602 213,232 222,723
Investment in FHLB stock 2,002 2,002 1,637 1,637
Accrued interest receivable 1,783 1,783 1,799 1,799
Financial liabilities:
Deposits 306,669 307,339 291,852 292,757
Short-term borrowings 12,859 12,859 9,016 9,016
Long-term debt 23,000 24,960 23,000 25,610
Accrued interest payable 1,309 1,309 1,654 1,654
Off-balance sheet financial instruments:
Commitments to extend credit and outstanding
letters of credit - - - -
- - 48 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NOTE 17 - NORWOOD FINANCIAL CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
------------------------
2003 2002
------------------------
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary $ 1,118 $ 1,544
Securities available for sale 605 370
Investment in bank subsidiary 41,648 38,739
Other assets 10 2
------------------------
$43,381 $40,655
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 550 $ 530
Stockholders' equity 42,831 40,125
------------------------
$43,381 $40,655
========================
STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In Thousands)
Income:
Dividends from bank subsidiary $1,693 $1,536 $1,378
Interest income from bank subsidiary 29 42 102
Other interest income 16 15 8
-----------------------------------------
1,738 1,593 1,488
Expenses 187 144 105
-----------------------------------------
1,551 1,449 1,383
Income tax expense (benefit) (49) (31) 10
-----------------------------------------
1,600 1,480 1,373
Equity in undistributed earnings of subsidiary 3,053 2,873 2,829
-----------------------------------------
Net Income $4,653 $4,353 $4,202
=========================================
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,653 $4,353 $4,202
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed earnings of bank subsidiary (3,053) (2,873) (2,829)
Release of ESOP shares 436 350 283
Tax benefit of stock options exercised 20 5 -
Other, net (13) (33) 21
-----------------------------------------
Net Cash Provided by Operating Activities 2,043 1,802 1,677
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in bank subsidiary (1,000) - (200)
Purchase of securities available for sale (95) (55) -
-----------------------------------------
Net Cash Used in Investing Activities (1,095) (55) (200)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised 334 356 125
Acquisition of treasury stock (46) (8) -
Cash dividends paid (1,662) (1,494) (1,341)
-----------------------------------------
Net Cash Used in Financing Activities (1,374) (1,146) (1,216)
-----------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (426) 601 261
CASH AND CASH EQUIVALENTS - BEGINNING 1,544 943 682
-----------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $1,118 $1,544 $ 943
=========================================
NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT - 49 -
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, 2003 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
- - 50 - NORWOOD FINANCIAL CORP. / 2003 ANNUAL REPORT
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
Russell L. Ridd Chairman of the Board
William W. Davis, Jr. President & Chief Executive Officer
Lewis J. Critelli Executive Vice President
& Chief Financial Officer
Edward C. Kasper Senior Vice President
John H. Sanders Senior Vice President
Joseph A. Kneller Senior Vice President
John E. Marshall Secretary
WAYNE BANK
Russell L. Ridd Chairman of the Board
William W. Davis, Jr. President & Chief Executive Officer
Lewis J. Critelli Executive Vice President &
Chief Financial Officer
Edward C. Kasper Senior Vice President &
Senior Loan Officer/Corporate Bank
John H. Sanders Senior Vice President/Retail Bank
Joseph A. Kneller Senior Vice President
Wayne D. Wilcha Senior Vice President & Trust Officer
John E. Marshall Secretary
Robert J. Behrens, Jr. Vice President
Carolyn K. Gwozdziewycz Vice President
Nancy A. Hart Vice President, Controller &
Assistant Secretary
William J. Henigan, Jr. Vice President
William R. Kerstetter Vice President
Barbara A. Ridd Vice President
Eli T. Tomlinson Vice President
Lynne Wetzel Vice President
John F. Carmody Assistant Vice President
James D. Dyson Assistant Vice President
Joann Fuller Assistant Vice President
Raymond C. Hebden Assistant Vice President
Kathleen A. Horan Assistant Vice President
Norma J. Kuta Assistant Vice President
Kelley J. Lalley Assistant Vice President &
Assistant Secretary
Mary Alice Petzinger Assistant Vice President
Elisa Rosario Assistant Vice President
Jennifer M. Witowic Assistant Vice President
Laurie J. Bishop Assistant Community Office Manager
Christopher T. Bresset Consumer Lending Officer
Denise Finagan Assistant Community Office Manager
Lorraine M. Gallik Commercial Loan
Administration Manager
Karen R. Gasper Internal Auditor
Renee Gilbert Community Office Manager
Gary D. Henry Consumer Lending Officer &
Remarketing Manager
Annette A. Jurkowski Trust Operations Manager
Thomas Kowalski Resource Recovery Manager
Paula Lasky Community Office Manager
Jill Melody Assistant Community Office Manager
William E. Murray Mortgage Originator
Sarah J. Rapp Human Resources Officer
Diane L. Richter Assistant Community Office Manager
Melissa D. Speaker Community Office Manager
Toni M. Stenger Assistant Community Office Manager
Doreen A. Swingle Residential Mortgage Lending Officer
Nancy M. Worobey Community Office Manager
NORWOOD INVESTMENT CORP
William W. Davis, Jr. President & Chief Executive Officer
Lewis J. Critelli Executive Vice President
Scott C. Rickard Investment Representative,
Invest Financial Corporation
MONROE COUNTY ASSOCIATE BOARD
Michael J. Baxter
Sara Cramer
Andrew Forte
Ralph A. Matergia, Esq.
Randy R. Motts
James H. Ott
Ron Sarajian
Ray Price
Marvin Papillon
NORWOOD
--------------
FINANCIAL CORP
VISIT US:www.waynebank.com