<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission file number
----------------------------------
NORWOOD FINANCIAL CORP.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
- -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717)253-1455
---------------------------
N/A
- -----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicated by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of
- --------------------------------------- October 30, 1996
common stock, par value $0.10 per share ----------------
828,887 shares
<PAGE>
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
Number
======
PART I - CONSOLIDATED FINANCIAL INFORMATION OF
NORWOOD FINANCIAL CORP.
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Materially Important Events 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
============================
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
<TABLE>
(dollars in thousands)
September 30, December 31,
1996 1995
-------------- --------------
<CAPTION>
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,673 $ 5,343
Interest bearing deposits with banks 396 255
Federal Funds sold 2,350 850
Investment securities available for sale 45,909 36,671
Investment securities 8,579 12,211
Loans (net of unearned income) 168,476 152,095
Less: Allowance for loan losses 2,283 2,125
-------------- --------------
Net loans 166,193 149,970
Bank premises and equipment, net 7,499 7,017
Other real estate owned 2,283 1,944
Accrued interest receivable 1,595 1,504
Other assets 4,401 1,497
-------------- --------------
TOTAL ASSETS $ 248,878 $ 217,262
============== ==============
LIABILITIES
Deposits:
Non interest-bearing demand $ 28,871 $ 19,656
Interest-bearing deposits 189,123 167,643
-------------- --------------
Total deposits 217,994 187,299
Federal funds purchased and securities
sold under agreements to repurchase 2,871 1,727
Other borrowed funds 1,000 304
Long-term debt 2,582 2,582
Accrued interest payable 1,725 1,831
Accrued expenses and other liabilities 1,393 737
-------------- --------------
TOTAL LIABILITIES 227,565 194,480
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 828,887 and 880,542 90 90
Surplus 4,443 4,379
Retained earnings 18,627 17,704
Treasury stock, at cost (10,803 and 19,754) (347) (562)
Unearned ESOP shares (2,000) 0
Net unrealized gain on securities 500 1,171
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 21,313 22,782
------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 248,878 $ 217,262
============= ==============
See accompanying notes to the unaudited consolidated financial statements.
</TABLE>
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Income (unaudited)
(dollars in thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
1996 1995 1996 1995
------------------------- --------------------------
<CAPTION>
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 3,646 $ 3,486 $ 10,654 $ 9,861
Interest on investment securities 858 425 2,553 1,361
Interest on federal funds sold and
deposits with banks 73 238 172 330
---------- ---------- ----------- ----------
Total interest income 4,577 4,149 13,379 11,552
INTEREST EXPENSE
Interest on deposits 1,894 1,723 5,578 4,709
Interest on federal funds purchased
and repurchase agreements 44 11 185 104
Interest on other borrowed funds 8 9 18 20
Interest on long-term debt 54 52 163 158
---------- ---------- ----------- ----------
Total interest income 2,000 1,795 5,944 4,991
---------- ---------- ----------- ----------
NET INTEREST INCOME 2,577 2,354 7,435 6,561
PROVISION FOR LOAN LOSSES 250 100 600 399
---------- ---------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,327 2,254 6,835 6,162
OTHER INCOME
Service charges on deposits 137 105 372 298
Trust department income 48 23 158 93
Investment securities gains/(losses) (43) (121) (43) (129)
Other operating income 135 37 362 216
---------- ---------- ----------- ----------
Total other income 277 44 849 478
OTHER EXPENSES
Salaries and employee benefits 966 895 2,833 2,510
Occupancy, furniture and equipment 285 234 824 675
Federal deposit insurance premiums 1 0 2 190
Other real estate owned operations 220 54 383 172
Other operating expenses 611 467 1,779 1,365
----------- ---------- ----------- ----------
Total other expense 2,083 1,650 5,821 4,912
INCOME BEFORE TAX 521 648 1,863 1,728
INCOME TAXES 99 133 400 425
----------- ---------- ----------- ----------
NET INCOME $ 422 $ 515 $ 1,463 $ 1,303
=========== ========== =========== ==========
EARNINGS PER SHARE $ 0.50 $ 0.58 $ 1.70 $ 1.46
=========== ========== =========== ==========
Dividends per Share $ 0.21 $ 0.19 $ 0.63 $ 0.57
=========== ========== =========== ==========
Average Shares outstanding 837,105 891,448 861,092 893,936
See accompanying notes to the unaudited consolidated financial statements.
</TABLE>
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of changes in Stockholders' Equity
(dollars in thousands)
<TABLE>
Net
Unearned Unrealized
Common Retained Treasury ESOP Gain on
Stock Surplus Earnings Stock Shares Securities Total
--------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 90 $ 4,379 $ 17,704 $ (562) $ 0 $ 1,171 $ 22,782
Net Income 1,463 1,463
Common stock issued upon exercise
of options 12 12
Cash Dividend Declared (540) (540)
Net Unrealized gain/(loss) on Securities (671) (671)
Acquisition of Treasury Stock (1,733) (1,733)
Treasury Stock Reissued to ESOP 52 1,948 2,000
Increase in unearned ESOP shares (2,000) (2,000)
--------------------------------------------------------------------------------
Balance, September 30, 1996 $ 90 $ 4,443 $ 18,627 $ ($347) $(2,000) $ 500 $ 21,313
====== ========= ========== ======== ======== ====== ==========
See accompanying notes to the unaudited consolidated financial statements
</TABLE>
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Cash Flow (unaudited)
(dollars in thousands)
<TABLE>
Nine Months Ended September 30,
---------------------------------
1996 1995
---------------------------------
<CAPTION>
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,463 $ 1,303
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan losses 600 399
Depreciation and amortization 448 684
Net amortization of investment securities (2) 153
Investment security (gains) losses, net 43 129
Loss on sale of other real estate, net 175 182
Decrease (increase) in accrued interest receivable (91) 530
Increase (decrease) in accrued interest payable (106) 333
Other, net 32 (446)
-------------- --------------
Net cash provided by operating activities 2,562 3,267
-------------- --------------
INTEREST ACTIVITIES
Investment securities available for sale:
Proceeds from sales of investment securities 2,959 6
Proceeds from maturities of investment securities 9,259 5,000
Purchases of investment securities (22,522) 0
Investment securities:
Proceeds from maturities of investment securities 3,641 14,535
Purchases of investment securities 0 (11,233)
Net increase in loans (18,210) (8,641)
Purchase of premises and equipment, net (294) (822)
Proceeds received from branch acquisitions 17,716 0
Proceeds from sales of other real estate 758 610
-------------- --------------
Net cash used for investing activities (6,693) (545)
-------------- --------------
FINANCING ACTIVITIES
Net increase in deposits 10,523 16,112
Net increase in short-term borrowings 1,840 111
Acquisition of treasury stock (1,733) (492)
Proceeds from Issuance of common stock 12 0
Cash dividends paid (540) (339)
-------------- --------------
Net cash provided by financing activities 10,102 15,392
-------------- --------------
Increase in cash and cash equivalents 5,971 18,114
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,448 6,919
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 12,419 25,033
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
---------------------
The consolidated financial statements have been prepared on an accrual
basis. For additional information and disclosures required under generally
accepted accounting principles, reference is made to the Company's 1995 Annual
Report included in the Company's initial registration statement on Form 10
filed with the Securities and Exchange Commission on April 29, 1996 (File No.
0-28366).
The accompanying financial statements reflect in the opinion of
management, all normal, recurring adjustments necessary to present fairly the
financial position of Norwood Financial Corp. and the results of operations
and changes in cash flows. The financial statements presented, in all material
respects, comply with the current reporting requirements of supervisory
authorities. The operating results for the nine-month period ended September
30,1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996 or any other period. All significant
intercompany accounts and transactions have been eliminated.
Note 2 - Cash Flow Information
---------------------
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
Cash payments for interest through September 30, 1996 were $6,057,000
and for income taxes, $788,000. Noncash investing activity through
September 30, 1996 includes foreclosed mortgage loans transferred to real
estate owned of $1,312,000 and $1,948,000 of treasury stock transferred to
the ESOP.
Note 3 - Earnings Per Share
------------------
Earnings per share for the three month and nine month periods ended
September 30, 1996 and September 30, 1995 are calculated by dividing the net
earnings for the periods by the average shares outstanding. The average
shares outstanding for the three months ended September 30, 1996 and 1995 were
837,105 and 891,448 respectively. For the nine months ended September 30,
1996 and 1995 average shares outstanding were 861,092 and 893,936
respectively.
<PAGE>
Note 4 - Employee Stock Ownership Plan
-----------------------------
The Company established an Employee Stock Ownership Plan (ESOP) on
September 30, 1996, to provide the opportunity for substantially all full-time
employees to become stockholders. The ESOP was funded by a $2,000,000 loan
with a 10 year repayment term from the parent company to the ESOP Trust. The
Company will follow Accounting Standards Division of the American Institute of
Certified Public Accountants Statement of Position 93-6 ("SOP 93-6")
"Employers' Accounting for Employee Stock Ownership Plans."
ESOP shares purchased subject to debt guaranteed by the corporation are
recorded as a reduction of common shareholders' equity by charging unearned
ESOP shares. As shares are committed to be released to the ESOP Trust for
allocation to plan participants unearned ESOP shares is credited for the cost
of the shares to the ESOP. Compensation cost recognized in accordance with
the provisions of SOP 93-6 is based upon the fair market value of the shares
committed to be released. Surplus is credited or charged for the difference
between the fair value of the shares committed to be released and cost of
those shares to the ESOP. The average number of shares outstanding used in
calculating earnings per share excludes all unallocated ESOP shares.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- ---------------------
FINANCIAL CONDITION
GENERAL. Total assets at September 30, 1996 were $248.9 million compared to
$217.3 million at December 31, 1995, an increase of $31.6 million, or 14.6%.
On March 23, 1996 the Bank completed an assumption of liabilities and
purchase of selected assets of three branches of Meridian Bank, Reading, Berks
County, Pennsylvania. The branches are located in: Lakewood, Wayne County;
Shohola, Pike County; and Thompson, Susquehanna County. Total deposits
associated with the transaction were $20,014,000, real estate and equipment of
$646,000 and loans of $30,000 consisted only of overdraft lines and those
loans secured by deposits.
INVESTMENTS. At September 30, 1996 the fair value of the available for sale
portfolio was $45.9 million compared to $36.7 million at December 31, 1995.
The increase was due to purchases of obligations of U.S. Government agencies
and obligations of state and political subdivisions. This represents, in
part, the investment of proceeds of deposits acquired from Meridian Bank.
Held to maturity (HTM) Securities totaled $8.6 million at September 30, 1996
down from $12.2 million at December 31, 1995 and reflects the maturity of
certain investments. The HTM portfolio consists principally of longer term
obligations of state and political subdivisions.
<PAGE>
LOANS. Total loans and leases at September 30, 1996 were $168.5 million
compared to $152.1 million at December 31, 1995 an increase of $16.4 million
or 10.8%. The increase is principally due to higher levels of loans to
consumers including indirect automobile loans, $12.1 million increase,
automobile leasing of $9.8 million and increased home equity loans of
$5.7 million. This is partially offset by pay downs in residential adjustable
rate mortgages of $6.9 million and lower levels of commercial loans of
$2.6 million. The indirect and auto leasing volume is originated through a
network of over 35 dealers with an average term of 50 months and geographically
disbursed throughout northeastern Pennsylvania.
NON-PERFORMING ASSETS AND ALLOWANCES FOR LOAN LOSSES. Effective January 1,
1995, the Bank adopted Statement of Financial Accounting Standards Statement
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." Under this standard, the Bank estimates credit
losses on impaired loans based on the present value of expected cash flows or
the fair value of the underlying collateral if the loan repayment is expected
to come from the sale or operation of such collateral. Total impaired loans
at September 30, 1996 were $3,957,000 comprised of $1,828,000 with related
allowance of $446,000 and $2,129,000 without related allowance for loan
losses. For the nine months ended September 30, 1996, average impaired loans
totaled $3,355,000.
The Bank's loan review function assesses the adequacy of the allowance
for loan losses. The process includes a review of the risks inherent in the
loan portfolio. It includes a credit review and gives consideration to areas
of exposure such as concentration of credit, economic and industry conditions,
trends in delinquencies, collections and collateral value coverage. General
reserve percentages are identified by loan type and credit grading and
allocated accordingly. Management considers the allowance at September 30,
1996 and December 31, 1995 adequate for its loan mix, classifications and
collateral position based on its internal analysis. There can be no assurance
that the allowance for losses will be adequate to cover losses which may in
fact be realized in the future and that additional provisions will not be
required.
The allowances for loan losses at September 30, 1996 was $2,283,000 or
1.36% of total loans, compared to $2,125,000, or 1.40% of total loans at
December 31, 1995. The allowance for loan losses provides coverage for 47% of
non-performing loans compared to 54.8% at year-end 1995. While the allowance
for loan losses as a percentage of total loans is in line with the Bank's peer
group and considered adequate by management, prudence dictates it should be
increased going forward given the current level of non-performing loans. As a
result, the Bank will increase the provision to obtain the appropriate level.
Following is a summary of changes in the allowance for loan losses for the
periods indicated.
<PAGE>
<TABLE>
At or for the three At or for the nine
months ended September 30 months ended September 30
------------------------- -------------------------
(dollars in thousands) 1996 1995 1996 1995
<CAPTION>
------- ------- ------- -------
<S> <C> <C> <C> <C>
Bal. at beginning of period $ 2,133 $ 2,032 $ 2,125 $ 1,893
Provision for loan losses 250 100 600 399
Charge-offs (130) (415) (548) (668)
Recoveries 30 437 106 530
------- ------- ------- -------
Net (charge-off) recovery (100) 22 (442) (138)
------- ------- ------- -------
Balance at end of period $ 2,283 $ 2,154 $ 2,283 $ 2,154
======= ======= ======= =======
Net charge-offs to average
loans (annualized) .38% .13%
======= =======
</TABLE>
Non-performing loans at September 30, 1996 were $4,865,000 or 2.89% of total
loans and leases, compared to $3,880,000 or 2.55% of total loans at December
31, 1995. The following table sets forth information regarding non-performing
loans and other real estate owned at the dates indicated:
(dollars in thousands) September 30, 1996 December 31, 1995
------------------ -----------------
Non-performing loans:
Commercial & other $ 2,457 $ 1,627
Real Estate Related 2,382 2,205
Consumer 26 48
------- -------
TOTAL 4,865 3,880
Other Real Estate Owned 2,283 1,944
------- -------
Total Non-performing Assets $ 7,148 $ 5,824
======= =======
Total Non-performing loans
to total loans 2.89% 2.55%
Total Non-performing assets
to total assets 2.87% 2.68%
The increase in non-performing real-estate related loans of $177,000 is
principally due to the delinquency status of a single large residential
mortgage, while commercial and other increases of $830,000, principally due to
floor plans of two marinas.
DEPOSITS. Total deposits at September 30, 1996 were $218 million, an increase
of $30.6 million or 16.4% from $187.3 million at December 31, 1995. The
September 30 balance includes $21 million of deposits acquired with three
branches purchased from Meridian Bank. Demand deposits totaled $28.9 million
at September 30, 1996 representing 13.2% of total deposits, improving from
10.5% at December 31, 1995. At September 30, 1996 commercial CDS over
$100,000 totaled $13.1 million, a decrease of $5.2 million from December,
principally due to lower levels of municipality and school district funds.
STOCKHOLDERS' EQUITY. Total stockholders' equity was $21,313,000 at September
30, 1996, compared to $22,782,000 at December 31, 1995. The decrease from
year-end is principally due to the establishment of an Employee Stock
Ownership Plan as of September 30.
<PAGE>
At September 30, 1996, unallocated ESOP shares totaled $2,000,000 to be
allocated to plan participants over a 10 year period. See "Note 4 -
Employee Stock Ownership Plan" of the Consolidated Financial Statement.
At September 30, 1996, 10,803 shares were held in treasury at a
cost of $347,000 compared to 19,754 shares at $562,000 at December 31.
RESULTS OF OPERATION
Comparison of Operating Results for Nine Months Ended September 30, 1996 and
- -----------------------------------------------------------------------------
1995
- ----
GENERAL. For the nine months of 1996, net income was $1,463,000 compared to
$1,303,000 for the 1995 period, an increase of $160,000 or 12.1%. This
represents earnings per share of $1.70 in 1996 compared to $1.46 in 1995.
Return on assets and return on equity for 1996 is .83% and 8.73% respectively.
<PAGE>
<TABLE>
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Nine Months Ended September 30,
----------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------
Average Ave Average Ave
Balance Interest Rate Balance Interest Rate
<CAPTION>
------- -------- ---- ------- -------- ----
ASSETS
<S> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold $ 3,937 $ 155 5.24% $ 8,632 $ 373 5.75%
Interest bearing deposits w/banks 414 17 5.46 0 0
Investment securities available for sale 43,794 2,200 6.68 16,540 654 5.26
Investment securities:
Taxable investments 42 4 6.67 7,987 385 6.41
Tax-exempt securities 10,710 673 8.36 8,271 420 6.75
---------- ------ ---- ---------- ------- ----
Total investment securities 10,752 677 8.37 16,258 805 6.58
Loans 156,612 10,664 9.06 144,431 9,817 9.04
---------- ------ ---- ---------- ------- ----
Total interest earning assets 215,509 13,713 8.46 185,861 11,649 8.34
Non-interest earning assets:
Cash and due from banks 6,503 5,484
Allowance for loan losses (2,176) (2,095)
Other assets 15,100 11,609
---------- ----------
Total non-interest earning assets 19,427 14,998
---------- ----------
TOTAL ASSETS $ 234,936 $ 200,859
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits $ 44,341 933 2.80 $ 38,595 806 2.78
Savings deposits 43,096 906 2.80 38,083 854 2.98
Time deposits 91,789 3,738 5.42 74,931 3,049 5.41
---------- ------ ---- ---------- ------- ----
Total interest bearing deposits 179,226 5,577 4.14 151,609 4,709 4.13
Other borrowed funds 5,396 204 5.03 2,958 124 5.58
Long-term debt 2,582 163 8.04 2,414 158 8.71
---------- ------ ---- ---------- ------- ----
Total interest bearing liabilities 187,204 5,944 4.22 156,981 4,991 4.23
Non-interest bearing liabilities
Demand deposits 22,220 19,603
Other liabilities 3,177 2,341
---------- ----------
Total non-interest bearing liab. 25,397 21,944
Shareholders' equity 22,335 21,934
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 234,936 $ 200,859
========== ==========
Net interest income (tax-equivalent basis) 7,769 4.24% 6,658 4.11%
===== =====
Tax-equivalent basis adjustment (334) (97)
---------- ----------
Net interest income 7,435 6,561
========== ==========
Net interest margin (tax-equivalent basis) 4.79% 4.76%
===== =====
- ------------------------------
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.
2. Average balances have been calculated based on daily balances.
3. Loan balances include non-accrual loans and are net of unearned income.
4. Loan yields include the effect of amortization of deferred fees net of costs.
</TABLE>
<PAGE>
Rate/Volume Analysis
The following table shows the fully taxable equivalent effect of changes in
volumes and rates on interest income and interest expense.
(Increase/(Decrease)
------------------------------------
Nine months ended September 30,1996
Compared to
Nine months ended September 30,1995
------------------------------------
Variance due to
------------------------------------
Volume Rate Net
-------- ------- --------
(Dollars in thousands)
ASSETS
Interest Earning Assets:
Federal funds sold $ (187) $ (31) $ (218)
Interest bearing deposits with banks 14 3 17
Investment securities available for sale 1,328 218 1,546
Investment securities:
Taxable investments (697) 316 (381)
Tax-exempt securities 140 113 253
------- ------ -------
Total investment securities (557) 429 (128)
Loans 829 18 847
------- ------ -------
Total interest earnings assets 1,427 637 2,064
Interest bearing liabilities:
Interest bearing demand deposits 121 6 127
Savings deposits 132 (80) 52
Time deposits 687 2 689
------- ------ -------
Total interest bearing deposits 940 (72) 868
Other borrowed funds 100 (20) 80
Long-term debt 13 (8) 5
------- ------ -------
Total interest bearing liabilities 964 (11) 953
Net interest income (tax-equivalent basis) $ 463 $ 648 $ 1,111
======= ====== =======
(1) 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.
<PAGE>
INTEREST INCOME. Interest income on a fully taxable equivalent basis ("FTE")
totaled $13,713,000 for nine months of 1996, an increase of $2,064,000 or
15.1% over the same period in 1995. The FTE yield on earning assets was 8.46%
in 1996, an increase of 12 basis points from 1995, which represents $637,000
of additional interest income. Average earning assets increased $29.6 million
or 15.9% from 1995 which accounted for $1,427,000 of the increase in interest
income. Loans averaged $156.6 million in 1996 representing 72.7% of earning
assets and yielding 9.06% compared to 77.7% in 1995 yielding 9.04%. Income on
loans for 1996 was $10,664,000 compared to $9,817,000 in 1995. The yields on
the investment increased to 7.03% compared to 5.93% due to lengthening of
maturities and increase in higher yielding tax-exempt municipal bonds and
mortgage backed securities.
INTEREST EXPENSE. Interest expense was $5,944,000 for nine months 1996 with a
total cost of interest bearing liabilities of 4.22%, compared to $4,991,000 at
a cost of 4.23% during 1995. A decrease of 18 basis points (bp) rate paid on
savings deposits, 2.80% in 1996, was offset by higher costing interest bearing
demand deposits at 2.80%, increasing 2 bp and time deposits of 5.42%, up
1 bp. The mix of deposits was more expensive in 1996, with time deposits at
49% of total interest-bearing liabilities compared to 47.7% in 1995.
NET INTEREST INCOME. Net interest income on an FTE basis increased $1,111,000
or 16.7% to $7,769,000 for nine months 1996. On a rate/volume basis,
increases in volume accounted for $463,000 of the increase and rate changes
provided $648,000 of the growth. Net interest spread and net interest margin
were 4.24% and 4.79% respectively, for 1996 compared to 4.11% and 4.76%
respectively in 1995. The improvement in net interest spread is due to
increase in earning asset yield of 12 bp while reducing the cost of
liabilities by 1 bp. Net interest margin increase of 3 bp is growing at a
lesser rate then net interest spread due to balance sheet changes including
higher levels of non-earning assets.
PROVISION FOR LOAN LOSSES. Provision for loan losses was $600,000 for nine
months 1996 compared to $399,000 in 1995. Increase in provision is due in
part to higher level of net charge-offs in 1996 of $442,000 compared to
$138,000 as result of recoveries in 1995, loan growth and level of
non-performing loans. See also "Financial Condition Non-performing Assets and
Allowance for Loan Losses."
NON-INTEREST INCOME. Non-interest income for nine months of 1996 totaled
$849,000, an increase of $371,000 or 77.6% over 1995. Service charges on
deposits increased 24.8% principally due to increased volume and increases in
certain fees during the second quarter of 1996. Trust income totaled $158,000
in 1996 compared to $93,000 in 1995 as a result of higher fees related to
mutual fund sales, increased volume and restructured fee schedule. The nine
months of 1996 included $43,000 loss on sale of investment securities compared
to $129,000 loss in 1995.
<PAGE>
NON-INTEREST EXPENSE. Non-interest expenses totaled $5,821,000 for nine
months 1996 compared to $4,912,000 in 1995, an increase of $909,000 or 18.5%.
Expenses related to three branches acquired from Meridian Bank in March
accounted for $325,000 of the increase, and implementation of auto leasing and
indirect lending increased expenses by $125,000. Costs related to maintaining
and disposition of other real estate was $383,000 in nine months 1996
increasing from $172,000 in 1995. Legal fees increased $50,000 to $157,000 in
1996 reflecting expenses incurred during loan-work-out situations and
additional costs related to formation of holding company and initial
registration to become a public company.
Federal Deposit Insurance Corporation (FDIC) insurance premiums decreased
$188,000 for the nine month period due to rate reduction as a result of the
Bank Insurance Fund (BIF) reaching its required level of capitalization,
thereby reducing deposit insurance premiums. On September 30, 1996, the
president signed into law the Deposit Insurance Funds Act of 1996 (DIFA).
DIFA includes provisions fully capitalizing the Savings Association Insurance
Fund (SAIF) and providing for the eventual merger of thrift fund, SAIF, with
BIF. Wayne Bank is a member of BIF. DIFA requires depository institutions to
pay a one-time special assessment on their SAIF-assessable deposits held as of
March 31, 1995, neither the company nor its banking subsidiary have any
SAIF-assessable deposits. DIFA also requires that all insured depository
institutions share pro rata beginning in the year 2000, the Financing Corp.
(FICO) bond obligation. For the transition period from January 1, 1997 until
December 31, 1999 banks will pay semiannually on their BIF deposit base 20% of
the assessment rate imposed upon thrifts. According to current FDIC estimates
the FICO assessment will run 1.3 basis points for banks, subject to change.
On the company's deposit base as of September 30, 1996, 1.3 basis points
equates to an assessment of $28,000. It should be noted that FICO assessment
is distinct from the insurance premium, (if any) paid by banks for FDIC
coverage.
Salary and employee benefit expense totaled $2,833,000 and represented 48.6%
of non-interest expense compared to $2,510,000 and 51.1% in 1995. At
September 30, 1996, the company had total full-time equivalent staff of 124
compared to 104 in 1995, with the increase principally due to additional
branches and lending staff. The Bank has filed with the Pension Benefit
Guaranty Corporation to terminate its defined benefit plan and freeze accruals
effective September 1, 1996. Under the agreement of the standard termination
and in order to guarantee that plan assets are sufficient to pay all benefit
liabilities, the bank will commit additional funds, if needed to pay benefits.
The defined benefit plan is being replaced by an Employee Stock Ownership Plan
(ESOP) - see Note Four of the Consolidated Financial Statements. In addition
the bank has amended its deferred profit sharing plan to allow eligible
employees to make 401(K) contributions. The bank will match 100% of the first
2% of annual salary contributed by the employee. The bank will continue its
practice of making discretionary year end contributions to the plan.
<PAGE>
INCOME TAX EXPENSES. Income tax expense for nine months of 1996 was $400,000
for an effective tax rate of 21.4% compared to an effective rate of 24.5% in
1995. The change in rate is due to higher levels of obligations of state and
political subdivision in 1996 which provide income which is partially exempt
from federal income tax.
Comparison of Operating Results for the Three months ended September 30, 1996
- -----------------------------------------------------------------------------
and 1995.
- --------
GENERAL. For the three months ended September 30, 1996 net income was
$422,000 compared to $515,000 in 1995, for a resultant earnings per share of
$.50 for the 1996 period and $.58 in 1995. The results for the third quarter
of 1996 were adversely impacted by a higher provision for loan losses,
$250,000 in 1996 compared to $100,000 in 1995, and expenses associated with
other real estate of $220,000 in 1996 an increase of $166,000 form the 1995
period.
INTEREST INCOME. Interest income on an FTE basis totaled $4,685,000 for the
quarter an increase of $543,000 or 13.1% over 1995. The increase was
principally due to higher level of earning assets in 1996. The yield on
earning assets for the third quarter of 1996 was 8.36% compared to 8.52% in
1995.
INTEREST EXPENSE. For the third quarter of 1996 interest expense totaled
$2,000,000 compared to $1,795,000 in 1995. Cost of interest-bearing
liabilities decreased from 4.41% in 1995 to 4.09% in 1996 principally due to
lower rates on savings and time deposits.
NET INTEREST INCOME. Net interest income on FTE basis was $2,685,000 for the
1996 period an increase of $338,000 or 14.4% from 1995. Net interest spread
and net interest margin were 4.27% and 4.79% respectively for the current
quarter compared to 4.11% and 4.81%, respectively in 1995. The increase was
principally due to lower cost of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. Provision for loan losses for the third quarter of
1996 was $250,000 increased from $100,000 in 1995. Net charge-offs for 1996
were $100,000 compared to net recovery total of $22,000 in 1995. The third
quarter of 1995 included two significant recoveries totaling $420,000.
Prudence dictates the provision should be increased given the level of
non-performing loans. As a result, the Bank will increase the provision to
obtain the appropriate level.
NON-INTEREST INCOME. Non-interest income for the three months ended
September 30, 1996 was $277,000 compared to $44,000 in the 1995 period.
The 1996 period included loss on investment securities of $43,000 compared
to $121,000 loss realized in the third quarter of 1995. Service charges on
deposits increase $32,000 or 30.5% due to volume increases and new fee
schedule adopted in 1996. Trust income improved to $48,000 for the quarter
compared to $23,000 in 1995.
<PAGE>
NON-INTEREST EXPENSE. Non-interest expenses totaled $2,083,000 for the
quarter, an increase of $433,000 or 26.1%. Expenses associated with new
offices account for $95,000 of the increase. Costs associated with other real
estate were $220,000 for the 1996 period compared to $54,000 in 1995. The
Bank continues to incur legal fees related to loan work-out, for the third
quarter of 1996 legal expenses were $46,000 compared to $28,000 in the third
quarter of 1995. Salary and benefit expenses for the third quarter of 1996
totaled $966,000 and represented 46.4% of total expenses compared to $895,000
or 54.2% in 1995. See "Comparison of Operating Expenses for Nine Months 1996
- - Non-Interest Expenses" for information concerning "Deposit Insurance Funds
Act of 1996" and changes in employee benefit plans.
INCOME TAX EXPENSES. Income tax expense for the third quarter of 1996 was
$99,000 compared to $133,000 for the third quarter of 1995. The tax expense
decreases as a result of lower pre-tax income and due to a higher level of
obligations of state and political subdivision, in 1996 which provide income
which is partially exempt from federal income taxes.
CAPITAL. A comparison of capital ratios is as follows:
At At
September 30, 1996 December 31, 1995
------------------ -----------------
Leverage Capital 7.84% 10.05%
Tier 1 Capital 10.37% 13.93%
Total Capital 11.62% 15.18%
The minimum capital requirements imposed by the FDIC for leverage
capital, tier 1 capital and total capital are 3.0%, 4.0% and 8.0%
respectively. The Bank is also subject to more stringent Pennsylvania
Department of Banking (PDB) guidelines. Although not adopted in regulation
form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage
capital and 10% total capital. The Bank was in compliance in both FDIC and
PDB capital requirements at September 30, 1996 and December 31, 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY. Maintenance of liquidity for the Bank
is coordinated by Asset Liability Committee ("ALCO"). Liquidity Policy is set
by the Board of Directors with certain key ratios used to measure the Bank's
liquidity. Bank liquidity can be viewed as the ability to fund customers
borrowing needs and their deposit withdrawal request while supporting the
Bank's asset growth. The Bank's primary sources of liquidity include deposit
generation, asset maturities and repayments. The Bank also maintains
established lines of credit with the Federal Home Loan Bank (FHLB) of
Pittsburgh and other correspondent banks which support liquidity needs. At
September 30, 1996 the Flex Line Limit with the FHLB was $5,350,000 and
maximum borrowing capacity of $54,135,000. The line had a zero balance at
September 30, 1996.
Total deposits have increased $30.7 million from December 31, 1995 to
September 30, 1996 with $21.1 million of the growth attributable to the
acquisition of three offices from Meridian Bank.
<PAGE>
All categories of deposits increased during that period. The Bank used the
proceeds from the deposits to fund loan growth of $16.4 million and
$5.6 million increase in the investment portfolio. The Bank had $2.4 million
invested in overnight federal funds at September 30, 1996 compared to
$850,000 at December 31, 1996. At September 30, 1996, there were no federal
funds purchased and $2.9 million of securities sold under agreements to
repurchase.
Sources of liquidity are available in the investment portfolio.
Scheduled maturities, anticipated repayments and projected calls of
investments, including the AFS portfolio, is $18.7 million over the next
twelve months. Cash flow is also provided by the scheduled pay downs in the
loan portfolio, including residential adjustable rate mortgages and consumer
instalment credit.
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by the Bank's 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 managed by using both
traditional static gap analysis and computer simulation modeling to measure
the effect of changes in interest rates on net interest income.
Net interest income, which is the primary source of the Bank's earnings,
is affected by interest rate movements. To manage the impact of rate changes
the balance sheet must be structured so that repricing opportunities exist for
both assets and liabilities at similar time intervals. ALCO monitors these
repricing characteristics and identifies strategies, including management of
liability costs and maturities, structure of the investment portfolio and
various lending activities to insulate net interest income from the effects of
changes in interest rates.
At September 30, 1996, the Bank had a positive 90 day gap of $23,895,000
and at one year a negative gap of $6,753,000. A positive gap at 90 days means
the Company's interest sensitive assets are higher than its interest-sensitive
liabilities. This would indicate that in a declining rate environment, the
yield on earnings assets would decrease faster than the cost of interest-
bearing liabilities. This risk is managed by ALCO strategies including
investment portfolio structure, pricing of deposits, loan pricing and
structure of fixed and variable rate products.
Certain shortcomings are inherent in the method of analysis presented in
the preceding paragraph. For example, although certain assets and liabilities
may have similar maturities or periods following repricing, they may react in
different degrees to changes in market interest rates. Also, 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. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features which restrict changes in
interest rates on a short-term basis over the life of the asset. Further, in
the event of change in interest rates, prepayment levels and decay rates on
core deposits may deviate significantly from those assumed in calculating the
Banks gap.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Not applicable.
Item 2. Changes in Securities
- ------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Other Materially Important Events
- ------------------------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
NORWOOD FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORWOOD FINANCIAL CORP.
Date: By:
----------------------------- ----------------------------
William W. Davis, Jr.
President and
Chief Executive Officer
(Principal Executive Officer)
Date: By:
----------------------------- ----------------------------
Lewis J. Critelli
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 9,673
<INT-BEARING-DEPOSITS> 396
<FED-FUNDS-SOLD> 2,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,909
<INVESTMENTS-CARRYING> 8,579
<INVESTMENTS-MARKET> 8,706
<LOANS> 168,476
<ALLOWANCE> 2,283
<TOTAL-ASSETS> 248,878
<DEPOSITS> 217,994
<SHORT-TERM> 3,871
<LIABILITIES-OTHER> 3,118
<LONG-TERM> 2,582
0
0
<COMMON> 90
<OTHER-SE> 21,223
<TOTAL-LIABILITIES-AND-EQUITY> 248,878
<INTEREST-LOAN> 10,654
<INTEREST-INVEST> 2,553
<INTEREST-OTHER> 172
<INTEREST-TOTAL> 13,379
<INTEREST-DEPOSIT> 5,579
<INTEREST-EXPENSE> 5,944
<INTEREST-INCOME-NET> 7,435
<LOAN-LOSSES> 600
<SECURITIES-GAINS> (43)
<EXPENSE-OTHER> 5,821
<INCOME-PRETAX> 1,863
<INCOME-PRE-EXTRAORDINARY> 1,863
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,463
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.79
<LOANS-NON> 4,640
<LOANS-PAST> 225
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,125
<CHARGE-OFFS> 548
<RECOVERIES> 106
<ALLOWANCE-CLOSE> 2,283
<ALLOWANCE-DOMESTIC> 2,047
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 236
</TABLE>
