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 June 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 0-28366
-------
NORWOOD FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
------------ ----------
(State or other jurisdiction (I.R.S. employer identification no.)
of 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.
Indicate by checkmark 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of
Class August 12, 1996
- --------------------------------------- -------------------
common stock, par value $0.10 per share 871,540 shares
<PAGE>
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Materially Important Events 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)*
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,354 $ 5,343
Interest bearing deposits with banks 349 255
Federal funds sold 4,650 850
Investment securities available for sale 45,220 36,671
Investment securities 9,074 12,211
Loans (net of unearned Income) 157,318 152,095
Less: Allowance for loan losses 2,133 2,125
--------- ---------
Net loans 155,185 149,970
Bank premises and equipment,net 7,518 7,017
Other real estate owned 2,632 1,944
Accrued interest receivable 1,545 1,504
Goodwill
Other assets 4,406 1,497
--------- ---------
TOTAL ASSETS $ 237,933 $ 217,262
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 23,666 $ 19,656
Interest-bearing deposits 182,179 167,643
--------- ---------
Total Deposits 205,845 187,299
Federal funds purchased and securities sold under
agreements to repurchase 3,460 1,727
Other borrowed funds 1,000 304
Long-term debt 2,582 2,582
Accrued interest payable 1,713 1,831
Accrued expenses and other liabilities 899 737
--------- ---------
TOTAL LIABILITIES 215,499 194,480
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value, authorized
10,000,000 shares, issued 871,406 and 880,542 90 90
shares
Surplus 4,391 4,379
Retained earnings 18,562 17,704
Treasury stock, at cost (29,390 and 19,754 shares) (881) (562)
Net unrealized gain on securities 272 1,171
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 22,434 22,782
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 237,933 $ 217,262
========= =========
</TABLE>
- ---------------
* The consolidated balance sheet for December 31, 1995 has been taken from
the audited financial statements for the fiscal year ended December 31,
1995.
See accompanying notes to the unaudited consolidated financial statement
-1-
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Income (unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
---------------------------- -----------------------
1996 1995 1996 1995
--------------- ------------ ------------- ---------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 3,526 $ 3,282 $ 7,008 $ 6,375
Interest on investment securities 889 446 1,695 936
Interest on federal funds sold and deposits
with banks 75 86 99 92
--------- --------- --------- ---------
Total Interest income 4,490 3,814 8,802 7,403
INTEREST EXPENSE
Interest on deposits 1,889 1,588 3,684 2,986
Interest on federal funds purchased and
repurchase agreements 30 33 141 93
Interest on other borrowed funds 5 4 10 11
Interest on long-term debt 55 53 109 106
--------- --------- --------- ---------
Total Interest expense 1,979 1,678 3,944 3,196
--------- --------- --------- ---------
NET INTEREST INCOME 2,511 2,136 4,858 4,207
PROVISION FOR LOAN LOSSES 200 150 350 299
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,311 1,986 4,508 3,908
OTHER INCOME
Service charges on deposits 135 100 235 193
Trust department income 59 34 110 70
Investment securities gains/(losses) 0 (52) 0 (8)
Other operating income 130 107 227 179
--------- --------- --------- ---------
Total other income 324 189 572 434
OTHER EXPENSES
Salaries and employee benefits 968 780 1,867 1,615
Occupancy, furniture and equipment 274 217 539 441
Federal deposit insurance premiums (7) 95 1 190
Other real estate owned operations 136 65 163 118
Other operating expenses 631 429 1,168 898
--------- --------- --------- ---------
Total other expenses 2,002 1,586 3,738 3,262
INCOME BEFORE TAX 633 589 1,342 1,080
INCOME TAXES 130 163 301 292
--------- --------- --------- ---------
NET INCOME $ 503 $ 426 $ 1,041 $ 788
========= ========= ========= =========
EARNINGS PER SHARE $ 0.58 $ 0.48 $ 1.20 $ 0.88
========= ========= ========= =========
Dividends per Share $ 0.21 $ 0.19 $ 0.42 $ 0.38
========= ========= ========= =========
Average Shares outstanding 871,540 891,646 873,027 895,180
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
-2-
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of changes in Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Common Retained Treasury Gain on
Stock Surplus Earnings Stock Securities Total
----- ------- -------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 90 $ 4,379 $16,594 $ $ 579 $21,642
Net Income 788 788
Cash Dividend Declared ($0.19 per Share) (170) (170)
Net Unrealized gain/(loss) on Securities 335 335
Acquisition of Treasury Stock (218) (218)
------ ------ ------ ------ ------ ------
Balance, June 30, 1995 $ 90 $ 4,379 $17,212 $ (218) $ 914 $22,377
====== ====== ====== ====== ====== =======
Balance, December 31, 1995 $ 90 $ 4,379 $17,704 $ (561) $ 1,170 $22,782
Net Income 1,041 1,041
Common stock issued upon exercise of 12 12
options
Cash Dividend Declared (183) (183)
Net Unrealized gain/(loss) on Securities (898) (898)
Acquisition of Treasury Stock (320) (320)
------ ------ ------ ------ ------ ------
Balance, June 30, 1996 $ 90 $ 4,391 $18,562 $ (881) $ 272 $22,434
====== ====== ====== ====== ====== =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
-3-
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Cash Flow (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
----------- ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,041 $ 788
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 350 299
Depreciation and amortization 296 263
Net amortization of investment securities 3 128
Investment security (gains) losses, net 0 8
Loss on sale of other real estate, net 64 46
Increase in core deposit intangible, net (1,744) 0
Decrease (increase) in accrued interest receivable (41) 310
Increase (decrease) in accrued interest payable (119) 162
Other, net (360) 285
-------- --------
Net cash provided by (used for) operating activities (510) 2,289
-------- --------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales of investment securities 502 49
Proceeds from maturities of investment securities 11,234 2,500
Purchases of investment securities (21,623) 0
Investment securities:
Proceeds from maturities of investment securities 3,140 10,965
Purchases of investment securities 0 (7)
Net increase in loans (6,918) (6,669)
Purchase of premises and equipment, net (882) (443)
Proceeds from sales of other real estate 395 432
Proceeds from sales of loans 85 132
-------- --------
Net cash provided by (used for) investing activities (14,067) 6,959
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 18,545 7,501
Net increase in short - term borrowings 2,429 761
Repayments of other borrowings 0 0
Acquisition of treasury stock (320) (218)
Proceeds from issuance of common stock 12 0
Cash dividends paid (183) (169)
-------- --------
Net cash provided by (used for) financing activities 20,483 7,875
-------- --------
Increase (decrease) in cash and cash equivalents 5,906 17,123
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 6,447 6,919
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,353 $ 24,042
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<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 audited
financial statements 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 six-month period ended June 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 - Loans
-----
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.
Prior to 1995, the credit losses related to these loans were estimated based on
undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit the creditor to use existing
methods for recognizing interest income on impaired loans eliminating the income
recognition provision of Statement 114.
The allowance method is used in providing for loan losses. Accordingly
all loan losses are charged to the allowance, and all recoveries are credited to
it. The allowance for loan losses is established through a provision for loan
losses which is charged to operations. The allowance is maintained at a level
believed by management to be sufficient to absorb estimated potential credit
losses. Management's determination of the adequacy of the allowance is based on
periodic evaluations of the credit portfolio, the overall risk characteristics
of the various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of expected future cash flows on impaired loans, which may be
susceptible to significant change. The allowance for loan losses on impaired
loans pursuant to Statement 114 is one component of the methodology for
determining the allowance for loan losses on commercial loans, commercial real
estate loans, consumer loans and residential real estate mortgages, and general
amounts for historical loss experience, uncertainties in estimating losses, and
inherent risks in the various credit portfolios.
Note 3 - 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.
-5-
<PAGE>
Cash payments for interest through June, 28, 1996 were $4,063,481 and
for income taxes, $569,544. Noncash investing activity through June 28, 1996
includes foreclosed mortgage loans transferred to real estate owned of
$1,146,810.
Note 4 - Earnings Per Share
------------------
Earnings per share for the three month and six month periods ended June
30, 1996 and June 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 June 30, 1996 and 1995 were 871,540 and 891,646,
respectively. For the six months ended June 30, 1996 and 1995 average shares
outstanding were 873,027 and 895,180 respectively.
Note 5 - Branch Acquisition
------------------
On March 23, 1996, the Bank completed an assumption of liabilities and
purchase of selected assets of three branches of Meridian Bank, Reading Berks
Counties, Pennsylvania. The branches are located in; Lakewood, Wayne County;
Shohola, Pike County; and Thompson, Susquehanna County. Pursuant to the
transaction, the Bank assumed $20,014,000 of deposits, acquired real estate and
equipment of $646,000 and loans of $30,000 which consisted only of overdraft
lines of credit and those secured by deposits. Management initially reinvested a
substantial portion of the $17.3 million of cash received as a result of the
branch purchases in investment and mortgage-backed securities with short to
medium terms. The Bank assumed deposits with an average cost of 3.68%.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
General. Total assets at June 30, 1996 were $237.9 million compared to $217.3 at
December 31, 1995, an increase of $20.6 million, or 9.5%.
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.
Investment Portfolio. Effective January 1, 1994, the Bank adopted statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In adopting Statement No. 115 the Bank has
classified investment securities in two categories: held to maturity ("HTM") and
available for sale ("AFS").
At June 30, 1996 the fair value of the AFS portfolio was $45.2 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. HTM Securities totaled $9.1 million at
June 30, 1996 down from $12.2 million at December 31, 1995. The HTM portfolio
consists principally of longer term obligations of state and political
subdivisions.
Loans. Total loans and leases at June 30, 1996 were $157.3 compared to $152.1
million at December 31, 1995, an increase of $5.2 million or 3.4%. The increase
from year-end is principally due to higher
-6-
<PAGE>
levels of indirect automobile financing of $7.8 million, home equity loans of
$2.7 million and introduction of automobile leasing totaling $3.7 million. These
increases were partially offset by lower levels of residential real estate $3.9
million and commercial mortgages, $3.8.
Non-performing Assets and Allowance 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 June 30, 1996 were
$3,411,767 comprised of $182,728 with related allowance of $12,014 and
$3,229,039 without related allowance for loan losses. For the six months ended
June 30, 1996, average impaired loans totaled $3,190,143.
The Bank's loan review functions assess 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 June 30, 1996 and December
31, 1995 adequate for its loan mix and classifications based on its internal
analysis. There can be no assurance that the allowance for loan losses will be
adequate to cover losses which may in fact be realized in the future or that
additional provisions to the allowance for loan losses will not be required.
The allowances for loan losses at June 30, 1996 was $2,133,000 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 52% of non-performing
loans compared to 54.8% at year-end 1995. Following is a summary of changes in
the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At or for the At or for the
three months ended June 30, six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,097 $ 1,951 $ 2,125 $ 1,893
Provision for loan losses 200 150 350 299
Charge-offs (208) (131) (418) (253)
Recoveries 44 62 76 93
------- ------- ------- -------
Net charge-offs (164) (69) (342) (160)
Balance at end of Period $ 2,133 $ 2,032 $ 2,133 $ 2,032
======= ======= ======= =======
Net charge-offs to average loans
(annualized) 0.45% 0.22%
======= =======
</TABLE>
-7-
<PAGE>
Non-performing loans at June 30, 1996 were $4,101,000 or 2.61% of total
loans. Compared to $3,880,000 or 2.55% of total loans at December 31, 1996. The
following table sets forth information regarding non-performing loans and other
real estate owned at the dates indicated:
<TABLE>
<CAPTION>
At At
June 30, 1996 December 31, 1995
------------- -----------------
(Dollars in thousands)
Non-performing loans:
<S> <C> <C>
Commercial and other $1,580 $1,627
Real estate related 2,469 2,205
Consumer 52 48
------ ------
Total non-performing loans 4,101 3,880
Other real estate owned 2,632 1,944
------ ------
Total non-performing assets $6,733 $5,824
====== ======
Total non-performing loans to total loans 2.61% 2.55%
====== ======
Total non-performing assets to total assets 2.83% 2.68%
====== ======
</TABLE>
The increase in non-performing real-estate related loans of $264,000 is
principally due to the delinquency status of a single large residential
mortgage.
Deposits. Total deposits at June 30, 1996 were $205.8 million, an increase of
$18.5, or 9.9%, from $187.3 million at December 31, 1995. The June 30 balance
includes $21 million of deposits acquired in a branch purchase from Meridian
Bank. Demand deposits totaled $23.7 million at June 30, 1996 representing 11.5%
of total deposits, an increase of 10.5% from December 31, 1995. At June 30, 1996
commercial CDs over $100,000 were $13.9 million, a decrease $4.4 million from
$18.3 million from December 31, 1995. This decrease is principally due to lower
level of municipality and school district funds.
Stockholders' Equity. Total stockholders' equity was $22,434,000 at June 30,
1996, compared to $22,782,000 at December 31, 1995. Higher levels of treasury
stock due to stock repurchases and unrealized loss on securities related to SFAS
No. 115 resulted in the net decrease in total stockholders' equity. At June 30,
1996, 29,390 shares were held in treasury at a cost of $881,000. These shares
may be held for use in employee benefit plans currently under evaluation.
RESULTS OF OPERATION
Comparison of Operating Results for Six Months Ended June 30, 1996 and 1995
- ---------------------------------------------------------------------------
General. For the six months of 1996, net income was $1,041,000 compared to
$788,000 for the 1995 period, an increase of $253,000 or 32.1%. This represents
earnings per share of $1.20 in 1996 compared to $0.88 in 1995.
-8-
<PAGE>
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- -------
ASSETS
Interest Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 3,380 $ 92 5.44% $ 3,091 $ 93 6.02%
Interest bearing deposits with banks 250 7 5.60 0
Investment securities available for sale 43,360 1,436 6.62 16,997 456 5.37
Investment securities:
Taxable investments 191 4 4.19 9,938 292 5.88
Tax-exempt securities 11,704 471 8.05 8,514 287 6.74
------- ----- ------- -----
Total investment securities 11,895 475 7.99 18,452 579 6.28
Loans 153,396 7,018 9.15 143,410 6,379 8.90
------- ----- ------- -----
Total interest earning assets 212,281 9,028 8.51 181,950 7,507 8.25
---- ----
Non-interest earning assets:
Cash and due from banks 6,285 5,246
Allowance for loan losses (2,166) (1,986)
Other assets 14,828 11,497
Total non-interest earning assets 18,947 14,757
TOTAL ASSETS $ 231,228 $ 196,707
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits $ 43,056 610 2.83 $ 37,636 512 2.72
Savings deposits 42,069 593 2.82 37,904 563 2.97
Time deposits 90,828 2,481 5.46 72,739 1,911 5.25
------- ----- ------- -----
Total interest bearing deposits 175,953 3,684 4.19 148,279 2,986 4.03
Other borrowed funds 5,927 181 6.11 3,720 104 5.59
Long-term debt 2,582 109 8.44 2,262 106 9.37
------- ----- ------- -----
Total interest bearing liabilities 184,462 3,974 4.31 154,261 3,196 4.14
---- ----
Non-interest bearing liabilities
Demand deposits 20,713 18,761
Other liabilities 3,286 2,557
Total non-interest bearing liabilities 23,999 21,318
------- --------
Shareholders' equity 22,767 21,128
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $231,228 $196,707
======= =======
Net interest income(tax-equivalent basis) 5,054 4.20% 4,311 4.11%
==== ====
Tax-equivalent basis adjustment (103) (49)
----- -----
Net Interest Income $4,951 $4,262
===== =====
Net Interest margin(tax-equivalent basis) 4.76% 4.74%
==== ====
</TABLE>
- ----------------
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.
-9-
<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.
<TABLE>
<CAPTION>
Increase/(Decrease)
--------------------------------
Six months ended June 30,1996
Compared to
six months ended June 30,1995
--------------------------------
Variance due to
--------------------------------
Volume Rate Net
-------- -------- ---------
(Dollars in thousands)
ASSETS
Interest Earning Assets:
<S> <C> <C> <C>
Federal funds sold $ 17 $ (18) $ (1)
Interest bearing deposits with banks 4 3 7
Investment securities available for sale 851 129 980
Investment securities:
Taxable investments (223) (65) (288)
Tax-exempt securities 121 63 184
------- ------- -------
Total investment securities (101) (3) (104)
Loans 453 186 639
------- ------- -------
Total interest earning assets 1,224 297 1,521
Interest bearing liabilities:
Interest bearing demand deposits 76 22 98
Savings deposits 99 (69) 30
Time deposits 492 78 570
------- ------- -------
Total interest bearing deposits 667 31 698
Other borrowed funds 67 10 77
Long-term debt 26 (23) 3
Total interest bearing liabilities 646 132 778
------- ------- -------
Net interest income(tax-equivalent basis) $ 578 $ 165 $ 743
======= ======= =======
</TABLE>
- ----------------
(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.
-10-
<PAGE>
Interest Income. Interest income on a fully taxable equivalent ("FTE") basis
totaled $9,028,000 for six months of 1996, an increase of $1,521,000, or 20.3%
over the same period in 1995. The FTE yield on earning assets was 8.51% in 1996,
an increase from 8.25% in 1995. This increase was principally related to growth
in average earnings assets of $30.3 million or 16.7%, which represented an
increase in income of $1,224,000. Loans averaged $153.4 million in 1996,
representing 72.3% of earnings assets and yielding 9.15%. For six months of
1995, loans represented 78.8% of earning assets with a yield of 8.90%. Income on
loans for 1996 was $7,018,000 compared to $6,379,000 for 1995. The yields on the
investment portfolio, both the AFS and HTM, increased from 1995 principally due
to lengthening of maturities. The total portfolio yield for six months of 1996
was 6.92% compared to 5.84% in 1995.
Interest Expense. Interest expense was $3,944,000 for six months 1996 compared
to $3,196,000 in 1995, an increase of $748,000 or 23.4%. The rates paid on
interest-bearing liabilities for six months 1996 was 4.31% compared to 4.14% in
1995. The cost of interest bearing deposits increased to 4.19% from 4.03%,
reflecting higher costs on CD's which increased 21 basis points and represented
51.6% of interest-bearing deposits compared to 49.1% in 1995.
Net interest Income. Net interest income on an FTE basis increased $743,000, or
17.2%, to $5,054,000 for six months of 1996. The increase was principally due to
increase in volume which accounted for $578,000 while rate changes accounted for
$165,000 of the increase. Net interest spread and net interest margin were 4.20%
and 4.76%, respectively for 1996, compared to 4.11% and 4.74%, respectively in
1995.
Provision for Loan Losses. Provision for loan losses was $350,000 for six months
of 1996 increased from $299,000 in 1995 reflecting a higher level of net
charge-offs in 1996. See also "Financial Condition -- Non-performing Assets and
Allowance for Loan Losses."
Non-interest Income. Non-interest income for the six months of 1996 was
$572,000, an increase of $138,000 or 31.8% over 1995. Service charges on
deposits increased 22% reflecting additional volume and increase in certain fees
in the second quarter of 1996. Trust department income for 1996 totaled $110,000
compared to $70,000 in 1995 as a result of higher fees related to mutual fund
sales and increased volume. The six months of 1995 included a $8,000 net loss on
the sale of investment securities, with no such activity in 1996.
Non-interest Expenses. Non-interest expenses totaled $3,738,000 for six months
1996, compared to $3,262,000 in 1995, an increase of $476,000 or 14.6%. Expenses
related to three new branches acquired from Meridian in March accounted for
$210,000 of the increase. FDIC insurance premiums decreased $189,000 for the six
month period due to the rate reduction as a result of the Bank Insurance Fund
reaching its required level of capitalization, thereby reducing deposit
insurance premiums. Expenses relating to other real estate increased $45,000 to
$163,000 due to higher levels of write-downs and increased volume of properties.
Legal fees increased $33,000 from 1995 with additional expenses related to costs
incurred during loan work-out situations and the additional costs related to
formation of holding company and initial registration to become a public
company. Consulting costs of $53,000 for six months 1996 increased $37,000 from
1995 due to services related to technology planning and human resources/benefits
administration.
Income Tax Expenses. Income tax expense for six months of 1996 was $301,000 for
an effective tax rate of 22.4% compared to an effective rate of 27% 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.
-11-
<PAGE>
Comparison of Operating Results for Three Months Ended June 30, 1996 and 1995
- -----------------------------------------------------------------------------
General. For the three months ended June 30, 1996, net income was $503,000
compared to $426,000 for the 1995 period, an increase of $77,000 or 18.1%. This
represents earnings per share of $0.58 in 1996 compared to $0.48 in 1995. The
resultant return on average assets and return on average equity for the 1996
period was 0.84% and 8.84%, respectively, compared to 0.85% and 7.71%
respectively in 1995.
Interest Income. Interest income on a fully taxable equivalent ("FTE") basis
totaled $4,613,000 for the quarter, an increase of $744,000 or 19.2% over 1995.
The increase was principally due to a higher level of earning assets, $217.3
million compared to $183.9 million in 1995.
Interest Expense. Total interest expense was $1,979,000 for the 1996 period
compared to $1,678,000 in 1995. The increase was attributable to a higher level
of interest bearing deposits due primarily to the branch acquisition and
increased costs on certificates of deposit.
Net Interest Income. Net interest income on an FTE basis was $2,604,000 compared
to $2,191,000 in the 1995 period. Net interest spread and net interest margin
were 4.27% and 4.79% respectively in 1996, compared to 4.20% and 4.84%
respectively in 1995.
Provision for Loan Losses. Provision for loan losses for the second quarter of
1996 were $200,000 increasing from $150,000 in 1995. The increase is due to
higher level of charge-offs in 1996 and increased loan volume.
Non-interest Income. Non-interest income for the three months ended June 30,
1996 was $324,000 an increase of $135,000 or 71.4% over the same period in 1995.
The 1995 period included losses on investment securities of $52,000, with no
activity in the 1996 quarter. Service charges on deposits increased $35,000 or
35% due to volume increases and a increase in certain fees in the second quarter
of 1996.
Non-interest Expenses. Non-interest expenses totaled $2,002,000 for the three
months ended June 30, 1996 compared to $1,586,000 in the same period of 1995, an
increase of $416,000, or 26.2%. Expenses related to new branch locations
accounted for $210,000 of the increase. Other real estate owned operations
expenses increased $71,000 to $136,000 for the current period. These increases
were partially offset by lower FDIC insurance assessment of $102,000 in 1996
compared to 1995.
Income Tax Expense. Income tax expense for the second quarter of 1996 was
$130,000 compared to $163,000 for the second quarter of 1995. The tax expense
decreases even as pre-tax income increased 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:
<TABLE>
<CAPTION>
At At
June 30, 1996 December 31, 1995
----------------------------- ------------------------
<S> <C> <C>
Leverage Capital 9.15% 10.05%
Tier 1 Capital 12.33% 13.93%
Total Capital 13.58% 15.18%
</TABLE>
-12-
<PAGE>
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
June 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 June 30, 1996 the Flex
Line Limit with the FHLB was $5,350,000 and maximum borrowing capacity of
$54,135,000.
Total deposits have increased $18.5 million from December 31, 1995 to
June 30, 1996, principally as a result of acquiring three offices from Meridian
Bank with total deposits of $21.1 million. The Bank had $4.7 million invested in
overnight Federal Funds at June 30, 1996 compared to $850,000 at December 31,
1995. Additional sources of liquidity are available in the investment available
for sale and the investment portfolio. Scheduled maturities and anticipated
repayments of the total investment portfolio, including those available for
sale, is approximately $6.3 million for the next twelve months.
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 June 30, 1996, the Bank had a positive 90 day gap of $22,143,000 and
at one year a negative gap of $4,990,000. 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 of 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
-13-
<PAGE>
and decay rates on core deposits may deviate significantly from those assumed in
calculating the Bank's gap.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Neither the Company nor the Bank was engaged in any legal proceeding of
a material nature at June 30, 1996 that would have a material adverse effect on
the Company's or the Bank's financial condition, liquidity or results of
operation. From time to time, the Company is a party to legal proceedings in the
ordinary course of business, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests, claims
involving the making and servicing of loans, and other issues related to the
operations of the Company and the Bank.
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
- ------------------------------------------------------------
The Annual Meeting of shareholders of the Company was held on April 23,
1996.
Proposal 1 - Election of Directors.
The following incumbent Class III Directors were nominated for election to
the Board of Directors for a three year term: Daniel J. O'Neill, Dr. Kenneth A.
Phillips and Gary P. Rickard.
The results of the voting were as follows:
Shares
For Against
--- -------
O'Neill 569,661 7,172
Phillips 570,877 6,172
Rickard 569,285 7,764
Item 5. Other Materially Important Events
- ------------------------------------------
Not applicable.
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
-15-
<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: August 13, 1996 By: /s/ Russell L. Ridd
Russell L. Ridd
President
(Principal Executive Officer)
Date: August 13, 1996 By: /s/ Lewis J. Critelli
Lewis J. Critelli
Vice President and Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,354
<INT-BEARING-DEPOSITS> 349
<FED-FUNDS-SOLD> 4,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,220
<INVESTMENTS-CARRYING> 54,294
<INVESTMENTS-MARKET> 54,161
<LOANS> 157,318
<ALLOWANCE> 2,133
<TOTAL-ASSETS> 237,933
<DEPOSITS> 205,845
<SHORT-TERM> 4,460
<LIABILITIES-OTHER> 2,612
<LONG-TERM> 2,582
0
0
<COMMON> 90
<OTHER-SE> 22,344
<TOTAL-LIABILITIES-AND-EQUITY> 237,933
<INTEREST-LOAN> 7,008
<INTEREST-INVEST> 1,695
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 8,802
<INTEREST-DEPOSIT> 3,683
<INTEREST-EXPENSE> 3,944
<INTEREST-INCOME-NET> 4,858
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,738
<INCOME-PRETAX> 1,342
<INCOME-PRE-EXTRAORDINARY> 1,342
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 4.76
<LOANS-NON> 4,101
<LOANS-PAST> 1,573
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,125
<CHARGE-OFFS> 418
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 2,133
<ALLOWANCE-DOMESTIC> 2,133
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 119
</TABLE>
