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 quarter period ended March 31, 1998
------------------------------------------
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
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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 April 30, 1998
- ---------------------------------------
common stock, par value $0.10 per share 1,780,430
--------------------------------
<PAGE>
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
Part I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Materially Important Events 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,534 $ 6,571
Interest bearing deposits with banks 1,685 4,353
Federal funds sold 2,300 --
Securities available for sale 53,532 49,372
Securities held-to-maturity (fair value of $8,498
and $8,516) 8,160 8,159
Loans Receivable (net of unearned income) 183,501 185,640
Less: Allowance for loan losses 3,289 3,250
--------- ---------
Net loans receivable 180,212 182,390
Bank premises and equipment, net 7,184 7,300
Other real estate 536 537
Accrued interest receivable 1,434 1,358
Other assets 3,823 3,210
--------- ---------
TOTAL ASSETS $ 264,220 $ 263,250
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 24,212 $ 24,065
Interest-bearing deposits 199,299 202,689
--------- ---------
Total deposits 223,511 226,754
Short-term borrowings 7,185 4,990
Other borrowings 2,000 2,000
Accrued interest payable 2,394 2,365
Other liabilities 3,750 2,547
--------- ---------
TOTAL LIABILITIES 238,840 238,656
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1998 1,802,824 shares and
1997 1,801,592 shares 180 180
Surplus 4,453 4,384
Retained earnings 21,362 20,844
Treasury stock, at cost (22,394 shares) (344) (344)
Unearned ESOP shares (1,702) (1,750)
Net unrealized appreciation on securities 1,431 1,280
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 25,380 24,594
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 264,220 $ 263,250
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
3
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended
March 31
----------------
1998 1997
------ ------
INTEREST INCOME
Loans receivable including fees $3,977 $3,867
Securities 902 924
Federal funds sold and deposits
with banks 55 45
------ ------
Total interest income 4,934 4,836
INTEREST EXPENSE
Deposits 2,040 2,059
Short-term borrowings 5 51
Other borrowed funds 30 54
------ ------
Total interest expense 2,125 2,164
------ ------
NET INTEREST INCOME 2,809 2,672
PROVISION FOR LOAN LOSSES 180 250
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,629 2,422
OTHER INCOME
Service charges and fees 23 170
Income from fiduciary activities 41 47
Net realized gain on sales of securities 15 --
Other 72 56
------ ------
Total other income 35 273
OTHER EXPENSES
Salaries and employee benefits 96 947
Occupancy, furniture & equipment, net 327 314
Taxes, other than income 63 59
Other real estate owned operations 1 46
Other 585 596
------ ------
Total other expenses 1,957 1,962
INCOME BEFORE INCOME TAXES 1,030 733
INCOME TAX EXPENSE 310 176
------ ------
NET INCOME $ 720 $ 557
====== ======
BASIC AND DILUTED
EARNINGS PER SHARE $ 0.43 $ 0.34
====== ======
Dividends per share $ 0.12 $0.105
====== ======
See accompanying notes to the unaudited consolidated financial statements.
Per share amounts have been adjusted to reflect two-for-one stock split in the
form of a 100% stock dividend payable on February 2, 1998.
4
<PAGE>
NORWOOD FINANCIAL CORP.
Statements of Comprehensive Income (unaudited)
(dollars in thousands)
Three months ended March 31
---------------------------
1998 1997
---- ----
Net Income $720 $557
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period net of tax,
expense (benefit) 1998-$83;
1997-$(160) $161 (311)
Less reclassification adjustments for
gains included in net income
1998-$5; 1997-$0 (10) --
---- ----
Other comprehensive income 151 (311)
---- ----
Comprehensive income $871 $ 246
==== =====
5
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Unearned Unrealized
Common Retained Treasury ESOP Appreciation
Stock Surplus Earnings Stock Shares on Securities Total
----- ------- -------- ----- ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $180 $4,384 $20,844 ($344) ($1,750) $1,280 $24,594
Net Income 720 720
Cash dividend declared (202) (202)
Net change in unrealized appreciation
on securities 151 151
Stock options exercised 20 20
Release of earned ESOP shares 49 48 97
---- ------ ------- ----- ------- ------ ------
Balance, March 31, 1998 $180 $4,453 $21,362 ($344) ($1,702) $1,431 $25,380
==== ====== ======= ====== ======= ====== ======
</TABLE>
See accompanying notes to the unaudited financial statements
6
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 720 $ 557
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 180 250
Depreciation 164
Amortization of intangible assets 68 63
Deferred income taxes 981 64
Net realized gain on sales of securities (15) --
Gain(loss) on sale of other real estate, net (4) 9
Net gain on sale of mortgage loans (27) (19)
Mortgage loans originated for sale (1,881) (2,332)
Proceeds from sale of mortgage loans 1,908 2,351
Decrease (increase) in accrued interest receivable (76) (56)
Increase (decrease) in accrued interest payable 25 (87)
Other, net (113) 374
-------- --------
Net cash provided by operating activities 1,942 1,338
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 15 --
Proceeds from maturities and principal reductions on
mortgage-backed securities 1,740 112
Purchases (5,502) (2,107)
Securities held to maturity:
Proceeds from maturities -- --
Purchases -- --
Net decrease (increase) in loans 1,637 (4,664)
Purchase of bank premises and equipment, net (60) (261)
Proceeds from sales of other real estate 6 404
-------- --------
Net cash used in investing activities (2,165) (6,516)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (decrease) in deposits (3,243) (10,482)
Net increase (decrease) in short term borrowings 2,194 8,102
Repayments of other borrowings -- --
Proceeds from other borrowings -- --
Stock options exercised 20 --
Release of ESOP shares 48 --
Net cash dividends paid (201) (176)
-------- --------
Net cash used in financing activities (1,182) (2,556)
-------- --------
Decrease in cash and cash equivalents (1,405) (7,734)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,924 15,109
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,519 $ 7,375
======== ========
</TABLE>
7
<PAGE>
See accompanying notes to consolidated financial statement
Notes to Unaudited Consolidated Financial Statements
- ----------------------------------------------------
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and WTRO Properties. All significant intercompany transactions have been
eliminated in consolidation. The investments in subsidiaries on the Company's
financial statements are carried at the Company's equity in the underlying net
assets.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998 or any other period.
For additional information and disclosure required under generally
accepted accounting principals, reference is made to the Company's 1997 Annual
Report filed on Form 10-K (File No. 0-28366).
2. Earnings Per Share
------------------
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of stock options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the Statement No. 128 requirements.
On December 9, 1997, the Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend on common stock outstanding,
payable on February 2, 1998 to shareholders of record on January 15, 1998. The
stock split resulted in the issuance of 900,796 additional common shares. The
effect of this stock split has been recorded as of December 31, 1997. All per
share data has been adjusted for the effect of the stock split.
3. Comprehensive Income
--------------------
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income", in June 1997. The Company adopted the
provisions of the new standard in the first quarter of 1998. In accordance with
the statement, prior year financial statements have been reclassified in order
to be consistent with the current year presentation. The only comprehensive
income item that the Company has is unrealized gains (losses) on securites
8
<PAGE>
available for sale.
4. Cash Flow Information
---------------------
For the purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold.
Cash payments for interest for the three month period ended March 31,
1998 and 1997 were $2,014,000 and $2,105,000 respectively. There were no cash
payments for income taxes in 1998 or 1997. There were no non-cash investing
activity for 1998 and 1997.
5. Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for prior years have been reclassified to
conform to current year presentation. Such reclassifications did not affect net
income.
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
- -------------------
General
- -------
Total assets at March 31, 1998 were $264.2 million, compared to $263.3
million at year-end 1997. The Company experienced a modest decline in loans and
deposits during the quarter reflecting seasonality of its customer base. Growth
in the securities portfolio was funded by short-term borrowings.
Securities
- ----------
The fair value of securities available for sale at March 31, 1998 was
$53.5 million, an increase of $4.2 million from December 31, 1997. The increase
was principally in government agency issued mortgage backed securities. For the
quarter ended March 31, 1998, maturities and calls on available for sale
securities totaled $1.7 million with purchases of $5.5 million. In the current
interest rate environment, the Company has experienced increased cash-flow from
higher pre-payment speeds on its mortgage backed securities.
Loans
- -----
Total loans at March 31, 1998 were $183.5 million compared to $185.6
million at year-end. The decrease was principally due to lower level of
residential mortgages, $1.3 million, and commercial real estate loans, $1
million. The Company has experienced refinancing of its adjustable rate
residential mortgages into a fixed rate product. The fixed rate loans are
subsequently sold into the secondary market, such sales totaled $1.9 million
during the quarter. Indirect financing which includes new and used automobile
and marine lending totaled $28 million at March 31, 1998 compared to $27.9 at
year-end. The auto leasing portfolio totaled $33.9 million, which was no change
from year-end. Automobile lending and leasing volume
9
<PAGE>
slowed in the quarter ended March 31 reflecting weaker auto sales and increased
competition.
Set forth below is selected data relating to the composition of the
loan portfolio at the dates indicated:
Types of loans
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
----------------------- --------------------
$ % $ %
----------- --------- ----------- -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 29,976 14.6% $ 26,589 14.2%
Real Estate-construction 2,465 1.3 2,046 1.1
Real Estate-residential 52,952 28.7 54,227 29.0
Real Estate-commercial 31,991 17.3 32,986 17.7
Leases to individuals 33,867 18.4 33,877 18.1
Installment loans to individuals 36,166 19.6 37,082 19.9
---------- --------
Total loans 184,417 100.0% 186,807 100.0%
Less unearned income 916 1,167
Allowance for loan losses 3,289 3,250
--------- --------
Total loans, net $180,212 $182,390
======== ========
</TABLE>
10
<PAGE>
Allowance for Loan Losses and Non-performing Assets
- ---------------------------------------------------
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
At or for the Three
(dollars in thousands) Months Ended March 31
- ---------------------- ---------------------
1998 1997
------- --------
Balance at beginning of period $ 3,250 $ 2,615
Provision for loan losses 180 250
Charge-offs (148) (148)
Recoveries 23 23
------- -------
Net charge-offs (141) (125)
------- -------
Balance at end of period $ 3,289 $ 2,740
======= =======
Allowance to total loans 1.79% 1.53%
Net charge-offs to average loans
(annualized) .31% .28%
The allowance for loan losses totaled $3,289,000 at March 31, 1998
and represented 1.79% of total loans, increasing from $3,250,000 and 1.75% at
year-end, and $2,740,000 and 1.53% at March 31, 1997. The provision for loan
losses for the current quarter was $180,000, compared to $250,000 for the first
quarter of 1997. The Bank's loan review function assess 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 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. Larger credit exposures are individually
analyzed. While management considers the allowance adequate at March 31, 1998
based on the loan mix and level of classifications, there can be no assurances
that future provisions will not be made to the allowance, and that such losses
will not exceed estimated amounts.
At March 31, 1998, the recorded investment in loans which are
considered to be impaired in accordance with Statement of Financial Accounting
Standards Nos. 114 and 118 was $2,110,000. This was comprised of $425,000 with
related allowance of $26,000 and loans of $1,685,000 with no related allowance
for loan losses. Impaired loans are commercial and commercial real estate loans
for which it is probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
Company estimates credit losses on impaired loans based on present value of
expected cash flows or the fair value of the underlying collateral if loan
repayment is expected to come from the sale of such collateral
11
<PAGE>
At March 31, 1998, non-performing loans totaled $2,038,000 which is 1.11% of
total loans decreasing from $2,175,000, or 1.17% of total loans at December 31,
1997. The following table sets forth information regarding non-performing loans
and other real estate owned at the date indicated:
(dollars in thousands) March 31, 1998 December 31, 1997
-------------- -----------------
Loans accounted for on a non-accrual
Basis:
Commercial and all other $ 851 $ 963
Real Estate 1,115 1,112
Consumer 29 33
------ ------
Total 1,995 2,108
Accruing Loans which are contractually
past due 90 days or more 43 44
------ ------
Total non-performing loans $2,038 $2,175
Other real estate owned 536 537
------ ------
Total non-performing assets $2,574 $2,712
====== ======
Allowance for loan losses as a
percent of non-performing loans 161.4% 149.4%
Non-performing loans to total loans 1.11% 1.17%
Non-performing assets to total assets .97% 1.03%
The two largest non-performing loan relationships total $1,015,000
and represent 49.8% of total non-performing loans at March 31, 1998. On April
15, 1998, the Bank's subsidiary WTRO Properties, Inc. acquired, through
foreclosure action, the real estate related to one of these credits, and will
begin aggressively marketing the property which includes a restaurant, a
residential property and several rental units. The second relationship consists
of the inventory and real estate of a marina. The Company is in the process of
liquidating the inventory and seeking a buyer for the real estate.
Deposits and Other Borrowings
- -----------------------------
Total deposits at March 31, 1998 were $223.5 million compared to
$226.8 million at year-end. The decrease was principally due to $5.2 million of
maturities of short-term time deposits of school district and other public
funds. Non-interest bearing demand deposits represented 10.8% of total deposits
at March 31, improving from 10.6 % at year-end. Money market deposit accounts
totaled $29.3 million, increasing $488,000 from year-end principally due to
growth in high yield Investor Account.
The Company substituted short-term borrowings, principally cash
management accounts which represent customers excess funds invested in overnight
repurchase agreements for short-term jumbo CDs. Repurchase agreements totaled
$6.3 million at March 31 compared to $2.8 million at year-end. The Company
believes such accounts are a stable source of funds as they represent
substitutes for core deposits for larger commercial and governmental agency
customers.
12
<PAGE>
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at March 31, 1998, was $25,380,000
compared to $24,594,000 at December 31, 1997. A comparison of the Company's
capital ratios is as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Tier 1 Capital
(To average assets) 8.68% 8.34%
Tier 1 Capital
(To risk-weighted assets) 11.59% 11.27%
Total Capital
(To risk-weighted assets) 12.84% 12.53%
The minimum capital requirements imposed by the FDIC for leverage,
Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has
similar capital requirements imposed by the Board of Governors of the Federal
Reserve System. The Bank is also subject to more stringent Pennsylvania
Department of Banking (PDB) guidelines. The Bank's capital ratios do not differ
significantly from the Company's ratios. Although not adopted in regulation
form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage
capital and 10% total capital. The Company and the Bank were in compliance in
both FDIC and PDB capital requirements at March 31, 1998 and December 31, 1997.
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 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. 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. 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. At March 31, 1998,
the level of net interest income at risk in a 200 basis points increase or
decrease was within the Company's policy limits.
13
<PAGE>
Imbalance in repricing opportunities at a given point in time reflect
interest- sensitivity gaps measured as the difference between interest-sensitive
assets and interest-sensitive liabilities. An asset or liability is considered
interest-sensitive if the rate it yields is subject to change or if it produces
a cash-flow in a given period which must be redeployed by the Company. 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 March 31, 1998, the Bank had a positive 30 day gap position of
$18.5 million, or 7% of total assets. A positive gap means that
interest-sensitive assets are higher than interest-sensitive liabilities at the
time interval. This would generally indicate that in a declining rate
environment, the yield on earning assets would decrease faster than the cost of
interest-bearing liabilities in the 30 day time frame. This risk is managed by
ALCO strategies, including investment portfolio structure, pricing of deposit
liabilities, loan pricing and structure of fixed and variable rate products.
The Company analyzes and measures the time periods in which
interest-earning assets and interest-bearing liabilities 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 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,
nor does the Company have any off-balance sheet derivatives.
Liquidity
- ---------
Maintenance of liquidity is coordinated by ALCO. 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
loans and securities.
At March 31, 1998, the Company had cash and cash equivalents of $9.5
million in the form of cash, due from banks and interest bearing deposits with
other institutions. In addition, the Company had total securities available for
sale of $53.5 million which could be used for liquidity needs. This totals $63.0
million and represents 23.8% of total assets, increasing from 22.5% at year-end.
The Company also monitors other liquidity measures all of which were within
Company policy guidelines at March 31, 1998. The Company believes its liquidity
position is adequate.
14
<PAGE>
The Company maintains established lines of credit with the Federal
Home Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The short-term borrowing capacity from FHLB was in excess of
$53 million. At March 31, 1998 the Company had $2 million borrowing from the
FHLB with a scheduled maturity in December 1999.
Results of Operation
Comparison of Operating Results for Three Months Ended March 31, 1998
- ---------------------------------------------------------------------
and March 31, 1997
- ------------- ----
General
- -------
For the three months ended March 31, 1998 net income totaled $720,000
or $.43 per share compared to $557,000, or $.34 per share earned in the first
quarter of 1997. The resulting return on average assets and return on average
equity for the quarter were 1.11% and 11.58% respectively increasing from .87%
and 10.23% respectively for the corresponding period in 1997.
Net Interest Income
-------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the first quarter of 1998 was $2,881,000, an increase of $104,000, or 3.8% over
1997. The fte net interest spread and net interest margin for three months 1998
was 4.02% and 4.66% respectively compared to 4.10% and 4.65%, respectively in
1997.
The decrease in net interest spread was principally the result of
lower yields on earning assets, 8.10% decreasing from 8.27%, or a 17 basis point
decline. The cost of interest-bearing liabilities decreased 9 basis points to
4.08% for the first quarter of 1998. Net interest margin remained stable,
despite the decrease in net interest spread, due to a higher earning asset ratio
of 94.9% in 1998 compared to 92.8% in 1997.
Interest income on an fte basis totaled $5,006,000 for the three
months of 1998, compared to $4,941,000 in 1997. The yield on the securities
portfolio decreased from 6.60% in 1997 to 6.26% principally due to lower
interest rate environment and shortening of the average repricing term of the
portfolio to 3.4 years from 5.1 years at March 31, 1997. Total loans averaged
$184 million for the quarter with interest income of $3,981,000 and yield of
8.65% compared to $176.6 million average, $3,873,000 income and 8.77% yield in
1997. The growth in loans was principally in lower yielding retail loans and
lease financing with a decrease in higher yielding commercial related credits.
Total interest expense for the quarter was $2,125,000 compared to
$2,164,000 in 1997. The average cost of interest-bearing deposits was 4.06% in
1998 decreasing from 4.11% in 1997. During the quarter, the Company decreased
rates paid on certain deposit products including interest-bearing checking,
savings and money market accounts. This was partially offset by increased cost
on retail CDs, reflecting a lengthening of maturities. The first quarter of 1998
also includes $6.1 million of higher yielding, Investor Account deposits at
4.82%, not offered in
15
<PAGE>
the first quarter of 1997.
Other Income
- ------------
Other income, excluding gains on sales of securities, totaled
$344,000 for the quarter, an increase of $71,000 or 26% over the corresponding
period in 1997. The increase was principally due to additional fees on
deposit-related products including a new checking account product, improvements
in collection of overdraft fees, Visa check card fee income of $9,000 and ATM
fee income increasing $12,000 due to surcharging non-customers for the use of
the Company's ATMs.
During the quarter the Company sold an equity holding in another
financial institution for a gain on sale of $15,000. There were no such gains in
the first quarter of 1997.
Other Expense
- -------------
Other expenses totaled $1,957,000 for the first quarter of 1998
compared to $1,962,000 in 1997. Salary and employee benefit costs totaled
$963,000, an increase of 1.7% over the period in 1997. Total full-time
equivalent employees at March 31, 1998 were 112 compared to 117 at March 31,
1997. Cost associated with other real estate owned decreased to $19,000 from
$46,000 principally due to decrease in the number of properties owned. The
efficiency ratio for the quarter ended March 31, 1998 was 62.6% improving from
64.3% in 1997.
Income Tax Expense
- ------------------
Income tax expense for the three months of 1998 was $310,000, for an
effective tax rate of 30.1% compared to $176,000 and an effective rate of 24% in
1997. The increase in the effective rate was due to higher level of pre-tax
income and lower levels of tax-exempt municipal investments.
Year 2000
- ---------
Timely and accurate data processing are critical to the operation of
the Company. Issues regarding the Year 2000 arise out of the fact that many
existing computer programs use only two digits to identify a year in the date
field. Any of the Company's programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures.
The Company has developed a Year 2000 project plan to manage the
issues involved. The Company has entered into a new seven year $2.2 million
agreement with a data servicing provider for its core application systems. The
conversion is planned to occur in the fourth quarter of 1998 and will address
Year 2000. Substantially all systems will be tested by year-end 1998. Management
believes its level of preparedness is appropriate.
In addition, certain commercial customers could experience problems
with their operations which could negatively effect their cash flow and ability
to handle their debt service. The Company is analyzing its portfolio and
surveying its commercial customers to determine the risks associated with the
Year 2000.
16
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(2) (1) (3) (2) (1) (3)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal funds sold............................... $ 537 $ 7 5.21 % $ 1,984 $31 6.25%
Interest bearing deposits with banks 3,455 48 5.56 1,069 14 5.24
Securities held-to-maturity...................... 8,159 172 8.43 8,805 189 8.59
Securities available for sale:
Taxable ....................................... 49,305 770 6.25 45,338 732 6.46
Tax-exempt .................................... 1,646 28 6.80 5,173 102 7.89
----- -- ------ ---
Total securities available for sale......... 50,951 798 6.26 50,511 834 6.60
Loans receivable (4) (5)....................... 184,049 3,981 8.65 176,641 3,873 8.77
------- ----- ------- -----
Total interest earning assets............... 247,151 5,006 8.10 239,010 4,941 8.27
Non-interest earning assets:
Cash and due from banks.......................... 6,111 5,687
Allowance for loan losses........................ (3,268) (2,701)
Other assets..................................... 10,527 15,652
------ ------
Total non-interest earning assets................ 13,370 18,638
------ -------
Total Assets........................................ $260,521 $257,648
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits................. $49,844 316 2.54 % $45,154 291 2.58
Savings deposits................................. 42,996 272 2.53 44,051 297 2.70
Time deposits.................................... 108,103 1,452 5.37 111,157 1,471 5.29
------- ----- -------- ------
Total interest bearing deposits............... 200,943 2,040 4.06 200,362 2,059 4.11
Short-term borrowings............................... 5,138 55 4.28 4,772 51 4.27
Other borrowings ................................... 2,000 30 6.00 2,442 54 8.85
----- -- ------- ---
Total interest bearing liabilities............... 208,081 2,125 4.08 207,576 2,164 4.17
Non-interest bearing liabilities:
Demand deposits.................................. 23,758 23,995
Other liabilities................................ 3,795 4,279
----- -----
Total non-interest bearing liabilities........ 27,553 28,274
------ ------
Stockholders' equity............................. 24,887 21,798
------ -------
Total Liabilities and Stockholders' Equity.......... $260,521 $257,648
======= =======
Net interest income (tax equivalent basis).......... 2,881 4.02% 2,777 4.10%
===== =====
Tax-equivalent basis adjustment..................... (72) (105)
---- ------
Net interest income................................. $ 2,809 $2,672
======= ======
Net interest margin (tax equivalent basis).......... 4.66% 4.65%
==== ====
</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) Annualized
(4) Loan balances include non-accrual loans and are net of unearned income.
(5) Loan yields include the effect of amortization of deferred fees, net of
costs.
17
<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)
--------------------------------------------
Three months ended March 31,1998 Compared to
Three months ended March 31, 1997
--------------------------------------------
Variance due to
--------------------------------------------
Volume Rate Net
----------------- ------- ----------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (20) $ (4) $ (24)
Interest bearing deposits with banks 3 1 34
Securities held to maturity (14) (3) (17)
Securities available for sale:
Taxable 167 (129) 38
Tax-exempt securities (62) (12) (74)
----- ----- -----
Total securities 106 (142) (36)
Loans 398 (290) 108
----- ----- -----
Total interest earning assets 503 (43 65
Interest bearing liabilities:
Interest bearing demand deposits 54 (29) 25
Savings deposits (7) (18) (25)
Time deposits (126) 107 (19)
----- ----- -----
Total interest bearing deposits (79) 6 (19)
Short-term borrowings 4 4
Other borrowings (9) (15 (24)
----- ----- -----
Total interest bearing liabilities (84) 45 (39)
Net interest income (tax-equivalent basis) $ 587 $(483) $ 104
===== ===== =====
- -------------
(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.
18
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and use of proceeds
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 28, 1998.
The following incumbent Class II directors were nominated for and duly elected
to the Board of Directors for a three-year term expiring in 2001:
Russell L. Ridd, 1,457,707 for, 13,272 withheld; Harold A. Shook,
1,452,297 for, 18,536 withheld; John J. Weidner, 1,433,281 for, 37,552 withheld
Item 5. Other Materially Important Events
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-Financial Data Schedule
(In electronic filing only)
(b) Reports on Form 8-k
None.
19
<PAGE>
Signatures
- ----------
Pursuant to the requirements of the Securities and 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: 4/30/98 By: /s/ William W. Davis, Jr.
------- --------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: 4/30/98 By: /s/ Lewis J. Critelli
------- --------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,534
<INT-BEARING-DEPOSITS> 1,685
<FED-FUNDS-SOLD> 2,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,532
<INVESTMENTS-CARRYING> 8,160
<INVESTMENTS-MARKET> 8,498
<LOANS> 183,501
<ALLOWANCE> 3,289
<TOTAL-ASSETS> 264,220
<DEPOSITS> 223,511
<SHORT-TERM> 7,185
<LIABILITIES-OTHER> 6,144
<LONG-TERM> 2,000
0
0
<COMMON> 180
<OTHER-SE> 25,200
<TOTAL-LIABILITIES-AND-EQUITY> 264,220
<INTEREST-LOAN> 3,977
<INTEREST-INVEST> 902
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 4,934
<INTEREST-DEPOSIT> 2,040
<INTEREST-EXPENSE> 2,125
<INTEREST-INCOME-NET> 2,809
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 1,957
<INCOME-PRETAX> 1,030
<INCOME-PRE-EXTRAORDINARY> 1,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 720
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.66
<LOANS-NON> 1,995
<LOANS-PAST> 43
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,250
<CHARGE-OFFS> 148
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 3,289
<ALLOWANCE-DOMESTIC> 3,289
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,547
</TABLE>
