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 June 30, 1999
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
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(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
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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 July 30, 1999
- ---------------------------------------
common stock, par value $0.10 per share 1,760,178
------------------------------------
<PAGE>
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page
Number
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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Materially Important Events 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, December 31,
1999 1998
---------- -----------
ASSETS
Cash and due from banks $ 7,111 $ 7,954
Interest bearing deposits with banks 216 1,284
Federal funds sold 2,350 3,360
Securities available for sale 74,623 62,270
Securities held-to-maturity (fair value of $7,913
and $8,528) 7,648 7,645
Loans receivable (net of unearned income) 195,335 186,919
Less: Allowance for loan losses 3,326 3,333
------- -------
Net loans receivable 192,009 183,586
Bank premises and equipment, net 6,943 7,076
Other real estate 99 204
Accrued interest receivable 1,378 1,441
Other assets 3,916 4,197
------- -------
TOTAL ASSETS $296,293 $279,017
======= =======
LIABILITIES
Deposits:
Noninterest-bearing demand $ 30,175 $ 27,264
Interest-bearing deposits 203,026 206,503
------- -------
Total deposits 233,201 233,767
Short-term borrowings 7,913 7,776
Other borrowings 22,000 2,000
Accrued interest payable 2,006 2,283
Other liabilities 4,556 5,463
------- -------
TOTAL LIABILITIES 269,676 251,289
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized
10,000,000 shares issued 1,803,824 shares 180 180
Surplus 4,580 4,542
Retained earnings 24,431 23,240
Treasury stock, at cost 1999 43,046 shares, (805) (343)
1998 22,347 shares
Unearned ESOP shares (1,474) (1,546)
Accumulated other comprehensive income (295) 1,655
------- -------
TOTAL STOCKHOLDERS' EQUITY 26,617 27,728
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 296,293 $ 279,017
======= =======
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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable including fees $ 3,984 $ 4,049 $ 7,886 $ 8,026
Securities 1,224 956 2,212 1,858
Federal funds sold and deposits with banks 16 13 47 68
------- ------- ------- -------
Total interest income 5,224 5,018 10,145 9,952
INTEREST EXPENSE
Deposits 1,912 1,961 3,895 4,001
Short-term borrowings 71 110 139 165
Other borrowed funds 225 30 272 60
------- ------- ------- -------
Total interest expense 2,208 2,101 4,306 4,226
------- ------- ------- -------
NET INTEREST INCOME 3,016 2,917 5,839 5,726
PROVISION FOR LOAN LOSSES 100 180 230 360
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,916 2,737 5,609 5,366
OTHER INCOME
Service charges and fees 284 262 563 492
Income from fiduciary activities 59 27 138 68
Net realized gain on sales of securities 34 -- 58 15
Other 55 119 130 191
------- ------- ------- -------
Total other income 432 408 889 766
OTHER EXPENSES
Salaries and employee benefits 1,003 963 1,992 1,926
Occupancy, furniture & equipment, net 292 302 562 629
Taxes, other than income 63 62 126 125
Other real estate owned operations 4 57 -- 76
Other 769 627 1,435 1,212
------- ------- ------- -------
Total other expenses 2,131 2,011 4,115 3,968
INCOME BEFORE INCOME TAXES 1,217 1,134 2,383 2,164
INCOME TAX EXPENSE 369 343 721 653
------- ------- ------- -------
NET INCOME $ 848 $ 791 $ 1,662 $ 1,511
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER $ 0.50 $ 0.47 $ 0.98 $ 0.90
======= ======= ======= =======
SHARE
Dividends per share $ 0.14 $ 0.12 $ 0.28 $ 0.24
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income Total
----- ------- -------- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $180 $4,542 $23,240 ($343) ($1,546) $1,655 $27,728
------
Net Income 1,662 1,662
Cash dividend declared
Change in unrealized gains (losses)
on securities available for sale,
net of reclassification adjustment
and tax effects (1,950) (1,950)
------
Total comprehensive income (288)
Cash dividends declared $.28 per share (471) (471)
Purchase of treasury stock (462) (462)
Release of earned ESOP shares 38 72 110
----- ----- ------ ----- ------ ----- ------
Balance, June 30, 1999 $ 180 $4,580 $24,431 $(805) $(1,474) $ (295) $26,617
===== ===== ====== ==== ====== ===== ======
</TABLE>
See accompanying notes to the unaudited financial statements
5
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1999 1998
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,661 $ 1,511
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 230 360
Depreciation 337 330
Amortization of intangible assets 104 136
Deferred income taxes (51) 1,399
Net realized gain on sales of securities (58) (15)
Gain (loss) on sale of other real estate, net 9 1
Net gain on sale of mortgage loans (3) (62)
Mortgage loans originated for sale (453) (4,539)
Proceeds from sale of mortgage loans 457 4,602
Decrease (increase) in accrued interest receivable 62 (9)
Increase (decrease) in accrued interest payable (276) (434)
Other, net 1,040 216
-------- --------
Net cash provided by operating activities 3,059 3,496
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 5,787 76
Proceeds from maturities and principal reductions on mortgage-
backed securities 10,255 4,702
Purchases (31,338) (12,590)
Securities held to maturity:
Proceeds from maturities -- --
Purchases -- --
Net decrease (increase) in loans (9,369) (2,562)
Purchase of bank premises and equipment, net (204) (100)
Proceeds from sales of other real estate 179 73
-------- --------
Net cash used in investing activities (24,689) (9,601)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (566) (1,342)
Net increase (decrease) in short term borrowings 2,137 9,293
Repayments of other borrowings -- --
Proceeds from other borrowings 18,000 --
Stock options exercised -- 37
Acquisition of treasury stock (462) --
Release of ESOP shares 72 98
Net cash dividends paid 470 (402)
-------- --------
Net cash used in financing activities 18,710 7,684
-------- --------
Increase (decrease) in cash and cash equivalents 2,920 1,579
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,598 10,924
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,677 $12,503
======== ========
</TABLE>
See accompanying notes to consolidated financial statement.
6
<PAGE>
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.
2. Estimates:
----------
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 and six month period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999 or any other period.
For additional information and disclosure required under generally
accepted accounting principals, reference is made to the Company's 1998 Annual
Report filed on Form 10-K (File No. 0-28366).
3. Earnings Per Share:
-------------------
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilative potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and are determined using the treasury stock
method.
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 period June 30, 1999 and 1998 were
$4,271,000 and $4,435,000 respectively. Cash payments for income taxes in 1999
were $360,000 compared to $15,000 in 1998. Non-cash investing activity for 1999
and 1998 included foreclosed mortgage loans transferred to real estate owned of
$83,000 and $600,000 respectively.
5. Recent Accounting Pronouncements:
---------------------------------
In June of 1999 the FASB issued Statement #137 which delayed the
implementation of Statement #133 "Accounting for Derivative Instruments and
7
<PAGE>
Hedging Activities" until January 1, 2001.
6. 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
Forward Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes, "anticipates," "contemplates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Financial Condition
- -------------------
General
- -------
Total assets at June 30, 1999 were $296.3 million, compared to $279.0
million at year-end 1998. The Company funded an $8.4 million growth in loans and
a $12.4 million increase in the securities with borrowings from the Federal Home
Loan Bank (FHLB). Deposits were flat during the period due to scheduled
maturities of time deposits of various local school districts, which was
replaced by growth in transaction accounts and retail time deposits.
Securities
- ----------
The fair value of securities available for sale at June 30, 1999 was
$74.6 million compared to $62.3 million at year-end. The Company utilized
borrowings from the FHLB to fund the purchase of $15 million of securities,
principally mortgage-backed issues. At current interest rate levels, the
transaction is expected to generate $148,000 of net interest income for 1999.
Interest rates increased during the second quarter of 1999 with the
benchmark 30 year treasury bill yielding over 6.00% compared to 5.00% in the
fourth quarter of 1998. This increase caused a slow down in the cash flow from
the repayment of mortgage-backed securities and extended the average life. At
June 30, 1999 the average life of the portfolio was 6.9 years compared to 4.2
years at year-end. Securities available for sale are carried at fair value.
Unrealized gains and losses are reported in other comprehensive income, net of
related deferred tax effect. Generally, in a raising rate environment the fair
value of the Company's portfolio decreases.
8
<PAGE>
Loans
- -----
Total loans receivable, which includes automobile leases, were $195.3
million at June 30, 1999 compared to $186.9 million at December 31, 1998, an
increase of $8.4 million or 4.5%. Commercial loans (including real estate)
increased $4.5 million during the period which includes $1.8 million of
short-term tax anticipation notes for local municipalities. The Company
continued to experience pay-offs in its residential adjustable rate mortgage
portfolio which was offset by fixed rate originations. Fixed rate mortgages
totaled $13.9 million at June 30, 1999 compared to $9.2 million at year-end.
With the increase in long-term interest rates which impacts residential mortgage
rates, the Company could expect to see lower level of mortgage originations in
the second half of 1999. There can be no assurances, however, as to the
direction of market rates of interest.
The Company has reduced the volume of automobile lease originations to
monitor its experience in early terminations, amount of off-lease vehicles
returned and the actual value of vehicles returned compared to residual values.
Total leases declined $2.8 million from December 31, 1998 to $31.1 million at
June 30, 1999. Residual losses totaled $123,000 for the six months. The Company
maintains a reserve for residual losses which totaled $352,750 at June 30, 1999
with residual value of $22.6 million. The lease residual losses incurred were
principally on short term, 24 month, leases. At June 30, the lease portfolio
totaled $31.1 million, of which $29.0 million had an original term of 36 months
or longer. Based on the mix of the portfolio, management believes the reserve is
adequate as of June 30, 1999.
Set forth below is selected data relating to the composition of the
loan portfolio at the dates indicated:
Types of loans
(dollars in thousands)
June 30, 1999 December 31, 1998
----------------- -----------------
$ % $ %
------- ------ -------- ------
Commercial, financial and agricultural $ 31,578 16.1% $ 25,539 13.6%
Real Estate-construction 3,386 1.7 3,046 1.6
residential 51,257 26.2 52,038 27.8
commercial 29,052 14.8 30,555 16.3
Leases to individuals 31,092 15.9 33,860 18.1
Installment loans to individuals 49,484 25.3 42,266 22.6
------- ----- ------- -----
Total loans 195,849 100.0% 187,304 100.0%
Less: Unearned income 514 385
Allowance for loan losses 3,326 3,333
------- -------
Total loans, net $192,009 $183,586
======= =======
9
<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 At or for the Six
(dollars in thousands) Months Ended June 30 Months Ended June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 3,342 $ 3,289 $ 3 333 $ 3,250
Provision for loans losses 100 180 230 360
Charge-offs (196) (234) (351) (397)
Recoveries 80 25 114 47
------- ------- ------- -------
Net charge-offs (116) (209) (237) (350)
------- ------- ------- -------
Balance at end of period $ 3,326 $ 3,260 $ 3,326 $ 3,260
======= ======= ======= =======
Allowance to total loans 1.70% 1.75% 1.70% 1.75%
Net charge-offs to average loans
(annualized) .24% .45% .25% .38%
The allowance for loan losses totaled $3,326,000 at June 30, 1999
and represented 1.70% of total loans, $3,333,000 at year-end and $3,260,000 at
June 30, 1998. The provision for loan losses for the six months was $230,000,
compared to $360,000 for the six months of 1998. 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. The Company also
performs reviews of Year 2000 preparedness of its larger borrowers. See also
"Year 2000". Management considers the allowance adequate at June 30, 1999 based
on the loan mix and level of classifications.
At June 30, 1999, the recorded investment in loans which are
considered to be impaired in accordance with Statement of Financial Accounting
Standards Nos. 114 and 118 was $737,000 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.
At June 30, 1999, non-performing loans totaled $460,000 which
is .24% of total loans decreasing from $622,000, or .33% of total loans at
December 31, 1998.
10
<PAGE>
The following table sets forth information regarding non-performing loans and
other real estate owned at the date indicated:
June 30, December 31,
1999 1998
---------- -----------
(dollars in thousands)
Loans accounted for on a non-accrual
Basis:
Commercial and all other $109 $ 65
Real Estate 323 503
Consumer 7 20
---- ----
Total 439 588
Accruing Loans which are contractually past due 90 days
or more 21 34
---- ----
Total non-performing loans $460 $622
Other real estate owned 99 204
---- ----
Total non-performing assets $559 $826
==== ====
Allowance for loan losses as a percent
of non-performing loans 723.0% 535.8%
Non-performing loans to total loans .24% .33%
Non-performing assets to total assets .19% .30%
Deposits and Other Borrowings
- -----------------------------
Total deposits at June 30, 1999 were $233.2 million compared to
$233.8 million at December 31, 1998. The decrease was principally due to
scheduled maturities of short-term time deposits of school districts and other
local municipalities. These accounts decreased to $17.7 million from $27.5
million at year-end 1998.
A new retail time deposit product with a 30 month term and
penalty-free withdrawal anytime after 12 months generated $10.6 million with
approximately $4 million of the funds from external sources. Transaction
accounts increased $8.2 million principally due to seasonal fluctuations in
certain large commercial accounts and increased retail accounts.
Other borrowings totaled $22 million at June 30, 1999 increasing from
$4 million at year-end. The increase consists of term borrowings from the FHLB
as follows:
11
<PAGE>
Balance Original Term Rate Maturity
------- ------------- ---- --------
$2,000,000 2 year 6.04% 12/99
2,000,000 1 year 5.01 11/99
5,000,000 10 year/3 year call feature 5.07 4/02
5,000,000 90 day 4.99 7/99
5,000,000 10 year/2 year call feature 4.83 4/01
3,000,000 60 day 5.21 8/99
---------- ----
$22,000,000 5.10%
========== ====
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at June 30, 1999, was $26,617,000 compared
to $27,728,000 at December 31, 1998. A comparison of the Company's capital
ratios is as follows: The decrease in capital is due in part to stock repurchase
program announced in April in which up to 3% of shares would be repurchased. As
of June 30, 1999, the Company had acquired 20,699 shares at a cost of $463,000.
June 30, 1999 December 31, 1998
------------- -----------------
Tier 1 Capital
(To average assets) 9.24% 9.09%
Tier 1 Capital
(To risk-weighted assets) 12.23% 12.30%
Total Capital
(To risk-weighted assets) 13.84% 14.00%
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 June 30, 1999 and December 31, 1998.
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 June 30, 1999, the Company had cash and cash equivalents of $9.7
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 $74.6 million which could be used for liquidity needs. This totals $84.3
million and represents 28.5% of total assets, increasing from 26.8% at year-end.
The Company also monitors other liquidity measures all of which were within
Company policy guidelines at June 30, 1999.
12
<PAGE>
The Company believes its liquidity position is adequate.
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 borrowing capacity from FHLB was in excess of $46.7 million
as of March 31, 1991. At June 30, 1999 the Company had $22 million in borrowings
from the FHLB.
13
<PAGE>
Results of Operation
Comparison of Operating Results for Six Months Ended June 30, 1999 and
- ----------------------------------------------------------------------
June 30, 1998
- -------------
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
--------------------------- ---------------------------
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............................... $1,742 $37 4.25% $312 $9 5.77%
Interest bearing deposits with banks 924 10 2.16 2,333 59 5.06
Investment Securities............................ 7,647 327 8.55 8,158 342 8.38
Investment Securities available for sale:
Taxable ....................................... 64,061 1,938 6.05 51,553 1,593 6.18
Tax-exempt .................................... 2,615 87 6.65 1,746 58 6.64
------- ------ ------ ------
Total Investment securities available for sale 66,676 2,025 6.07 53,299 1,651 6.20
Loans receivable............................... 191,632 7,901 8.25 184,861 8,032 8.69
------- ------ ------- -----
Total interest earning assets............... 268,621 10,300 7.67 248,963 10,093 8.11
Non-interest earning assets:
Cash and due from banks.......................... 6,981 6,138
Allowance for loan losses........................ (3,344) (3,258)
Other assets..................................... 12,746 11,785
------ ------
Total non-interest earning assets................ 16,383 14,665
------ -------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits................. $55,709 663 2.38% $51,062 641 2.51
Savings deposits................................. 42,084 455 2.16 42,593 532 2.50
Time deposits.................................... 107,394 2,776 5.17 105,345 2,828 5.37
------- ------ -------- ------
Total interest bearing deposits............... 205,187 3,894 3.80 199,000 4,001 4.02
Short-term borrowings............................... 7,485 162 4.33 7,234 165 4.56
Other borrowings ................................... 10,204 250 4.90 2,000 60 6.00
------ ------ ------- ------
Total interest bearing liabilities............... 222,876 4,306 3.86 208,234 4,226 4.06
Non-interest bearing liabilities:
Demand deposits.................................. 26,431 24,835
Other liabilities................................ 7,808 5,193
----- -----
Total non-interest bearing liabilities........ 34,239 30,028
------ ------
Stockholders' equity............................. 27,889 25,366
------ -------
Total Liabilities and Stockholders' Equity.......... $285,004 $263,628
======= =======
Net interest income (tax equivalent basis).......... 5,994 3.80% 5,867 4.05%
===== ====
Tax-equivalent basis adjustment..................... (155) (141)
------ -----
Net interest income................................. $5,839 $5,726
====== ======
Net interest margin (tax equivalent basis).......... 4.46% 4.71%
==== ====
</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.
14
<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
------------------------------
Six months ended June 30, 1999
Compared to
Six months ended June 30, 1998
------------------------------
Variance due to
------------------------------
Volume Rate Net
--------- --------- --------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ 35 $ (7) $ 28
Interest bearing deposits with banks (25) (24) (49)
Securities (32) 17 (15)
Securities available for sale:
Taxable 441 996) 345
Tax-exempt 29 0 29
------- ------- -------
Total securities available for sale 469 (95) 374
Loans receivable 631 (762) 131
Total interest earning assets 1,078 (871) 207
Interest bearing liabilities:
Interest bearing demand deposits 99 (77) 22
Savings deposits (6) (46) (69)
Time deposits 126 (178) (52)
------- ------- -------
Total interest bearing deposits 219 (326) (107)
Other borrowed funds 12 (15) (3)
Other borrowings 224 (34) 190
------- ------- -------
Total interest bearing liabilities 455 (375) 80
Net interest income (tax-equivalent basis) $ 623 $ (496) $ 127
======= ======= =======
- ----------------------
(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.
General
- -------
For the six months ended June 30, 1998, net income totaled
$1,662,000 or $.98 per share (basic and diluted) compared to $1,511,000 or $.90
earnings per share (basic and diluted)earned in 1998. The resulting return on
average assets and return on average equity were 1.17% and 11.92% respectively
compared to 1.15% and 11.92%
15
<PAGE>
respectively for the corresponding period in 1998. The Company paid dividends of
$.28 per share in 1999 compared to $.24 per share in 1998.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte)
for the six months of 1999 was $5,994,000, compared to $5,867,000 for the
similar period in 1998. The resultant fte net interest spread and net interest
margin for 1999 was 3.80% and 4.46%, respectively compared to 4.05% and 4.71%
respectively in 1998.
The decrease in net interest spread was principally the result
of lower yields on earning assets, 7.67%, declining 44 basis points from 8.10%
in 1998. This was partially offset by a decrease of 20 basis points in the cost
of interest-bearing liabilities, at 3.86% in the current period compared to
4.06% in 1998.
Interest income on an fte basis totaled $10,300,000 for the
six months of 1999 compared to $10,093,000 in 1998. A $19.7 million increase in
average earning assets was partially offset by decline in asset yields.
Total loans averaged $191.6 million for the six months of 1999
with interest income of $7,901,000 and a yield of 8.25% compared to $184.9
million, $8,032,000 and 8.69% in 1998. The decrease in yield was partially due
to a lower prime rate of 7.75% decreasing from 8.50% in 1998. The prime rate
change immediately impacts $31.5 million of floating rate loans. Also, during
the lower interest rate environment of third and fourth quarter of 1998, higher
yielding adjustable rate residential mortgages experienced significant
pre-payments and were replaced by lower yielding fixed rate mortgages. At June
30, 1999, adjustable rate mortgages were $24.6 million and fixed rate were $13.9
million compared to $32.3 million adjustable and $5.6 million fixed at June 30,
1998.
Securities available for sale averaged $66.7 million with
interest income of $2,025,000 and yield of 6.07% for 1999 compared to $53.3
million, $1,651,000 and 6.20% for six months 1999.
Total interest expense was $4,306,000 compared to $4,226,000
in 1998. The Company has taken steps to reduce its interest expense by
decreasing rates paid on interest bearing checking, money market accounts and
savings. As a result, the cost of interest-bearing deposits decreased to 3.80%
in 1999, from 4.06% in 1998. The Company funded earning asset growth with other
borrowings which averaged $10.2 million at 4.90% compared to $2 million in 1998.
Other Income
- ------------
Other income, excluding net realized gains on sales of
securities of $58,000, totaled $831,000 for 1999, an increase of $80,000 or
10.4% over $751,000 in 1998. Income from fiduciary activities was $138,000 for
the period compared to $68,000 in 1998, with the increase principally due to
estate and trust termination fees. The Company, through its subsidiary Norwood
Investment Corp. generated revenues of $48,000 on the commissions from sales of
annuities, mutual funds and discount brokerage decreasing from $67,000 in 1998
on lower volume. Service charges and fees increased to $563,000 from $492,000,
an increase of 14% principally due to a higher level of retail checking accounts
and loan related fees.
16
<PAGE>
Net realized gains on sales of securities transactions were
$58,000 for the period compared to $15,000 in 1998.
Other Expenses
- --------------
Other expenses totaled $4,115,000 for the six months ended
June 30, 1999 an increase of $147,000 or 3.7% over $3,968,000 in 1998. Staffing
costs were $1,992,000, increasing 3.4% over prior year with total full-time
equivalents of 120 at June 30, 1999 compared to 111 at June 30, 1998. This
includes 5 additions for a new branch opened in June of 1998. Data processing
costs totaled $201,000 compared to $115,000 in 1998 principally due to recurring
costs associated with new application systems installed in the fourth quarter of
1998 and one-time costs related to ATM and leasing conversions. For the period,
provision for lease residual losses and actual losses incurred totaled $168,000
increasing from $60,000 in 1998. With improvement in loan quality, legal and
other costs related to non-performing assets were $12,000, declining from
$132,000 in 1998.
Income Tax Expense
- ------------------
Income tax expense totaled $721,000 for an effective tax rate
of 30.2% compared to $653,000 and 30.2% in 1998. The increase in income tax
expense was due to higher pre-tax income.
Comparison of Operating Results for the Three Months ended June 30, 1999 and
- ----------------------------------------------------------------------------
June 30, 1998
- -------------
General
- -------
For the three months ended June 30, 1999, net income was
$848,000 or $.50 per share (basic and diluted) compared to $791,000, or $.47 per
share (basic and diluted) earned in the first quarter of 1998. The resulting
return on average assets and return on average equity for the quarter were 1.16%
and 12.20% respectively compared to 1.19% and 12.29% respectively for the
corresponding period in 1998. The Company paid dividends of $.14 per share in
1999 compared to $.12 per share in 1998.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte)
for the second quarter of 1999 was $3,094,000 compared to $2,986,000 for the
similar period in 1998. The resultant fte net interest spread and net interest
margin for the three months of 1999 was 3.72% and 4.35%, respectively compared
to 4.08% and 4.76% respectively in 1998.
The decrease in net interest spread was principally the result
of lower yields on earning assets, 7.45%, declining 61 basis points from 8.06%
in 1998. This was partially offset by a decrease of 25 basis points in the cost
of interest-bearing liabilities, at 3.73% in the current period compared to
3.98% in 1998.
Interest income on an fte basis totaled $5,302,000 for the
three months of 1999 compared to $5,087,000 in 1998. A $32 million increase in
average earning assets was partially offset by decline in asset yields.
Earning asset yields for loans and securities were lower for
the second quarter of 1999 compared to 1998. However, interest rates did
increase during the
17
<PAGE>
quarter, with prime rate increasing 25 basis points from 7.75% to 8.00%
effective July 1, 1999. In addition, residential mortgage rates also increased
during the quarter as well as yields on securities purchased. With these
increases in rates, the Company could expect the earning asset yield to show an
increasing trend during the third quarter.
Total interest expense for the quarter was $2,208,000 compared
to $2,101,000 in 1998. The Company during the first quarter reduced its interest
expense by decreasing rates paid on interest bearing checking money market
accounts and savings. As a result, the cost of interest-bearing deposits
decreased to 3.74% in the second quarter of 1999, from 3.96% in 1998. Increasing
interest rates could effect the cost of short-term borrowings in the third
quarter.
Other Income
- ------------
Other income, excluding net realized gains on sales of
securities of $34,000, totaled $398,000 for the second quarter of 1999, compared
to $408,000 in 1998. Income from fiduciary activities was $59,000 for the period
compared to $27,000 in the 1998 quarter. The Company, through its subsidiary
Norwood Investment Corp generated revenues of $18,000 on the commission from
sales of annuities, mutual funds and discount brokerage, compared to $54,000 in
1998. The second quarter of 1998 had significant volume which was not attained
in 1999. This subsidiary has introduced new products for the third quarter
including life insurance and long-term care which could have a positive effect
on revenue. Success of these new products however is subject to various factors
including competition, economic conditions and overall marketing efforts.
Net realized gains on sales of securities transactions were
$34,000 for the quarter compared to no transactions in 1998.
Other Expenses
- --------------
Other expenses totaled $2,131,000 for the second quarter of
1999 compared to $2,011,000 in 1998, an increase of $120,000 or 6%. The quarter
had $38,000 of costs, including certain one-time costs, related to opening a new
branch office in Stroudsburg, Monroe County. During the quarter the Company
completed its conversion of ATM and automobile leasing processing and incurred
$18,000 of one-time costs. Expenses going forward are expected to decrease for
ATM and leasing processing due to new processing companies. The Company had
training costs of $28,000 related principally to new application systems.
Provision for lease residual losses totaled $90,000 compared to $30,000 in 1998.
Legal and other costs related to non-performing assets were $15,000 declining
from $76,000 in 1998.
Income Tax
- ----------
Income tax expense totaled $369,000 for an effective tax rate
of 30.3% compared to $343,000 and 30.2% in 1998. The increase in income tax
expense was due to higher pre-tax income.
Year 2000
- ---------
The following discussion of the implications of the year 2000
problem for the Bank contains forward looking statements based on uncertain
information. The cost
18
<PAGE>
of the project and the date on which the Bank plans to complete the internal
year 2000 modifications are based on management's estimates, utilizing number of
assumptions including the continued availability of internal and external
resources, third party modifications and other factors. However, there can be no
guarantee that failure to modify the systems would not have a material adverse
effect on the Bank or the Company.
The Company has implemented a Year 2000 project plan which is
administered by a Senior Executive and is overseen by the Board of Directors. As
a major component of its Year 2000 preparedness, during 1998, The Company
entered into a seven year, $2.2 million agreement with a data servicing
provider, FiServ, for its core application systems. The conversion occurred on
October 31, 1998. FiServ has represented that the software being utilized for
the Company's operations is Year 2000 compliant. Furthermore, software provided
by FiServ is supported by a contractual agreement that states the software will
be Year 2000 compliant prior to January 1, 2000. The Company has also
participated in testing with FiServ in conjunction with its other bank clients.
The Company has also tested its IBM operating system, item processing software
and the Federal Reserve for wire transfer. Testing has been performed on the
Sungard System which processes the Company's trust accounts. The results of the
testing indicate the ability of systems to process after the century date
change.
Since the beginning of 1998, the Company also purchased
$400,000 of personal computers and communications and network monitoring
equipment to replace existing networks which may not have effectively handled
the Year 2000. The Company has also recently converted its ATM processing to the
Mellon Network Services and its auto leasing operations to a new processor.
Major commercial loans customers (loan balances in excess of
$500,000) have been contacted in writing and interviewed to determine any
potential exposure that might be present due to the customer's failure to
prepare adequately for the Year 2000. Any potential risk exposure will be
identified and adequate consideration given to adjusting the loan loss
provision. As of June 30, 1999, the Company has not allocated any Allowance for
Loan Losses specifically for Year 2000. The Company's allowance for loan losses
is considered adequate as of June 30, 1999. As a practical matter, individual
mortgage loan, consumer loan and smaller commercial loan customers were not
contacted regarding their Year 2000 readiness. Further, most of these are
individuals with adequate collateral for their loans.
Customer awareness is also a component of the Year 2000 plan,
and the Company has distributed brochures in the third quarter of 1998 and a
second mailing of new material occurred in the first quarter of 1999. The
Company in a joint effort with other local banks, is planning additional
education efforts throughout the remainder of 1999. The Company has video on Y2K
issues available for viewing at
19
<PAGE>
certain locations. All employees are trained and informed on the Bank's
progress.
The Company has contacted all other material vendors and
suppliers regarding their Year 2000 readiness. These third parties have given
assurance to the Company that they expect to be Year 2000 compliant prior to the
Year 2000. The Company has also contacted all significant customers and
non-information technology suppliers (i.e. utility systems, telephone systems,
etc.), regarding their year 2000 state of readiness. The Company is unable to
test the Year 2000 readiness of its significant suppliers of utilities and is
relying on utility companies' internal testing and representations to provide
the required services that drive the Company's data systems and physical plant.
No contracts, written assurances, or oral assurances with the Company's material
vendors, systems providers, and suppliers include any type of remedy or penalty
for breach of contract in the event that any of these parties are not year 2000
compliant.
Contingency and business resumption plans have been developed
and will be tested during 1999. The contingency plans address actions the
Company may take as a result of failure in various systems. The Company's plans
include an evaluation of key services, prioritization of critical functions,
re-deployment and additions to staff, offsite plans and alternative procedures
for processing critical functions. The Company has also established liquidity
contingency plans. The Company is evaluating cash levels and analyzing expected
demand for cash.
The Federal Financial Institutions Examination Council (FFIEC)
had a target date of June 30, 1999 in which financial institutions testing of
mission-critical systems should be completed and implementation of
mission-critical systems should be substantially complete. Also, financial
institutions should also have substantially completed the development of these
business resumption contingency plans and designed a method of validation. The
Company has met the June 30, 1999 requirements of the FFIEC. The Company,
through its subsidiary Wayne Bank has received extensive examinations,
information and guidance from various banking regulatory agencies.
The following, among other things, could negatively affect the
Bank:
(a) utility service companies may be unable to provide the
necessary service to drive our data systems or provide
sufficient sanitary conditions for our offices;
(b) our primary software provider could have a major
malfunction in its system or their service could be
utility providers, or somecombination of the two; or
20
<PAGE>
(c) the Bank may have to transact its business manually.
The Bank will attempt to monitor these uncertainties by
continuing to request an update on all critical and important vendors throughout
the remainder of 1999. If the Bank identifies any concern related to any
critical or important vendor, the contingency plans will be implemented
immediately to assure continued service to the Bank's customers.
Despite the best efforts of management to address this issue,
the vast number of external entities that have direct and indirect business
relationships with the Bank, such as utilities, customers, vendors, payment
system providers and other financial institutions, makes it impossible to assure
that a failure to achieve compliance by one or more of these entities would not
have material adverse impact on the operations of the Bank.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 June 30, 1999, the
level of net interest income at risk in a 200 basis points increase or decrease
was within the Company's policy limits.
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.
21
<PAGE>
At June 30, 1999, the Bank had a negative 30 day gap position
of $7.1 million, or 2.4% of total assets. A negative gap means that
interest-sensitive liabilities are greater than interest-sensitive assets at the
time interval. This would generally indicate that in an increasing rate
environment the cost of interest-bearing liabilities would increase faster than
the yield on earning assets. This risk is managed by ALCO strategies, including
investment portfolio structure, lagging the pricing changes 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.
22
<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 Information
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.
23
<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: 8/3/99 By:/s/ William W. Davis, Jr.
------------------------ -------------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: 8/3/99 By: /s/ Lewis J. Critelli
------------------------ -------------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 7,111
<INT-BEARING-DEPOSITS> 216
<FED-FUNDS-SOLD> 2,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,623
<INVESTMENTS-CARRYING> 7,648
<INVESTMENTS-MARKET> 7,913
<LOANS> 195,335
<ALLOWANCE> 3,326
<TOTAL-ASSETS> 296,293
<DEPOSITS> 233,201
<SHORT-TERM> 7,913
<LIABILITIES-OTHER> 6,562
<LONG-TERM> 22,000
0
0
<COMMON> 180
<OTHER-SE> 26,437
<TOTAL-LIABILITIES-AND-EQUITY> 296,293
<INTEREST-LOAN> 7,886
<INTEREST-INVEST> 2,212
<INTEREST-OTHER> 47
<INTEREST-TOTAL> 10,145
<INTEREST-DEPOSIT> 3,895
<INTEREST-EXPENSE> 4,306
<INTEREST-INCOME-NET> 5,839
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 58
<EXPENSE-OTHER> 4,115
<INCOME-PRETAX> 2,383
<INCOME-PRE-EXTRAORDINARY> 2,383
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,662
<EPS-BASIC> .98
<EPS-DILUTED> .98
<YIELD-ACTUAL> 4.46
<LOANS-NON> 439
<LOANS-PAST> 18
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,333
<CHARGE-OFFS> 351
<RECOVERIES> 114
<ALLOWANCE-CLOSE> 3,326
<ALLOWANCE-DOMESTIC> 3,326
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,173
</TABLE>
