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, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28366
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Norwood Financial Corp.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570)253-1455
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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 31, 2000
--------------------------------------- -------------------------------
common stock, par value $0.10 per share 1,743,935
<PAGE>
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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 Qualitative and Quantitative Disclosures about market risk 16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Materially Important Events 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,858 $ 8,430
Interest bearing deposits with banks -- 398
Federal funds sold -- 1,970
Securities available for sale 82,726 78,875
Securities held-to-maturity (fair value 2000: $7,549
1999; $7,411) 7,480 7,477
Loans receivable (net of unearned income) 211,551 205,160
Less: Allowance for loan losses 3,381 3,344
--------- ---------
Net loans receivable 208,170 201,816
Bank premises and equipment, net 6,305 6,739
Other real estate 83 110
Accrued interest receivable 1,742 1,646
Other assets 7,161 7,366
--------- ---------
TOTAL ASSETS $ 320,525 $ 314,827
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 30,608 $ 26,848
Interest-bearing deposits 211,246 216,659
--------- ---------
Total deposits 241,854 243,507
Short-term borrowings 17,601 8,600
Other borrowings 28,000 30,000
Accrued interest payable 2,285 2,385
Other liabilities 2,878 3,681
--------- ---------
TOTAL LIABILITIES 292,618 288,173
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1,803,824 shares 180 180
Surplus 4,617 4,603
Retained earnings 27,292 25,763
Treasury stock, at cost (59,889 shares) (1,214) (1,214)
Unearned ESOP shares (1,280) (1,359)
Accumulated other comprehensive income (loss) (1,688) (1,319)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,907 26,654
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 320,525 $ 314,827
========= =========
</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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable including fees $ 4,498 $ 3,984 $ 8,807 7,886
Securities 1,452 1,224 2,854 2,212
Federal funds sold and deposits
with banks 4 16 11 47
------- ------- ------- -------
Total interest income 5,954 5,224 11,672 10,145
INTEREST EXPENSE
Deposits 2,043 1,912 4,109 3,895
Short-term borrowings 84 71 166 139
Other borrowed funds 527 225 978 272
------- ------- ------- -------
Total interest expense 2,654 2,208 5,253 4,306
------- ------- ------- -------
NET INTEREST INCOME 3,300 3,016 6,419 5,839
PROVISION FOR LOAN LOSSES 120 100 215 230
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,180 2,916 6,204 5,609
OTHER INCOME
Service charges and fees 354 284 718 563
Income from fiduciary activities 87 59 154 138
Net realized gains on sales of securities -- 34 1 58
Other 169 57 315 141
------- ------- ------- -------
Total other income 610 434 1,188 900
OTHER EXPENSES
Salaries and employee benefits 1,081 1,003 2,155 1,992
Occupancy, furniture & equipment, net 319 292 639 562
Data processing related 115 113 209 202
Taxes, other than income 68 63 134 126
Professional fees 85 48 156 83
Other 851 614 1,596 1,161
------- ------- ------- -------
Total other expenses 2,519 2,133 4,889 4,126
INCOME BEFORE INCOME TAXES 1,271 1,217 2,503 2,383
INCOME TAX EXPENSE 347 369 691 721
------- ------- ------- -------
NET INCOME $ 924 $ 848 $ 1,812 $ 1,662
======= ======= ======= =======
BASIC AND DILUTED
EARNINGS PER SHARE $ 0.56 $ 0.50 $ 1.09 $ .98
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income (loss) Total
----- ------- -------- ----- ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $180 $4,603 $25,763 ($1,214) ($1,359) ($1,319) $26,654
Comprehensive income:
Net Income 1,812 1,812
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustment and tax effects (369) (369)
-------
Total comprehensive income 1,443
-------
Cash dividends declared, $.17 per share (283) (283)
Release of earned ESOP shares 14 79 93
---- ------ ------- ------- ------- ------- -------
Balance, June 30, 2000 $180 $4,617 $27,292 ($1,214) ($1,280) (1,688) $27,907
==== ====== ======= ======= ======= ======== =======
</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,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,812 $ 1,662
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 215 230
Depreciation 328 337
Amortization of intangible assets 89 104
Deferred income taxes (742) (51)
Net realized gain on sales of securities (1) (58)
Gain(loss) on sale of other real estate, net 27 9
Gain on sale of premises & equipment (97) --
Net gain on sale of mortgage loans (4) (3)
Mortgage loans originated for sale (636) (453)
Proceeds from sale of mortgage loans 640 457
Decrease (increase) in accrued interest receivable (96) 62
Increase (decrease) in accrued interest payable (100) (276)
(Increase) in cash surrender value of life insurance (83) --
Other, net 1,015 1,038
-------- --------
Net cash provided by operating activities 2,367 3,058
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 2,002 5,787
Proceeds from maturities and principal reductions on
mortgage-backed securities 2,814 10,255
Purchases (9,232) (31,338)
Net decrease (increase) in loans (7,148) (9,369)
Purchase of bank premises and equipment, net (163) (204)
Proceeds from sales of other real estate 374 179
-------- --------
Net cash used in investing activities (11,353) (24,690)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,653) (566)
Net increase (decrease) in short term borrowings 9,002 2,137
Proceeds from other borrowings -- 18,000
Repayments of other borrowings (2,000) --
Acquisition of treasury stock -- (462)
Release of ESOP shares (20) 72
Cash dividends paid (283) (470)
-------- --------
Net cash used in financing activities 5,046 18,711
-------- --------
(Decrease) in cash and cash equivalents (3,940) (2,921)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,798 12,598
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,858 $ 9,677
======== ========
</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.
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 periods
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000 or any other interim period.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by reference in
the Company's Annual Report on Form 10-K for the year-ended December 31, 1999.
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 dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and are determined using the treasury stock
method. For the three months and six months ended June 30, 2000 and 1999, there
was no dilutive effect on earnings per share.
4. Cash Flow Information
---------------------
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-bearing deposits with banks and
federal funds sold.
Cash payments for interest for the period June 30, 2000 and 1999 were
$5,353,000 and $4,435,000 respectively. Cash payments for income taxes in 2000
were $1,112,000 compared to $383,000 in 1999. Non-cash investing activity for
2000 and 1999 included foreclosed mortgage loans transferred to real estate
owned and repossession of other assets of $553,000 and $754,000, respectively.
5. Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for the prior period have been reclassified to
conform to the current period's presentation. Such reclassifications did not
affect net income.
6. Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which was
amended by Statement No. 137 and Statement No. 138 and which becomes effective
for the Company January 1, 2001. The adoption of the Statement is not expected
to have a significant impact on the financial condition or results of operations
of the Company.
7
<PAGE>
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, Year 2000 issues 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.
Changes in Financial Condition
------------------------------
General
-------
Total assets at June 30, 2000 were $320.5 million, compared to $314.8
million at year-end 1999.
Securities
----------
The fair value of securities available for sale at June 30, 2000 was $82.7
million, compared to $78.9 million at year-end 1999. The increase was
principally due to purchases of short-term securities and tax-exempt municipal
issues. Total purchases for the period were $9.2 million with maturities and
cashflows of $4.8 million.
Loans
-----
Total loans receivable, which include automobile leases, were $211.6
million at June 30, 2000 compared to $205.2 million at December 31, 1999, an
increase of $6.4 million. The increase was after $1.5 million of a commercial
loan participation sold and $636,000 of residential mortgages sold in the
secondary market. Indirect lending, principally in used automobiles, increased
$6.7 million to total $51.8 million at June 30, 2000.
The Company no longer originates automobile leases, and as a result the
portfolio declined $5.7 million from December 31, 1999 to $18.3 million at June
30, 2000, which includes residual value of $14.8 million, at June 30, 2000
declining from $17.8 million at year-end. The Company liquidates its returned
off-lease vehicles through various used car dealers and automobile auction
centers. At June 30, 2000 the Company had an inventory of vehicles to liquidate
of $787,000. Total losses incurred on sales of off-lease vehicles was $399,000
for the year-to-date. The Company's reserve for future residual value losses as
classified in other liabilities was $411,000 at June 30, 2000 and compared to
$311,000 at December 31, 1999.
8
<PAGE>
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>
June 30 , 2000 December 31, 1999
------------------------ ------------------------
$ % $ %
-------------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Real Estate-Residential $ 61,931 29.2 $ 56,984 27.7
Commercial 52,409 24.7 49,796 24.2
Construction 1,347 .6 3,339 1.6
Commercial, financial and agricultural 15,556 7.3 17,440 8.5
Consumer loans to individuals 62,355 29.6 54,026 26.3
Lease financing, net of unearned income 18,327 8.6 23,974 11.7
-------- ------- -------- ------
Total loans 211,925 100.0% 205,559 100.0%
Less:
Unearned income and deferred fees 374 399
Allowance for loan losses 3,381 3,344
-------- --------
Total loans, net $208,170 $201,816
======== ========
</TABLE>
Allowance for Loan Losses and Non-performing Assets
---------------------------------------------------
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
At or for the Three At or for Six Months
(dollars in thousands) Months Ended June 30 Ended June 30
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning $ 3,348 $ 3,342 $ 3,344 $ 3,333
Provision for loan losses 120 100 215 230
Charge-offs (139) (196) (337) (351)
Recoveries 52 80 159 114
------- ------- ------- -------
Net charge-offs (87) (116) (178) (237)
------- ------- ------- -------
Balance, ending $ 3,381 $ 3,326 $ 3,381 $ 3,326
======= ======= ======= =======
Allowance to total loans 1.60% 1.70% 1.60% 1.72%
Net charge-offs to average loans
(annualized) .17% .24% 0.17% 0.25%
</TABLE>
The allowance for loan losses totaled $3,381,000 at June 30, 2000 and
represented 1.60% of total loans, compared to $3,344,000 at year-end, and
$3,326,000 at June 30, 1999. As a result of the decrease in net charge-offs the
provision for loan losses for the six months ended June 30, 2000 was $215,000,
compared to $230,000 for 1999. Management's loan review function assesses the
adequacy
9
<PAGE>
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. Management considers the allowance adequate at June 30,
2000 based on the loan mix and level of classifications. However, there can be
no assurance that the allowance for loan losses will be adequate to cover
significant losses, if any, that might be incurred in the future.
At June 30, 2000, non-performing loans totaled $551,000, which is
.26% of total loans decreasing from $657,000, or .32% of total loans at December
31, 1999. The following table sets forth information regarding non-performing
loans and other real estate owned at the date indicated:
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Loans accounted for on a non-accrual
basis:
Commercial and all other $ 64 $ 64
Real Estate 487 513
Installment - 19
-------- -------
Total 551 596
Accruing loans which are contractually
past due 90 days or more - 61
-------- -------
Total non-performing loans $ 551 $ 657
Other real estate owned 83 110
-------- -------
Total non-performing assets $ 634 $ 767
======== =======
Allowance for loan losses as a
percent of non-performing loans 613.6% 508.9%
Non-performing loans to total loans .26% .32%
Non-performing assets to total assets .20% .24%
</TABLE>
Deposits
--------
Total deposits at June 30, 2000 were $241.9 million compared to
$243.5 million at December 31, 1999. The decrease was principally due to
scheduled maturities of school district time deposits which declined $12 million
from December 31, 1999. This decrease was partially offset by seasonal increase
in transaction accounts for summer camps and property owners associations. Core
deposits, which excludes time deposits in denominations of $100,000 or more,
totaled $223.7 million at June 30, 2000 compared to $211.1 million at year-end.
In addition, the Company had $7.6 million of commercial cash management accounts
included in short-term borrowings, which represents excess funds invested in
overnight securities. The Company considers these balances as core funding.
10
<PAGE>
Other Borrowings
----------------
Other borrowings consisted of the following:
Notes with the Federal Home Loan Bank (FHLB)
June 30, 2000
-------------
Fixed note due February 2001 6.46% $ 6,000
Convertible note due April 2005 6.13% 5,000
Fixed note due August 2000 6.35% 2,000
Convertible note due December 2006 6.19% 5,000
Convertible note due April 2009 4.83% 5,000
Convertible note due April 2009 5.07% 5,000
-------
$28,000
=======
The Bank has a maximum borrowing capacity with the FHLB of $76.5 million.
Stockholders' Equity and Capital Ratios
---------------------------------------
At June 30,2000, total stockholders' equity totaled $27.9 million, an
increase of $1.3 million from year-end 1999. The net increase in stockholders'
equity was primarily due to $1,812,000 in net income, that was partially offset
by $283,000 of dividend payments and $369,000 of other comprehensive loss due to
a decline in market value of the available for sale securities (primarily the
mortgage-backed securities portfolio). The decrease in market value of the
investment securities available for sale will not affect the Company's net
income unless the securities are sold. The Company currently plans to hold these
securities until maturity or until the market values of these securities
increase. Accordingly, the Company does not expect, though there is no
assurance, that the investment in these securities will affect net income in
future periods. A comparison of the Company's capital ratios is as follows:
June 30, 2000 December 31, 1999
------------- -----------------
Tier 1 Capital
(To average assets) 9.00% 9.15%
Tier 1 Capital
(To risk-weighted assets) 12.65% 11.98%
Total Capital
(To risk-weighted assets) 14.11% 13.50%
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 (FRB). 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
FRB, FDIC and PDB capital requirements at June 30, 2000 and December 31, 1999.
11
<PAGE>
Results of Operation 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,
----------------------------------------------------------------------------
2000 1999
------------------------------------ ----------------------------------
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 $283 $8 5.65% $1,742 $37 4.25%
Interest bearing deposits with banks 311 3 1.93 924 10 2.16
Securities held-to-maturity 7,478 324 8.67 7,647 327 8.55
Securities available for sale:
Taxable 76,916 2,557 6.65 64,061 1,938 6.05
Tax-exempt 3,603 127 7.05 2,615 87 6.65
------- ------ ------- ------
Total securities available for sale 80,519 2,684 6.67 66,676 2,025 6.07
Loans receivable (4) (5) 208,230 8,829 8.48 191,632 7,901 8.25
------- ------ ------- ------
Total interest earning assets 296,821 11,848 7.98% 268,621 10,300 7.67%
Non-interest earning assets:
Cash and due from banks 6,835 6,981
Allowance for loan losses (3,380) (3,344)
Other assets 15,532 12,746
-------- --------
Total non-interest earning assets 18,987 16,383
-------- --------
Total Assets $315,808 $285,004
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $59,353 722 2.43% $55,709 663 2.38%
Savings 42,615 465 2.18 42,084 455 2.16
Time 111,228 2,922 5.25 107,394 2,776 5.17
-------- ------ -------- ------
Total interest bearing deposits 213,196 4,109 3.85 205,187 3,894 3.80
Short-term borrowings 8,230 166 4.03 7,485 162 4.33
Other borrowings 33,088 978 5.91 10,204 250 4.90
-------- ------ -------- ------
Total interest bearing liabilities 254,514 5,253 4.13% 222,876 4,306 3.86%
Non-interest bearing liabilities:
Demand deposits 28,516 26,431
Other liabilities 5,770 7,808
-------- --------
Total non-interest bearing liabilities 34,286 34,239
Shareholders' equity 27,008 27,889
-------- --------
Total Liabilities and Shareholders' Equity $315,808 $285,004
======== ========
Net interest income (tax equivalent basis) 6,595 3.86% 5,994 3.80%
======== =====
Tax-equivalent basis adjustment (176) (155)
------- ------
Net interest income $ 6,419 $5,839
======= ======
Net interest margin (tax equivalent basis) 4.44% 4.46%
======= ========
</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.
12
<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 compared to
Six months ended June 30, 1999
Variance due to
Volume Rate Net
-----------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (56) $ 27 $ (29)
Interest bearing deposits with banks (6) (1) (7)
Securities held to maturity (13) 10 (3)
Securities available for sale:
Taxable 415 204 619
Tax-exempt securities 35 5 40
------- ------- -------
Total securities 450 209 659
Loans receivable 699 229 928
------- ------- -------
Total interest earning assets 1,074 474 1,548
Interest bearing liabilities:
Interest-bearing demand deposits 44 15 59
Savings 6 4 10
Time 100 46 146
------- ------- -------
Total interest bearing deposits 150 65 215
Short-term borrowings 29 (25) 4
Other borrowings 667 61 728
------- ------- -------
Total interest bearing liabilities 846 101 947
Net interest income (tax-equivalent basis) $ 228 $ 373 $ 601
======= ======= =======
(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.
13
<PAGE>
Comparison of Operating Results for Six Months Ended June 30, 2000 and June 30,
--------------------------------------------------------------------------------
1999
----
General
-------
For the six months ended June 30, 2000 net income totaled $1,812,000 or
$1.09 per share (basic and diluted) compared to $1,662,000, or $.98 per share
(basic and diluted) earned for the 1999 period. The resulting return on average
equity and average assets for six months 2000 were 13.42% and 1.15% respectively
compared to 11.92% and 1.17% respectively for six months of 1999.
Net Interest Income
-------------------
Net interest income on a fully taxable equivalent basis (fte) for the six
months ending June 30, 2000 was $6,595,000 compared to $5,994,000 in 1999, an
increase of $601,000 or 10.0%. The resultant fte net interest spread and net
interest margin for 2000 was 3.86% and 4.44% respectively, compared to 3.80% and
4.46% in 1999.
Interest income (fte) for the six months ended June 30, 2000 totaled
$11,848,000, increasing 15.0% from $10,300,000 in 1999. The increase was due to
$28.2 million growth in average earning assets and the yield on earning assets
of 7.98%, improving 31 basis points from 7.67% in 1999.
Securities available for sale averaged $80.5 million for six months of 2000
compared to $66.7 million in 1999 with increase principally due to higher levels
of mortgage backed securities. The yield also increased to 6.67% from 6.07% in
1999 principally due to the generally higher interest rate environment which
began in the third quarter of 1999. Average loans for the six month period in
2000 were $208.2 million with income of $8,829,000 and yield of 8.48% compared
to $191.6 million, $7,901,000 and 8.25% respectively in 1999. The increase in
loan yield was partially due to higher prime rate of interest of 9.50% at June
30, 2000 compared to 7.75% in 1999.
Total interest expense for the six months ended June 30, 2000 was
$5,253,000 increasing $947,000 from $4,306,000 in 1999. The resultant cost of
funds was 4.13% in 2000 and 3.86% in 1999, a 27 basis point increase. The
increase was principally due to a higher level of other borrowings, consisting
of FHLB advances , $33.1 million at 5.91% in 2000 compared to $10.2 million at
4.80% in 1999. In addition, the cost of time deposits increased to 5.25% from
5.17% in 1999. The cost of transaction and savings products has not increased to
the same degree as time deposits and borrowings.
Other Income
------------
Other income, excluding net realized gains on sales of securities totaled
$1,187,000 for the six months end June 30, 2000, an increase of $345,000 or
40.1% over $842,000 in the same period in 1999. A loan promotion generated
$49,000 in revenue in 2000. The Bank through its subsidiary, Norwood Investment
Corp. had revenue of $108,000 on commissions from sales of annuities, mutual
funds and discount brokerage compared to $49,000 in 1999. Earnings on the
increase in cash surrender of value of $3.2 million of Bank owned life
insurance, purchased in the fourth quarter of 1999, was $87,000, the proceeds of
which are used to fund employee benefit plans. For the six month period, fee
income represents 15.3% of total revenue.
14
<PAGE>
Other Expense
-------------
Other expenses totaled $4,889,000 for the six months ended June 30, 2000
compared to $4,126,000 in 1999, an increase of $760,000. The increase was due in
part to additional losses and costs of disposing of vehicles from the auto
leasing portfolio of $522,000 in 2000 increasing from $172,000 in 1999. The
Stroud Mall Branch, opened in June 1999, had costs of $159,000 which includes
salaries, benefits and occupancy costs compared to $15,000 in the prior year.
The Company also incurred additional costs of $52,000 related to improvements in
local and wide area network communications. Other expense was favorably impacted
by a gain on sale of property originally purchased for expansion but no longer
needed, of $113,000.
Income Tax Expense
------------------
Income tax expense totaled $691,000 for an effective tax rate of 27.6%
compared to $721,000 and 30.3% for the 1999 period. The decrease in the
effective rate is due to higher levels of interest income on municipal
securities and increase in the cash surrender value of bank owned life insurance
not subject to Federal income tax.
Comparison of operating results for the three months ended June 30, 2000 and
--------------------------------------------------------------------------------
June 30, 1999
-------------
General
-------
For the three months ended June 30, 2000 net income was $924,000 or $.56
per share (basic and diluted) compared to $848,000 or $.50 per share (basic and
diluted) earned in the second quarter of 1999. The resultant return on average
equity (ROE) was 13.43% with a return on average assets (ROA) of 1.16% compared
to an ROE of 12.20% and ROA of 1.16% for the second quarter of 1999.
Net Interest Income
-------------------
Net interest income (fte) for the second quarter of 2000 was $3,386,000
with a net interest spread of 3.84% and net interest margin of 4.48% compared to
$3,094,000, 3.72% and 4.35%, respectively in 1999.
The increase in net interest income was principally due to $17.5 million
growth in earning assets and an increase in yield. The yield on earning assets
for the three months ended June 30, 2000 was 7.99%, improving from 7.45% in the
1999 period. This was partially offset by rising cost of interest-bearing
liabilities, 4.15% in 2000 from 3.73% in 1999.
Total interest income for the three months ending June 30, 2000 was
$6,041,000, an increase of $739,000 from $5,302,000 in 1999. Interest expense
for the period in 2000 was $2,655,000, increasing from $2,208,000 in 1999.
Other Income
------------
Other income, excluding net realized gains on sales of securities
transactions totaled $610,000 for the second quarter of 2000, compared to
$400,000 for the same period in 1999. The increase was due to higher levels of
deposit service charge income, $70,000 as a result of a new officer and account
analysis income. Income from fiduciary activities increased $28,000 to $87,000
principally due to
15
<PAGE>
estate settlement fees. Commissions on sales of annuities, mutual funds and
discount brokerage services was $62,000 in the second quarter of 2000, compared
to $18,000 in 1999, as a result of increased volume and higher pay-out ratio
from 12.3% in 1999.
Other Expenses
--------------
Other expenses totaled $2,519,000 for the second quarter of 2000,
increasing, from $2,133,000 in 1999. The increase was due in part to additional
losses and costs of disposing of vehicles from the auto-leasing portfolio of
$327,000 included in other expense, compared to $90,000 in 1999. The Stroud Mall
branch, opened in June 1999, had operating costs of $74,000 in 2000, and $15,000
in 1999. Other expenses were favorably impacted by a gain on sale of property
originally held for expansion, but no longer needed, of $113,000.
Income Tax Expense
------------------
Income tax expense totaled $347,000 for an effective tax rate of 27.3% in
2000 decreasing from $369,000 and an effective tax rate of 30.3% in 1999. The
decrease in the effective rate is due to higher levels of income on municipal
securities and increase in the cash surrender value on bank owned life insurance
not subject to Federal income tax.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
------------------------------------------------------------------
Market Risk
-----------
There were no significant changes for the three months or six months ended
June 30, 2000 from the information presented in the Form 10-k for the year-ended
December 31, 1999.
16
<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 25, 2000.
The following incumbent directors were nominated and duly elected to the Board
of Directors for a three year term expiring in 2003:
For Withheld
--- --------
Charles E. Case: 1,341,815.84 7,200.11
William W. Davis, Jr.: 1,346,493.95 2,522
John E. Marshall: 1,341,566.95 7,459
Item 5. Other Materially Important Events
None
17
<PAGE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
<S> <C>
(a) 3(i) Articles of Incorporation of Norwood Financial Corp*
3(ii) Bylaws of Norwood Financial Corp.*
4.0 Specimen Stock Certificate of Norwood Financial Corp.*
10.1 Amended Employment Agreement with William W. Davis, Jr.***
10.2 Amended Employment Agreement with Lewis J. Critelli ***
10.3 Form of Change-In-Control Severance Agreement with nine key
employees of the Bank*
10.4 Consulting Agreement with Russell L. Ridd**
10.5 Wayne Bank Stock Option Plan*
10.6 Salary Continuation Agreement between the Bank and William W. Davis, Jr.***
10.7 Salary Continuation Agreement between the Bank and Lewis J. Critelli***
10.8 Salary Continuation Agreement between the Bank and Edward C. Kasper***
10.9 1999 Directors Stock Compensation Plan***
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-k
None
</TABLE>
---------------------------
* Incorporated herein by reference into the identically numbered exhibits
of the Registrant's Form 10 Registration Statement initially filed with
the Commission on April 29, 1996.
** Incorporated herein by reference into the indentically numbered
exhibits of the Registrant's Form 10-K filed with the Commission on
March 31, 1997.
*** Incorporated herein by reference into the indentically numbered
exhibits of the Registrant's Form 10-K filed with the Commission on
March 23, 2000.
18
<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: August 10, 2000 By: /s/William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 By: /s/Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
19
