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 September 30, 2000
------------------
OR
[s] 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 (570) 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 October 31, 2000
- ---------------------------------------- 1,743,935
common stock, par value $0.10 per share ---------
1
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 9
Item 3 Qualitative and Quantitative Disclosures about market risk 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Materially Important Events 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
September 30, December 31,
2000 1999
--------- ---------
ASSETS
Cash and due from banks $ 9,925 $ 8,430
Interest bearing deposits with banks 83 398
Federal funds sold 2,350 1,970
Securities available for sale 78,917 78,875
Securities held-to-maturity (fair value 2000: $7,642
1999; $7,411) 7,482 7,477
Loans receivable (net of unearned income) 214,760 205,160
Less: Allowance for loan losses 3,334 3,344
--------- ---------
Net loans receivable 211,426 201,816
Bank premises and equipment, net 6,288 6,739
Other real estate 27 110
Accrued interest receivable 1,962 1,646
Other assets 7,106 7,366
--------- ---------
TOTAL ASSETS $ 325,566 $ 314,827
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 35,192 $ 26,848
Interest-bearing deposits 213,197 216,659
--------- ---------
Total deposits 248,389 243,507
Short-term borrowings 9,202 8,600
Other borrowings 33,000 30,000
Accrued interest payable 2,461 2,385
Other liabilities 3,296 3,681
--------- ---------
TOTAL LIABILITIES 296,348 288,173
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1,803,824 shares 180 180
Surplus 4,626 4,603
Retained earnings 27,767 25,763
Treasury stock, at cost (59,889 shares) (1,214) (1,214)
Unearned ESOP shares (1,230) (1,359)
Accumulated other comprehensive income (loss) (911) (1,319)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,218 26,654
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 325,566 $ 314,827
========= =========
See accompanying notes to the unaudited consolidated financial statements
3
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans receivable including fees $ 4,644 $ 4,143 $13,451 $12,029
Securities 1,447 1,309 4,301 3,521
Federal funds sold and deposits
with banks 3 15 14 62
------- ------- -------- ------
Total interest income 6,094 5,467 17,766 15,612
INTEREST EXPENSE
Deposits 2,079 1,877 6,188 5,772
Short-term borrowings 66 82 232 221
Other borrowed funds 612 322 1,590 594
------- ------- ------- -------
Total interest expense 2,757 2,281 8,010 6,587
------- ------- ------- -------
NET INTEREST INCOME 3,337 3,186 9,756 9,025
PROVISION FOR LOAN LOSSES 120 110 335 340
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,217 3,076 9,421 8,685
OTHER INCOME
Service charges and fees 384 336 1,102 899
Income from fiduciary activities 73 72 227 210
Net realized gains on sales of securities 1 1 2 59
Other 232 138 547 279
------- ------- ------- -------
Total other income 690 547 1,878 1,447
OTHER EXPENSES
Salaries and employee benefits 1,091 1,041 3,246 3,033
Occupancy, furniture & equipment, net 288 325 927 887
Data processing related 111 111 320 313
Taxes, other than income 69 63 203 189
Professional fees 53 57 209 140
Other 842 680 2,438 1,841
------- ------- ------- -------
Total other expenses 2,454 2,277 7,343 6,403
INCOME BEFORE INCOME TAXES 1,453 1,346 3,956 3,729
INCOME TAX EXPENSE 414 426 1,105 1,147
------- ------- ------- -------
NET INCOME $ 1,039 $ 920 $ 2,851 $ 2,582
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.62 $ 0.55 $ 1.71 $ 1.53
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.61 $ 0.55 $ 1.70 $ 1.53
======= ======= ======= =======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Nine months ended September 30, 1999 and 2000 (dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance, December 31, 1998 $180 $4,542 $23,240 ($343) ($1,546) $1,655 $27,728
Comprehensive income:
Net Income 2,582 2,582
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustment and tax effects (2,355) (2,355)
-------
Total comprehensive income 227
-------
Cash dividends declared, $.42 per share (702) (702)
Stock Options exercised (6) 49 43
Purchase of Treasury Stock (718) (718)
Release of earned ESOP shares 58 122 180
---- ------ ------- ------- ------- ------ -------
Balance, September 30, 1999 $180 $4,594 $25,120 ($1,012) ($1,424) (700) $26,758
==== ====== ======= ======== ======== ====== =======
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance, December 31, 1999 $180 $4,603 $25,763 ($1,214) ($1,359) ($1,319) $26,654
Comprehensive income:
Net Income 2,851 2,851
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustment and tax effects 408 408
-------
Total comprehensive income 3,259
-------
Cash dividends declared, $.51 per share (847) (847)
Release of earned ESOP shares 23 129 152
---- ------ ------- ------- ------- ----- -------
Balance, September 30, 2000 $180 $4,626 $27,767 ($1,214) ($1,230) ($911) $29,218
==== ====== ======= ======= ======= ====== =======
See accompanying notes to the unaudited financial statements
5
NORWOOD FINANCIAL COPR.
Consolidated Statement of changes in Stockholders' Equity (unaudited)
Three Months Ended September 1999 and 2000
(dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance June 30, 1999 $180 $4,580 $24,431 ($805) ($1,474) ($295) $26,617
Comprehensive Income:
Net Income 920 920
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
adjustment and tax effects (405) (405)
-------
Total comprehensive income 515
-------
Cash dividends declared $.14
per share (231) (231)
Stock options exercised (6) 49 43
Purchase of treasury stock (256) (256)
Release of earned ESOP shares 20 50 70
---- ------ ------- ------- ------- ----- -------
Balance, September 30, 1999 $180 $4,594 $25,120 ($1,012) ($1,424) ($700) $26,758
==== ====== ======= ======= ======= ===== =======
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance, June 30, 2000 $180 $4,617 $27,292 ($1,214) ($1,280) ($1,688) $27,907
Comprehensive income:
Net Income 1,039 1,039
Change in unrealized gains
(losses) on securities available
for sale, net of reclassification
and adjustment and tax effects 777 777
-------
Total comprehensive income 1,816
-------
Cash dividends declared $.34
per share (564) (564)
Release of earned ESOP shares 9 50 59
---- ------ ------- ------- ------- ----- -------
Balance, September 30, 2000 $180 $4,626 $27,767 ($1,214) ($1,230) ($911) $29,218
==== ====== ======= ======= ======= ===== =======
See accompanying notes to the unaudited financial statements.
6
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
-------------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,851 $ 2,582
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 335 340
Depreciation 471 501
Amortization of intangible assets 133 141
Deferred income taxes (1,084) (1,367)
Net realized gain on sales of securities (2) (59)
Gain(loss) on sale of other real estate, net (106) (9)
Gain on sale of premises & equipment 26 -
Net gain on sale of mortgage loans/servicing rights (108) (6)
Mortgage loans originated for sale (769) (690)
Proceeds from sale of mortgage loans/servicing rights 877 695
Decrease (increase) in accrued interest receivable (316) (161)
Increase (decrease) in accrued interest payable 76 (543)
(Increase) in cash surrender value of life insurance (124) -
Other, net 1,779 2,541
-------- --------
Net cash provided by operating activities 4,039 3,965
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 8,891 7,207
Proceeds from maturities and principal reductions on
mortgage-backed securities 4,119 11,925
Purchases (12,439) (38,031)
Net decrease (increase) in loans (10,816) (14,387)
Purchase of bank premises and equipment, net (289) (262)
Proceeds from sales of other real estate 439 197
-------- --------
Net cash used in investing activities (10,095) (33,351)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,882 6,246
Net increase (decrease) in short term borrowings (1,398) 14,921
Proceeds from other borrowings 5,000 10,000
Acquisition of treasury stock - (674)
Release of ESOP shares (20) 122
Cash dividends paid (848) (702)
-------- --------
Net cash used in financing activities 7,616 29,913
-------- --------
(Decrease) Increase in cash and cash equivalents 1,560 527
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,798 12,598
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,358 $ 13,125
======== --------
See accompanying notes to consolidated financial statement
7
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. Estimate
--------
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 nine month periods
ended September 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.
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 September 30, 2000 and 1999
were $7,934,000 and $6,330,000 respectively. Cash payments for income taxes in
2000 were $1,798,000 compared to $738,000 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 $824,000 and $973,000, 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.
8
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 September 30, 2000 were $325.6 million, compared to
$314.8 million at year-end 1999.
Securities
- ----------
The fair value of securities available for sale at September 30, 2000
was $78.9 million, compared to $78.9 million at year-end 1999. Total purchases
for the period were $9.2 million with maturities sales and cashflows of $4.8
million. The cashflow as reinvested in short-term securities and tax-exempt
municipal issues.
Loans
- -----
Total loans receivable, which include automobile leases, were $214.8
million at September 30, 2000 compared to $205.2 million at December 31, 1999,
an increase of $9.6 million. The increase was net of $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 $10.0 million to total $55.1 million at September 30, 2000.
The Company no longer originates automobile leases, and as a result,
the portfolio declined $8.2 million from December 31, 1999 to $15.8 million at
September 30, 2000, which includes residual value of $12.2 million, at September
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 September 30, 2000 the Company had an inventory of vehicles
to liquidate of $892,000. Total losses incurred on sales of off-lease vehicles
included in other expenses was $556,000 for the nine months ended September 30,
2000. The Company's reserve for future residual value losses as classified in
other liabilities was $509,000 at September 30, 2000 and compared to $311,000 at
December 31, 1999.
9
Set forth below is selected data relating to the composition of the
loan portfolio at the dates indicated:
Types of loans
(dollars in thousands)
September 30 , 2000 December 31, 1999
------------------------ ------------------------
$ % $ %
--------- ----- -------- -----
Real Estate-Residential $ 62,198 28.9 $ 56,984 27.7
Commercial 54,370 25.3 49,796 24.2
Construction 1,706 .8 3,339 1.6
Commercial, financial and agricultural 15,383 7.2 17,440 8.5
Consumer loans to individuals 65,629 30.4 54,026 26.3
Lease financing, net of unearned income 15,814 7.4 23,974 11.7
-------- ----- -------- -----
Total loans 215,100 100.0% 205,559 100.0%
Less:
Unearned income and deferred fees 340 399
Allowance for loan losses 3,334 3,344
-------- --------
Total loans, net $211,426 $201,816
======== ========
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 Nine Months
(dollars in thousands) Months Ended September 30 Ended September 30
------------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
Balance, beginning $ 3,381 $ 3,326 $ 3,344 $ 3,333
Provision for loan losses 120 110 335 340
Charge-offs (200) (115) (537) (466)
Recoveries 33 22 192 136
------- ------- ------- -------
Net charge-offs (167) (93) (345) (330)
------- ------- ------- -------
Balance, ending $ 3,334 $ 3,343 $ 3,334 $ 3,343
======= ======= ======= =======
Allowance to total loans 1.55% 1.67% 1.55% 1.67%
Net charge-offs to average loans
(annualized) .31% .19% 0.22% 0.23%
The allowance for loan losses totaled $3,334,000 at September 30,
2000 and represented 1.55% of total loans, compared to $3,344,000 at year-end,
and $3,343,000 at September 30, 1999. Management's loan review function assesses
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
10
percentages are identified by loan type and credit grading and allocated
accordingly. Larger credit exposures are individually analyzed. Management
considers the allowance adequate at September 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 September 30, 2000, non-performing loans totaled $574,000, which
is .27% of total loans decreasing from $657,000, or .32% of total loans at
December 31, 1999. Non-performing loans consist principally of residential real
estate with the largest loan at $292,000. The following table sets forth
information regarding non-performing loans and other real estate owned at the
date indicated:
(dollars in thousands) September 30, 2000 December 31, 1999
------------------ -----------------
Loans accounted for on a non-accrual
basis:
Commercial and all other $ 64 $ 64
Real Estate 492 513
Installment - 19
---- ----
Total 556 596
Accruing loans which are contractually
past due 90 days or more 18 61
---- ----
Total non-performing loans $574 $657
Other real estate owned 27 110
---- ----
Total non-performing assets $601 $767
==== ====
Allowance for loan losses as a
percent of non-performing loans 581.8% 508.9%
Non-performing loans to total loans .27% .32%
Non-performing assets to total assets .18% .24%
Deposits
- --------
Total deposits at September 30, 2000 were $248.4 million compared to
$243.5 million at December 31, 1999. Non interest bearing checking grew by $8.3
million from year-end with the increase principally in seasonal transactions for
summer camps, property owners associations, local municipalities and school
districts. The growth was partially offset by scheduled maturities of school
district time deposits which declined $12.4 million. In addition, the Company
had $8.2 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 a source of core funding.
11
Other Borrowings
- ----------------
Other borrowings consisted of the following:
Notes with the Federal Home Loan Bank (FHLB)
September 30, 2000
------------------
Fixed note due October 2000 6.65% $ 5,000
Fixed note due February 2001 6.46% 6,000
Convertible note due April 2005 6.13% 5,000
Fixed note due January 2001 6.68% 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
-------
$33,000
=======
The Bank has a maximum borrowing capacity with the FHLB of $76.5 million.
Stockholders' Equity and Capital Ratios
- ---------------------------------------
At September 30,2000, total stockholders' equity totaled $29.2
million, an increase of $2.6 million from year-end 1999. The net increase in
stockholders' equity was primarily due to $2,851,000 in net income, that was
partially offset by $847,000 of dividend payments and $408,000 of other
comprehensive income due to a decline in market value of the available for sale
securities (primarily the mortgage-backed securities portfolio). The increase 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:
September 30, 2000 December 31, 1999
------------------ -----------------
Tier 1 Capital
(To average assets) 9.06% 9.15%
Tier 1 Capital
(To risk-weighted assets) 12.53% 11.98%
Total Capital
(To risk-weighted assets) 14.01% 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 September 30, 2000.
12
Results of Operation
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Nine Months Ended September 30,
---------------------------------------------------------------------------
2000 2000
------------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $205 $9 5.85% $1,506 $47 4.16%
Interest bearing deposits with banks 243 5 2.74 911 15 2.20
Securities held-to-maturity 7,479 486 8.66 7,647 491 8.56
Securities available for sale:
Taxable 76,972 3,836 6.64 67,164 3,107 6.17
Tax-exempt 3,965 219 7.36 2,731 137 6.69
-------- ------- ------- -------
Total securities available for sale 80,937 4,055 6.68 69,895 3,244 6.19
Loans receivable (4) (5) 209,923 13,476 8.56 193,868 12,062 8.30
-------- ------- -------- -------
Total interest earning assets 298,787 18,031 8.05% 273,827 15,859 7.72%
Non-interest earning assets:
Cash and due from banks . . . . . . . .. . . . 7,003 7,056
Allowance for loan losses . . . . . . . . . . . (3,376) (3,353)
Other assets. . . . . . . . . . . . . . . . . . 15,412 12,553
-------- --------
Total non-interest earning assets 19,039 16,256
-------- --------
Total Assets $317,826 $290,083
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits. . . . . . . . $60,786 1,124 2.47% $57,509 1,037 2.40%
Savings . . . . .. . . . . . . . . . . . . . . 42,801 703 2.19 42,680 697 2.18
Time . . . . . . . . . . . . . . . . . . . . . 109,054 4,361 5.33 104,680 4,038 5.14
-------- ------- -------- -------
Total interest bearing deposits 212,641 6,188 3.88 204,869 5,772 3.76
Short-term borrowings 7,471 232 4.14 8,950 221 3.29
Other borrowings 35,151 1,590 6.03 15,016 594 5.27
-------- ------- -------- -------
Total interest bearing liabilities 255,263 8,010 4.18% 228,835 6,587 3.84%
Non-interest bearing liabilities:
Demand deposits 29,384 27,787
Other liabilities 5,697 5,922
-------- --------
Total non-interest bearing liabilities 35,081 33,709
Shareholders' equity 27,482 27,539
------ --------
Total Liabilities and Shareholders' Equity $317,826 $290,083
======== ========
Net interest income (tax equivalent basis) 10,021 3.86% 9,272 3.88%
====== ======
Tax-equivalent basis adjustment (265) (247)
------- -------
Net interest income $ 9,756 $9,025
======= =======
Net interest margin (tax equivalent basis) 4.47% 4.51%
====== ======
(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.
13
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
Nine months ended September 30, 2000 compared to
Nine months ended September 30, 1999
Variance due to
Volume Rate Net
-------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ...................... $ (60) $ 22 $ (38)
Interest bearing deposits with banks .... (15) 5 (10)
Securities held to maturity ............. (13) 8 (5)
Securities available for sale:
Taxable .............................. 477 252 729
Tax-exempt securities ................ 67 15 82
------- ------- -------
Total securities .................. 544 267 811
Loans receivable ........................ 1,022 392 1,414
------- ------- -------
Total interest earning assets ......... 1,478 694 2,172
Interest bearing liabilities:
Interest-bearing demand deposits ....... 60 27 87
Savings ................................ 2 4 6
Time ................................... 172 151 323
------- ------- -------
Total interest bearing deposits .... 234 182 416
Short-term borrowings ................... (55) 66 11
Other borrowings ......................... 900 96 996
------- ------- -------
Total interest bearing liabilities ...... 1,079 344 1,423
Net interest income (tax-equivalent basis) $ 399 $ 350 $ 749
======= ======= =======
(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.
14
Comparison of Operating Results for Nine Months Ended September 30, 2000 and
- ---------- ------------ ----------------------------- --------- ------------
September 30, 1999
- ------------------
General
- -------
For the nine months ended September 30, 2000, net income totaled
$2,851,000 or $1.71 basic earnings per share (eps) and diluted eps of $1.70,
compared to $2,582,000 or $1.53 eps (basic and diluted) earned for the similar
period in 2000. The resulting return on average equity and average assets were
13.83% and 1.20% respectively, compared to 12.50% and 1.19% for nine months of
1999.
Net Interest Income
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the
nine months ending September 30, 2000 was $10,021,000 compared to $9,272,000 in
1999, an increase of $749,000 or 8.1%. The resultant fte net interest spread and
net interest margin for 2000 was 3.86% and 4.47% respectively, compared to 3.88%
and 4.51% in 1999.
Interest income (fte) for the nine months ended September 30, 2000
totaled $18,031,000 increasing $2,172,000 or 13.7% from $15,859,000 in 1999. The
increase was due to $25,0 million growth in average earning assets and the yield
on earning assets improving 33 basis points to 8.05% in 2000 compared to 7.72%
in 1999.
Securities available for sale averaged $80.9 million for nine months
2000 compared to $68.9 million in 1999 with the increase principally due to
higher levels of mortgage backed securities. The yield also increased to 6.63%
from 6.19% in 1999 principally due to the generally higher interest rate
environment, which began in the third quarter of 1999. Average loans for the
nine month period in 2000 were $209.9 million, with interest income of
$13,476,000 and yield of 8.56% compared to $193.9 million, $12,062,000 and
8.30%, respectively, in 1999. The increase in loan income was partially due to
the higher prime rate of interest of 9.50% at September 30, 2000 compared to
8.50% in 1999.
Total interest expense for the nine months ended September 30, 2000
was $8,010,000 increasing $1,423,000 from $6,587,000 in 1999. The resulting of
cost of funds for 2000 was 4.18% increasing 34 basis points from 3.84% in 1999.
The increase was principally due to higher level of other borrowings consisting
of FHLB advances, $35.1 million at 6.03% in 2000 compared to $15.0 million at
5.27% in 1999. The proceeds of the borrowings were used in part to fund
purchases of securities available for sale. In addition, the cost of time
deposits increased to 5.33% from 5.14% in 1999. reflecting the higher interest
rate environment in 2000. The cost of transaction and savings products has not
increased to same degree as time deposits and borrowings whose rates are more
market driven.
Detailed changes regarding net interest income are contained in tables at pages
13 and 14.
Other Income
- ------------
Other income, excluding net realized gains on sales of securities
totaled $1,876,000 for the nine months end September 30, 2000, an increase of
$488,000 or 35.2% over $1,388,000 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 $155,000 on commissions from sales of annuities,
mutual funds and discount brokerage compared to $114,000 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 $131,000, the proceeds
of which are used to fund employee benefit plans. During
15
the third quarter, the Company sold its portfolio of mortgage servicing rights
for a net gain of $105,000. For the nine month period, fee income represents
18.7% of total revenue.
Other Expense
- -------------
Other expenses totaled $7,343,000 for the nine months ended September
30, 2000 compared to $6,403,000 in 1999, an increase of $940,000. The increase
was due in part to losses, additions to the reserve for future losses and costs
of disposing of vehicles from the auto leasing portfolio of $797,000 in 2000
increasing from $307,000 in 1999. The Stroud Mall Branch, opened in June 1999,
had costs of $241,000 which includes salaries, benefits and occupancy costs
compared to $74,000 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.
The cost of opening new branch office in Lords Valley in August 2000 was
$36,000, which includes salaries, occupancy costs and other expense.
Income Tax Expense
- ------------------
Income tax expense totaled $1,105,000 for an effective tax rate of
27.9% compared to $1,147,000 and 30.1% 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.
16
Results of Operation
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended September 30
-----------------------------------------------------------------------------
2000 1999
---------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---------- ------- -------- --------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $51 $1 7.84% $1,039 $10 3.85%
Interest bearing deposits with banks 107 2 7.48 598 5 3.34
Securities held-to-maturity 7,481 162 8.66 7,649 164 8.58
Securities available for sale:
Taxable 76,857 1,279 6.66 73,069 1,169 6.40
Tax-exempt 4,907 92 7.50 3,154 50 6.34
-------- ------- -------- -------
Total securities available for sale 81,764 1,371 6.71 76,223 1,219 6.40
Loans receivable (4) (5) 213,271 4,647 8.72 198,267 4,161 8.39
-------- ----- 8.17% -------- -----
Total interest earning assets 302,674 6,183 283,776 5,559 7.84%
Non-interest earning assets:
Cash and due from banks . . . . . . . . . . . . 7,334 7,790
Allowance for loan losses . . . . . . . . . . . (3,366) (3,371)
Other assets. . . . . . . . . . . . . . . . . . 15,174 11,887
-------- --------
Total non-interest earning assets 19,142 16,306
-------- --------
Total Assets $321,816 $300,082
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits. . . . . . . . $63,621 402 2.53% $61,050 374 2.45%
Savings . . . . .. . . . . . . . . . . . . . . 43,170 238 2.21 43,861 242 2.21
Time . . . . . . . . . . . . . . . . . . . . . 104,752 1,439 5.49 99,341 1,262 5.08
-------- ------- -------- -------
Total interest bearing deposits 211,543 2,079 3.93 204,252 1,878 3.68
Short-term borrowings 7,447 66 3.55 7,301 59 3.23
Other borrowings 37,753 612 6.48 25,207 344 5.46
-------- --- ------ - ---
Total interest bearing liabilities 256,743 2,757 4.30% 236,760 2,281 3.85%
Non-interest bearing liabilities:
Demand deposits 31,101 30,376
Other liabilities 5,545 5,407
-------- --------
Total non-interest bearing liabilities 36,646 35,783
Shareholders' equity 28,427 27,539
-------- --------
Total Liabilities and Shareholders' Equity $321,816 $300,082
======== ========
Net interest income (tax equivalent basis) 3,426 3.88% 3,278 3.98%
===== =====
Tax-equivalent basis adjustment (89) (92)
------- ------
Net interest income $ 3,337 $3,186
======= ======
Net interest margin (tax equivalent basis) 4.53% 4.62%
===== =====
(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
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 September 30, 2000 compared to
Three months ended September 30, 1999
Variance due to
Volume Rate Net
--------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ...................... $ (44) $ 35 $ (9)
Interest bearing deposits with banks .... (21) 18 (3)
Securities held to maturity ............. (9) 7 (2)
Securities available for sale:
Taxable .............................. 62 48 110
Tax-exempt securities ................ 32 10 42
----- ----- -----
Total securities .................. 94 58 152
Loans receivable ........................ 323 163 486
----- ----- -----
Total interest earning assets ......... 343 281 624
Interest bearing liabilities:
Interest-bearing demand deposits ....... 16 12 28
Savings ................................ (4) (0) (4)
Time ................................... 71 106 177
----- ----- -----
Total interest bearing deposits .... 83 118 201
Short-term borrowings ................... 1 6 7
Other borrowings ......................... 195 73 268
----- ----- -----
Total interest bearing liabilities ...... 279 197 476
Net interest income (tax-equivalent basis) $ 64 $ 84 $ 148
===== ===== =====
(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
Comparison of operating results for the three months ended September 30, 2000
- --------------------------------------------------------------------------------
and September 30, 1999
- ----------------------
General
- -------
For the three months ended September 30, 2000 net income was
$1,039,000 or $.62 per share basic and $.61 per share diluted compared to
$920,000 or $.55 per share (basic and diluted) earned in the third quarter of
1999. The resultant return on average equity (ROE) was 14.62% with a return on
average assets (ROA) of 1.29% compared to an ROE of 13.70% and ROA of 1.23% for
the second quarter of 1999.
Net Interest Income
- -------------------
Net interest income (fte) for the third quarter of 2000 was
$3,426,000 with a net interest spread of 3.88% and net interest margin of 4.53%
compared to $3,278,000, 3.98% and 4.62%, respectively in 1999.
The increase in net interest income was principally due to $18.9
million growth in earning assets and an increase in yield. The yield on earning
assets for the three months ended September 30, 2000 was 8.17%, improving from
7.84% in the 1999 period. This was partially offset by rising cost of
interest-bearing liabilities, 4.30% in 2000 from 3.85% in 1999.
Total interest income for the three months ending September 30, 2000
was $6,183,000, an increase of $624,000 from $5,559,000 in 1999. Interest
expense for the period in 2000 was $2,757,000, increasing from $2,281,000 in
1999.
Detailed changes regarding net interest income are contained in the
tables on pages 17 and 18.
Other Income
- ------------
Other income, excluding net realized gains on sales of securities
transactions totaled $689,000 for the third quarter of 2000, compared to
$546,000 for the same period in 1999. The increase was due to higher levels of
deposit service charge income, $48,000 as a result of a new office in
Stroudsburg and the implementation of account analysis income. During the third
quarter the Company sold its portfolio of mortgage servicing rights for a net
gain of $105,000.
Other Expenses
- --------------
Other expenses totaled $2,454,000 for the third quarter of 2000,
compared to $2,227,000 for the same period in 1999. The increase was due in part
to additional losses and costs of disposing of vehicles from the auto-leasing
portfolio of $274,000 included in other expense, compared to $127,000 in 1999.
The Company opened a new office in September 2000 with expenses of $36,000.
Income Tax Expense
- ------------------
Income tax expense totaled $414,000 for an effective tax rate of
28.5% in 2000 decreasing from $426,000 and an effective tax rate of 31.6% 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 nine months
ended September 30, 2000 from the information presented in the Form 10-k for the
year-ended December 31, 1999.
19
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
None
Item 5. Other Materially Important Events
None
20
Item 6. Exhibits and Reports on Form 8-K
(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
- ---------------------------
* 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.
21
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: November 7, 2000 By:/s/William W. Davis, Jr.
---------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2000 By:/s/Lewis J. Critelli
---------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22