SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter period ended March 31, 2002
----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -----------------------
Commission file number 0-28366
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Norwood Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570)253-1455
-------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicated by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of May 3, 2002
- --------------------------------------- 1,753,448
common stock, par value $0.10 per share -----------------------------
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
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 10
Item 3 Qualitative and Quantitative Disclosures About Market Risk 17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Materially Important Events 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
March 31, December 31,
2002 2001
--------- ---------
ASSETS
Cash and due from banks $ 6,331 $ 9,645
Interest bearing deposits with banks 172 111
Federal funds sold 17,495 7,580
--------- ---------
Cash and cash equivalents 23,998 17,336
Securities available for sale 91,564 95,793
Securities held to maturity, fair value 2002
$6,499, 2001 $6,464 6,227 6,226
Loans receivable (net of unearned income) 213,612 214,194
Less: Allowance for loan losses 3,272 3,216
--------- ---------
Net loans receivable 210,340 210,978
Investment in FHLB Stock 1,250 1,400
Bank premises and equipment, net 5,954 6,037
Foreclosed real estate 11 54
Accrued interest receivable 1,926 1,879
Other assets 6,116 6,326
--------- ---------
TOTAL ASSETS $ 347,386 $ 346,029
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 30,039 $ 31,715
Interest-bearing 248,043 243,208
--------- ---------
Total deposits 278,082 274,923
Short-term borrowings 6,557 6,641
Long-term debt 23,000 25,000
Accrued interest payable 2,209 2,326
Other liabilities 1,876 2,023
--------- ---------
TOTAL LIABILITIES 311,724 310,913
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1,803,824 shares 180 180
Surplus 4,714 4,687
Retained earnings 31,921 31,265
Treasury stock, at cost: 2002: 50,279 shares,
2001: 59,831 shares (1,020) (1,066)
Unearned ESOP shares (950) (952)
Accumulated other comprehensive income 817 1,002
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 35,662 35, 116
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 347,386 $ 346,029
========= =========
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
March 31
---------------
2002 2001
------ ------
INTEREST INCOME
Loans receivable, including fees $4,040 $4,674
Securities 1,403 1,356
Other 39 12
------ ------
Total interest income 5,482 6,042
INTEREST EXPENSE
Deposits 1,671 2,263
Short-term borrowings 32 70
Long-term debt 329 423
------ ------
Total interest expense 2,032 2,756
------ ------
NET INTEREST INCOME 3,450 3,286
PROVISION FOR LOAN LOSSES 180 170
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,270 3,116
OTHER INCOME
Service charges and fees 419 418
Income from fiduciary activities 63 83
Net realized gains on sales of securities 11 11
Other 205 154
------ ------
Total other income 698 666
OTHER EXPENSES
Salaries and employee benefits 1,246 1,156
Occupancy, furniture & equipment, net 310 335
Data processing related 132 124
Losses on lease residuals 180 180
Taxes, other than income 78 71
Professional fees 59 50
Other 563 534
------ ------
Total other expenses 2,568 2,450
INCOME BEFORE INCOME TAXES 1,400 1,332
INCOME TAX EXPENSE 371 363
------ ------
NET INCOME $1,029 $ 969
====== ======
BASIC EARNINGS PER SHARE $ 0.61 $ 0.58
====== ======
DILUTED EARNINGS PER SHARE $ 0.60 $ 0.58
====== ======
Dividends per share $ 0.22 $ 0.20
====== ======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income (loss) Total
----- ------- -------- ----- ------ ------------- -----
Income(loss)
Balance, December 31, 2000 $180 $4,629 $28,441 ($1,213) ($1,155) $ 488 $31,370
Comprehensive income:
Net Income 969 969
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustment and tax effects 539 539
-------
Total comprehensive income 1,508
-------
Cash dividends declared, $.20 per share (335) (335)
Release of earned ESOP shares 10 15 25
---- ------ ------- ------- ------- ------ -------
Balance, March 31, 2001 $180 $4,639 $29,075 ($1,213) ($1,140) $1,027 $32,568
==== ====== ======= ======= ======== ====== =======
5
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income (loss) Total
----- ------- -------- ----- ------ ------------- -----
Income(loss)
Balance, December 31, 2001 $180 $4,687 $28,441 ($1,066) ($952) $1,002 $35,116
Comprehensive income:
Net Income 1,029 1,029
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustment and tax effects (185) (185)
------
Total comprehensive income 844
------
Cash dividends declared, $.22 per share (373) (373)
Stock options exercised (7) 51 44
Tax benefit of stock options exercised 5 5
Acquisition of treasury stock (5) (5)
Release of earned ESOP shares 29 2 31
---- ------ ------- ------- ----- ------ -------
Balance, March 31, 2002 $180 $4,714 $31,921 ($1,020) ($950) $ 817 $35,662
==== ====== ======= ======= ===== ====== =======
See accompanying notes to the unaudited financial statements
6
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,029 $ 969
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 180 170
Depreciation 146 156
Amortization of intangible assets 44 44
Deferred income taxes (99) (297)
Net realized gain on sales of securities (11) (11)
Gain(loss) on sale of foreclosed real estate, net (1) -
Net gain on sale of mortgage loans and servicing (56) (130)
Mortgage loans originated for sale (4,013) (1,270)
Proceeds from sale of mortgage loans 4,069 1,401
Decrease (increase) in accrued interest receivable (47) 98
Increase (decrease) in accrued interest payable (117) (269)
(Increase) in cash surrender value of life insurance (54) (42)
Other, net 607 763
-------- --------
Net cash provided by operating activities 1,677 1,582
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 3,954 5,224
Proceeds from maturities and principal reductions on
mortgage-backed securities 9,779 9,995
Purchases (9,793) (14,457)
Net decrease (increase) in loans 221 1,089
Purchase of bank premises and equipment, net (63) (189)
Redemption of FHLB Stock 150 -
Proceeds from sales of foreclosed real estate 44 30
-------- --------
Net cash used in investing activities 4,292 1,692
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,159 (5,162)
Net increase (decrease) in short term borrowings (84) (1,302)
Repayments of long-term debt (2,000) (8,000)
Proceeds from long-term debt - 8,000
Stock options exercised 44 -
Acquisition of treasury stock (5) -
Release and (buyback) of ESOP shares (48) (35)
Cash dividends paid (373) (334)
-------- --------
Net cash used in financing activities 693 (6,833)
-------- --------
Increase(decrease) in cash and cash equivalents 6,662 (3,559)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,336 11,694
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,998 $ 8,135
======== ========
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 period ended March 31,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002 or any other future 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, 2001.
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 Ended
--------------------------
March 31
--------
2002 2001
---- ----
(In Thousands)
Basic EPS weighted average
Shares outstanding 1,694 1,673
Dilutive effect of stock options 23 10
----- -----
Diluted EPS weighted average
Shares outstanding 1,717 1,683
===== =====
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 March 31, 2002 and 2001 were
$2,149,000 and $3,025,000 respectively. Cash payments for income taxes in 2002
were $4,450 compared to $132,000 in 2001. Non-cash investing activity for 2002
and 2001 included foreclosed mortgage loans transferred to real estate owned and
repossession of other assets of $228,000 and $330,000.
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
6. Recent Accounting Standards
---------------------------
In June of 2001, the Financial Accounting Standards Board issued
Statement No. 141 "Business Combinations," and Statement No. 142, "Goodwill and
Other Intangible Assets."
Statement No. 141 requires all business combinations to be accounted
for using the purchase method of accounting as use of the pooling-of-interests
method is prohibited. In addition, this Statement requires that negative
goodwill that exists after the basis of certain acquired assets is reduced to
zero should be recognized as an extraordinary gain. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001.
Statement No. 142 prescribes that goodwill associated with a business
combination and intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually. The Statement
requires intangibles that are separable from goodwill and that have a
determinable useful life to be amortized over the determinable useful life. The
provisions of this Statement became effective for the Company in January of
2002. Upon adoption of this Statement, goodwill and other intangible assets
arising from acquisitions completed before July 1, 2001 should be accounted for
in accordance with the provisions of this Statement. This transition provision
could require a reclassification of a previously separately recognized
intangible to goodwill and vice versa if the intangibles in question do not meet
the new criteria for classification as a separately recognizable intangible.
At March 31, 2002, the Company had intangible assets with a net book
value of $594,000, which will continue to be amortized under the new rules.
Amortization expense related to these assets was $44,000 for the three months
ended March 31, 2002 and 2001.
In July of 2001, the Financial Accounting Standards Board issued
Statement 143, "Accounting for Asset Retirement Obligations," which addresses
the financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the Company on January 1, 2003 and is
not expected to have a significant impact on the Company's financial condition
or results of operations.
In August of 2001, the Financial Accounting Standards Board issued
Statement 144, "Accounting for the Impairment of or Disposal of Long-Lived
Assets." This Statement supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business." This Statement also
amends ARB No. 51, "Consolidated Financial Statements." The provisions of this
Statement were effective for the Company on January 1, 2002 and did not have a
significant impact on the Company's financial condition or results of
operations.
9
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.
Changes in Financial Condition
- ------------------------------
General
- -------
Total assets at March 31, 2002 were $347.4 million compared to $346.0
million at year-end 2001.
Securities
- ----------
The fair value of securities available for sale at March 31, 2002 was
$91.6 million, compared to $95.8 million at December 31, 2001. Total purchases
for the period were $9,793,000 with securities called and principal reductions
of $9,779,000 and sales of $3,954,000. (See cash flow). The purchases were
principally obligations of U.S. Government Agencies.
Loans
- -----
Total loans receivable, were $213.6 million at March 31, 2002, compared
to $214.2 million at December 31, 2001. The decrease was principally due to $3.9
million of longer-term, high coupon residential mortgages sold in the secondary
market. There was a gain on the sale of $56,000. The Company also experienced a
slow down in its indirect automobile lending, with loans decreasing $4.2 million
from December 31, 2001, to $43.8 million at March 31, 2002. Commercial and
commercial real estate loans increased $6.0 million, to $88.0 million. The
commercial lending activity was principally in the Monroe and Pike County market
areas.
The Company no longer originates automobile leases, and as a result the
portfolio declined $1.7 million from December 31, 2001 to $4.4 million at March
31, 2002, which includes residual value of $3.7 million, at March 31, 2002. The
Company liquidates its returned off-lease vehicles through various used car
dealers and automobile auction centers. At March 31, 2002 the Company had an
inventory of vehicles to liquidate of $814,000. Total provision for losses
incurred on off-lease vehicles included in other expense was $180,000 for the
quarter. The Company's reserve for future residual value losses was $161,000 at
March 31, 2002 compared to $225,000 at December 31, 2001.
10
Set forth below is selected data relating to the composition of the
loan portfolio at the dates indicated:
Types of loans
(dollars in thousands)
March 31, 2002 December 31, 2001
--------------- -------------------
$ % $ %
--------- ------ -------- -------
Real Estate-Residential $ 64,230 30.0 $ 64,635 30.1
Commercial 68,252 31.9 63,609 29.6
Construction 3,675 1.7 4,642 2.2
Commercial, financial and agricultural 19,747 9.2 17,442 8.1
Consumer loans to individuals 53,686 25.1 58,143 27.1
Lease financing, net of unearned income 4,433 2.1 6,126 2.9
--------- ------ -------- -------
Total loans 214,023 100.0% 214,597 100.0%
Less:
Unearned income and deferred fees 411 403
Allowance for loan losses 3,272 3,216
-------- --------
Total loans, net $210,340 $210,978
======== ========
Allowance for Loan Losses and Non-performing Assets
- ---------------------------------------------------
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
Three
(dollars in thousands) Months Ended March 31
---------------------
2002 2001
------- -------
Balance, beginning $ 3,216 $ 3,300
Provision for loan losses 180 170
Charge-offs (153) (240)
Recoveries 29 30
------- -------
Net charge-offs (124) (210)
------- -------
Balance, ending $ 3,272 $ 3,260
======= =======
Allowance to total loans 1.53% 1.52%
Net charge-offs to average loans
(annualized) .23% .39%
The allowance for loan losses totaled $3,272,000 at March 31, 2002
and represented 1.53% of total loans, compared to $3,216,000 at year-end, and
$3,260,000 at March 31, 2001. Net charge-offs for the three month period ended
March 31, 2002, totaled $124,000 and consisted principally of losses on the sale
of repossessed automobiles. 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 percentages are
identified by loan type and credit grading and allocated accordingly. Larger
credit exposures are individually analyzed. Management considers the allowance
adequate at March 31, 2002 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.
11
At March 31, 2002, non-performing loans totaled $1,027,000, which is
...48% of total loans compared to $683,000, or .32% of total loans at December 31,
2001. The increase is principally due to a commercial loan secured by real
estate, in the process of foreclosure. The following table sets forth
information regarding non-performing loans and other real estate owned at the
date indicated:
(dollars in thousands) March 31, 2002 December 31, 2001
-------------- -----------------
Loans accounted for on a non-accrual
basis:
Commercial and all other $ 64 $ 64
Real Estate 856 597
Consumer 72 11
------ ------
Total 992 672
Accruing loans which are contractually
past due 90 days or more 35 11
------ ------
Total non-performing loans $1,027 $ 683
Foreclosed real estate 11 54
------ ------
Total non-performing assets $1,038 $ 737
====== ======
Allowance for loan losses as a
percent of non-performing loans 318.6% 470.9%
Non-performing loans to total loans .48% .32%
Non-performing assets to total assets .30% .21%
Deposits
- --------
Total deposits at March 31, 2002 were $278.1 million compared to
$274.9 million at December 31, 2001. Non-interest bearing demand deposits at
March 31, 2002 were $30.0 million compared to $31.7 million at December 31,
2001. The change reflects a seasonal decline in commercial and municipal
accounts. Time deposits in denominations of $100,000 or more decreased to $25.1
million at March 31, 2002 from $27.4 million at December 31, 2001 due to
scheduled maturities of school district and other municipal deposits. This
decrease was offset by growth in retail time deposits of $4.8 million. In
addition, the Company had $5.6 million of commercial cash management accounts
included in short-term borrowings, which represents excess funds invested in
overnight securities, which the Company considers core funding.
12
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) March 31, 2002 December 31,2001
-------------- ----------------
Non-interest bearing demand $ 30,039 $ 31,715
Interest bearing demand 35,766 34,939
Money Market 34,044 34,360
Savings 46,638 44,894
Time 131,595 129,015
-------- --------
Total $278,082 $274,923
======== ========
Stockholders' Equity and Capital Ratios
- ---------------------------------------
At March 31,2002, total stockholders' equity totaled $35.7 million, a
net increase of $546,000 from December 31, 2001. The net increase in
stockholders' equity was primarily due to $1,029,000 in net income, that was
partially offset by $373,000 of dividends declared. In addition, accumulated
other comprehensive income decreased $185,000 due to decrease in fair value of
securities in the available for sale portfolio. This decrease in fair value is
the result of an increase in interest rates, which may unfavorably impact the
value of the securities. Because of interest rate volatility, the Company's
accumulated other income comprehensive income could materially fluctuate for
each interim and year-end period.
A comparison of the Company's capital ratios is as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Tier 1 Capital
(To average assets) 10.03 % 9.93%
Tier 1 Capital
(To risk-weighted assets) 14.09% 13.78%
Total Capital
(To risk-weighted assets) 15.64% 15.30%
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 March 31, 2002 and December 31, 2001.
13
Results of Operation NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
-------------------------------------------------------------------------
2002 2001
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 9,407 $ 38 1.62% $ 820 $ 11 5.37%
Interest bearing deposits with banks 152 1 2.63 104 1 3.85
Securities held-to-maturity 6,227 136 8.74 7,485 166 8.87
Securities available for sale:
Taxable 80,784 1,156 5.72 71,815 1,150 6.41
Tax-exempt 13,104 238 7.26 8,169 146 7.15
-------- ------ -------- ------
Total securities available for sale 93,888 1,394 5.94 79,984 1,296 6.48
Loans receivable (4) (5) 216,226 4,046 7.48 215,735 4,681 8.68
-------- ------ -------- ------
Total interest earning assets 325,900 5,615 6.89 304,128 6,155 8.10
Non-interest earning assets:
Cash and due from banks 7,434 6,699
Allowance for loan losses (3,263) (3,264)
Other assets 13,987 14,495
-------- --------
Total non-interest earning assets 18,158 17,930
-------- --------
Total Assets $344,058 $322,058
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 67,413 1.06% $59,268 365 2.46%
178
Savings 45,289 157 1.39 40,722 212 2.08
Time 131,031 1,336 4.08 119,914 1,686 5.62
-------- ------ -------- ------
Total interest bearing deposits 243,733 1,671 2.74 219,904 2,263 4.12
Short-term borrowings 5,923 32 2.16 7,792 70 3.59
Long-term debt 23,933 329 5.50 29,243 423 5.79
-------- ------ -------- ------
Total interest bearing liabilities 273,589 2,032 2.97 256,939 2,756 4.29
Non-interest bearing liabilities:
Demand deposits 30,255 27,002
Other liabilities 4,429 6,273
-------- --------
Total non-interest bearing liabilities 34,684 33,275
Shareholders' equity 35,785 31,844
-------- --------
Total Liabilities and Shareholders' Equity $344,058 $322,058
======== ========
Net interest income (tax equivalent basis) 3,583 3.92% 3,399 3.81%
==== ====
Tax-equivalent basis adjustment (133) (113)
------ ------
Net interest income $3,450 $3,286
====== ======
Net interest margin (tax equivalent basis) 4.40% 4.47%
==== ====
(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
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
-------------------
Three months ended March 31,2002 Compared to
--------------------------------------------
Three months ended March 31, 2001
---------------------------------
Variance due to
---------------
Volume Rate Net
------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ 82 $ (55) $ 27
Interest bearing deposits with banks 2 (2) -
Securities held to maturity (28) (2) (30)
Securities available for sale:
Taxable 532 (526) 6
Tax-exempt securities 90 2 92
------- ------- -------
Total securities 622 (524) 98
Loans receivable 74 (709) (635)
------- ------- -------
Total interest earning assets 752 (1,292) (540)
Interest bearing liabilities:
Interest-bearing demand deposits 287 (474) (187)
Savings 129 (184) (55)
Time 847 (1,197) (350)
------- ------- -------
Total interest bearing deposits 1,263 (1,855) (592)
Short-term borrowings (14) (24) (38)
Long Term debt (74) (20) (94)
------- ------- -------
Total interest bearing liabilities 1,175 (1,899) (724)
Net interest income (tax-equivalent basis) $ (423) $ 607 $ 184
======= ======= =======
(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.
15
Comparison of Operating Results for Three Months Ended March 31, 2002 and March
- -------------------------------------------------------------------------------
31, 2001
- --------
General
- -------
For the three months ended March 31, 2002 net income totaled
$1,029,000 or $.61 per share basic, and $.60 per share diluted compared to
$969,000, or $.58 per share basic and diluted earned in the first quarter of
2001. The resulting return on average assets and return on average equity for
the quarter were 1.21% and 11.66% respectively compared to 1.20% and 12.17%
respectively for the corresponding period in 2001. The Company declared cash
dividends of $.22 per share in 2002 compared to $.20 per share in 2001.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the three months ended March 31, 2002 totaled $3,583,000 compared to $3,399,000
in 2001, an increase of $184,000 or 5.4%. The resultant fte net interest spread
and net interest margin was 3.92% and 4.40%, respectively, compared to 3.81% and
4.47%, respectively, for the 2001 period.
Interest income on an fte basis totaled $5,615,000 with a yield of
6.89% for the period in 2002, compared to $6,155,000 and 8.10% in 2001. The
decrease in yield was principally due to the lower short term interest rates
with prime rate of 4.75% and Fed Funds of 1.75% at March 31,2002, compared to
8.00% and 5.00% respectively at March 31, 2001. The lower interest rates were
partially offset by the $21.8 million increase in average earning assets. The
earning asset yield was also unfavorably impacted by a change in the asset mix.
The change in asset mix was the result of deposits increasing faster than loans.
For the 2002 period, lower yielding fed funds and securities accounted for 33.7%
of earning assets and loans represented 66.3% compared to loans of 70.9% in
2001.
Interest expense for the three months ended March 31, 2002 totaled
$2,032,000 at a rate of 2.97%, compared to $2,756,000 and 4.29% in 2001. All
categories of liability costs decreased in the lower interest rate environments.
Average interest-bearing deposits increased $23.8 million, with the proceeds
principally invested in federal funds and other short-term investments.
Other Income
- ------------
Other income totaled $698,000 for the three months ended March 31,
2002 compared to $666,000 for the period in 2001, an increase of $32,000 or
4.8%. The increase was principally due to mortgage lending activities and growth
in retail deposit accounts. Commissions earned on sales of annuities and mutual
funds totaled $45,000 in the current period, increasing from $23,000 in 2001.
Net realized gains on securities transactions were $11,000 for the first quarter
of 2002.
Other Expense
- -------------
Other expenses total $2,568,000 for the period ending March 31, 2002,
an increase of $118,000 or 4.8%, from $2,450,000 in the prior year. The increase
is principally due to higher salaries and employee benefits related to incentive
and retirement plan costs, which increased $90,000, or 7.8%.
16
Income Tax Expense
- ------------------
Income tax expense totaled $371,000 for an effective tax rate of
26.5% for the period ending March 31, 2002, compared to $363,000 and 27.3% in
the first quarter of 2001. The effective tax rate declined due to a higher level
of tax-exempt income on municipal securities and investments.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Market Risk
- -----------
There were no significant changes for the three months ended March
31, 2002 from the information presented in the Form 10-K for the year-ended
December 31, 2001.
17
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
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***
(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 25, 2002.
18
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: May 10, 2002 By: /s/William W. Davis, Jr.
--------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2002 By: /s/Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
19