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, 2002
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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 30, 2002
- ---------------------------------------
common stock, par value $0.10 per share 1,754,448
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1
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 8
Item 3 Qualitative and Quantitative Disclosures About
Market Risk 20
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)
June 30, December 31,
2002 2001
-------- ------------
ASSETS
Cash and due from banks $ 9,390 $ 9,645
Interest bearing deposits with banks 213 111
Federal funds sold 13,135 7,580
-------- --------
Cash and cash equivalents 22,738 17,336
Securities available for sale 103,531 95,793
Securities held to maturity, fair value 2002
$6,726, 2001 $6,464 6,200 6,226
Loans receivable (net of unearned income) 211,946 214,194
Less: Allowance for loan losses 3,260 3,216
-------- --------
Net loans receivable 208,686 210,978
Investment in FHLB Stock 1,150 1,400
Bank premises and equipment, net 6,122 6,037
Foreclosed real estate 287 54
Accrued interest receivable 1,821 1,879
Other assets 6,420 6,326
-------- --------
TOTAL ASSETS $356,955 $346,029
======== ========
LIABILITIES
Deposits:
Non-interest bearing demand $ 33,732 $ 31,715
Interest-bearing deposits 248,673 243,208
-------- --------
Total deposits 282,405 274,923
Short-term borrowings 10,008 6,641
Long-term debt 23,000 25,000
Accrued interest payable 1,596 2,326
Other liabilities 2,312 2,023
-------- --------
TOTAL LIABILITIES 319,321 310,913
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized
10,000,000 shares issued 1,803,824 shares 180 180
Surplus 4,751 4,687
Retained earnings 32,589 31,265
Treasury stock, at cost 2002: 50,376
2001: 52,591 shares (1,023) (1,066)
Unearned ESOP shares (900) (952)
Accumulated other comprehensive income 2,037 1,002
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 37,634 35,116
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 356,955 $ 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 Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Loans receivable including fees $ 3,913 $ 4,545 $ 7,953 $ 9,219
Securities 1,432 1,378 2,835 2,734
Other 78 79 117 91
------- ------- ------- -------
Total interest income 5,423 6,002 10,905 12,044
INTEREST EXPENSE
Deposits 1,559 2,178 3,230 4,441
Short-term borrowings 49 78 81 148
Long-term debt 321 385 650 808
------- ------- ------- -------
Total interest expense 1,929 2,641 3,961 5,397
------- ------- ------- -------
NET INTEREST INCOME 3,494 3,361 6,944 6,647
PROVISION FOR LOAN LOSSES 150 200 330 370
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,344 3,161 6,614 6,277
OTHER INCOME
Service charges and fees 430 389 849 807
Income from fiduciary activities 44 68 107 151
Net realized gains on sales of securities 333 78 344 89
Other 124 159 329 313
------- ------- ------- -------
Total other income 931 694 1,629 1,360
OTHER EXPENSES
Salaries and employee benefits 1,210 1,128 2,456 2,284
Occupancy, furniture & equipment, net 328 334 638 669
Data processing related 131 131 263 255
Losses on lease residuals 430 150 610 330
Taxes, other than income 78 72 156 143
Professional fees 43 45 102 95
Other 636 604 1,199 1,138
------- ------- ------- -------
Total other expenses 2,856 2,464 5,424 4,914
INCOME BEFORE INCOME TAXES 1,419 1,391 2,819 2,723
INCOME TAX EXPENSE 378 375 749 738
------- ------- ------- -------
NET INCOME $ 1,041 $ 1,016 $ 2,070 $ 1,985
======= ======= ======= =======
Basic Earnings per share $ 0.61 $ 0.61 $ 1.22 $ 1.19
======= ======= ======= =======
Diluted earnings per share $ 0.60 $ 0.60 $ 1.20 $ 1.18
======= ======= ======= =======
Cash Dividends Declared per share $ 0.22 $ 0.20 $ 0.44 $ 0.40
======= ======= ======= =======
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 Total
----- ------- --------- -------- ------ ------------- ------
Balance December 31, 2000 $180 $4,629 $28,441 ($1,213) ($1,155) $488 $31,370
Comprehensive Income:
Net Income 1,985 1,985
Change in unrealized gains
on securities available for sale,
net of reclassification adjustment
and tax effects 762 762
-------
Total comprehensive income 2,747
-------
Cash dividends declared $.40 per share (670) (670)
Stock options exercised (9) 53 44
Release of earned ESOP shares 24 65 89
---- ------ ------- -------- -------- ------ -------
Balance, June 30, 2001 $180 $4,644 $29,756 ($1,160) ($1,090) $1,250 $33,580
==== ====== ======= ======== ======== ====== =======
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income Total
----- ------- --------- -------- ------ ------------- ------
Balance December 31, 2001 $180 $4,687 $31,265 ($1,066) ($952) $ 1,002 $35,116
Comprehensive Income:
Net Income 2,070 2,070
Change in unrealized gains
on securities available for sale,
net of reclassification adjustment
and tax effects 1,035 1,035
-------
Total comprehensive income 3,105
-------
Cash dividends declared $.44 per share (746) (746)
Stock options exercised (7) 51 44
Tax benefit of stock options exercised 5 5
Acquisition of Treasury Stock (8) (8)
Release of earned ESOP shares 66 52 118
---- ------ ------- -------- -------- ------ -------
Balance, June 30, 2002 $180 $4,751 $32,589 ($1,023) ($900) $2,037 $37,634
==== ====== ======= ======== ====== ====== =======
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Six Months Ended June 30,
-------------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,070 $ 1,985
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 330 370
Depreciation 298 316
Amortization of intangible assets 89 89
Deferred income taxes (584) (723)
Net realized gain on sales of securities (344) (89)
Gain(loss) on sale of foreclosed real estate, net (3) (2)
Gain on sale of premises and equipment -- --
Net gain on sale of mortgage loans and servicing (58) (47)
Mortgage loans originated for sale (4,234) (1,824)
Proceeds from sale of mortgage loans 4,292 1,871
Decrease (increase) in accrued interest receivable 58 (19)
(Decrease) in accrued interest payable (730) (846)
(Increase) in cash surrender value of life insurance
(108) (325)
Other, net 949 826
-------- --------
Net cash provided by operating activities 2,025 1,582
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 4,344 8,511
Proceeds from maturities and principal reductions on
mortgage-backed securities 17,716 15,284
Purchases (27,957) (31,794)
Securities held to maturity proceeds 30 1,000
Net decrease in loans 1,243 1,440
Redemption of FHLB stock 250 --
Purchase of bank premises and equipment, net (387) (229)
Proceeds from sales of other real estate 46 33
-------- --------
Net cash used in investing activities (4,715) (5,755)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,482 10,201
Net increase in short term borrowings 3,367 1,551
Repayments of long-term debt (2,000) (8,000)
Proceeds from long-term debt -- 8,000
Stock options exercised 44 44
Acquisition of treasury stock (8) --
Release and (buyback) of ESOP shares (48) (35)
Cash dividends paid (745) (669)
-------- --------
Net cash provided by financing activities 8,092 11,092
-------- --------
Increase in cash and cash equivalents 5,402 6,919
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,336 11,694
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,738 $ 18,613
======== ========
See accompanying notes to consolidated financial statement
6
Notes to Unaudited Consolidated Financial Statements
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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 and six month periods ended
June 30, 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 For the six months ended
-------------------------- ------------------------
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands) (In Thousands)
Basic EPS weighted average
Shares outstanding 1,697 1,673 1,695 1,668
Dilutive effect of stock options 28 10 26 14
----- ----- ----- -----
Diluted EPS weighted average
Shares outstanding 1,725 1,683 1,721 1,682
===== ===== ===== =====
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, 2002 and 2001 were
$4,691,000 and $6,243,000 respectively. Cash payments for income taxes in 2002
were $1,613,000 compared to $1,503,000 in 2001. Non-cash investing activity for
2002 and 2001 included foreclosed mortgage loans transferred to foreclosed real
estate and repossession of other assets of $692,000 and $666,000.
7
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. 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 June 30, 2002, the Company had intangible assets with a net book value
of $550,000, which will continue to be amortized under the new rules.
Amortization expense related to these assets was $89,000 for the six months
ended June 30, 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 any impact on the Company's financial condition or results
of operations.
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.
8
Overview
- --------
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of
2002 (the Act), following an investigative order proposed by the SEC on chief
financial officers and chief executive officers of 947 large public companies on
June 27, 2002. Additional regulations are expected to be promulgated by the SEC.
As a result of the accounting restatements by large public companies, the
passage of the act and regulations expected to be implemented by the SEC,
publicly-registered companies, such as the Company, will be subject to
additional and more cumbersome reporting regulations and disclosure. These new
regulations, which are intended to curtail corporate fraud, will require certain
officers to personally certify certain SEC filings and financial statements and
will require additional measures to be taken by our outside auditors, officers
and directors. The new laws and regulations will increase the non-interest
expenses of the Company.
Changes in Financial Condition
- ------------------------------
General
- -------
Total assets at June 30, 2002 were $357.0 million compared to $346.0
million at year-end 2001.
Securities
- ----------
The fair value of securities available for sale at June 30, 2002 was $103.5
million, compared to $95.8 million at December 31, 2001. Total purchases for the
period were $27.9 million with securities called and principal reductions of
$17.7 million and sales of $4.3 million. (See cash flow). The purchases were
principally obligations of U.S. Government Agencies, including callable
securities and mortgage-backed securities. The average life of the portfolio at
June 30, 2002 was 2.3 years compared to 3.5 years at December 31, 2001.
Loans
- -----
Total loans receivable, were $211.9 million at June 30, 2002, compared to
$214.2 million at December 31, 2001. The decrease was due in part to $4.3
million of longer-term residential mortgages sold in the secondary market. There
was a gain on the sale of $58,000 included in other income. The Company also
experienced a slow down in its indirect automobile lending, with loans
decreasing $6.2 million from December 31, 2001, to total $41.8 million at June
30, 2002. Commercial and commercial real estate loans increased $6.7 million, to
$88.7 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 $2.9 million from December 31, 2001 to $3.2 million at June
30, 2002, which includes residual value of $2.7 million, at June 30, 2002. The
Company liquidates its returned off-lease vehicles through various used car
dealers and automobile auction centers. At June 30, 2002 the Company had an
inventory of vehicles to liquidate of $545,000, decreasing from $620,000 at
December 31, 2001. Total provision for losses incurred on off-lease vehicles,
included in other expense, was $610,000 for the six months. The Company's
reserve for future residual value losses was $303,000 at June 30, 2002 compared
to $225,000 at December 31, 2001.
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)
June 30, 2002 December 31, 2001
-------------- -----------------
$ % $ %
-------- ----- -------- -----
Real Estate-Residential $ 66,217 31.3 $ 64,635 30.1
Commercial 69,325 32.6 63,609 29.6
Construction 3,844 1.8 4,642 2.2
Commercial, financial and agricultural 18,286 8.6 17,442 8.1
Consumer loans to individuals 51,485 24.2 58,143 27.1
Lease financing, net of unearned income 3,245 1.5 6,126 2.9
-------- ----- -------- -----
Total loans 212,402 100.0% 214,597 100.0%
Less:
Unearned income and deferred fees 456 403
Allowance for loan losses 3,260 3,216
-------- --------
Total loans, net $208,686 $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:
At or for the Three At or for the Six Months
(dollars in thousands) Months Ended June 30 Ended June 30
-------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- -----
Balance, beginning $ 3,272 $ 3,260 $ 3,216 $ 3,300
Provision for loan losses 150 200 330 370
Charge-offs (188) (219) (341) (458)
Recoveries 26 31 55 60
------- ------- ------- -------
Net charge-offs (162) (188) (286) (398)
------- ------- ------- -------
Balance, ending $ 3,260 $ 3,272 $ 3,260 $ 3,272
======= ======= ======= =======
Allowance to total loans 1.54% 1.53% 1.54% 1.53%
Net charge-offs to average loans
(annualized) .31% .35% .27% .37%
The allowance for loan losses totaled $3,260,000 at June 30, 2002 and
represented 1.54% of total loans, compared to $3,216,000 at year-end, and
$3,272,000 at June 30, 2001. Net charge-offs for the six month period ended June
30, 2002, totaled $286,000 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 June 30,
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.
At June 30, 2002, non-performing loans totaled $688,000, which is .32% of
total loans compared to $683,000 or .32% million at December 31, 2001.
Foreclosed real estate at June 30, 2002 was $287,000 compared to $54,000 at
December 31, 2001. The increase was due to a single piece of commercial real
estate, which the Company is actively marketing for sale. The following table
sets forth information regarding non-performing loans and foreclosed real estate
at the date indicated:
10
(dollars in thousands) June 30, 2002 December 31, 2001
------------- -----------------
Loans accounted for on a non-accrual
basis:
Commercial and all other $ 64 $ 64
Real Estate 557 597
Consumer 40 11
---- ----
Total 661 672
Accruing loans which are contractually
past due 90 days or more 27 11
---- ----
Total non-performing loans $688 $683
Foreclosed real estate 287 54
---- ----
Total non-performing assets $975 $737
==== ====
Allowance for loan losses as a
percent of non-performing loans 473.8% 470.9%
Non-performing loans to total loans .32% .32%
Non-performing assets to total assets .27% .21%
The recorded investment in impaired loans, not requiring an allowance for
loan losses was $261,000 and $618,000 at June 30, 2002 and December 31, 2001
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $408,000 and $64,000 at June 30, 2002 and December 31, 2001,
respectively. The related allowance for loan losses associated with these loans
was $151,000 and $7,000 respectively at June 30, 2002 and December 31, 2001.
Deposits
- --------
Total deposits at June 30, 2002 were $282.4 million compared to $274.9
million at December 31, 2001. Non-interest bearing demand deposits at June 30,
2002 were $33.7 million compared to $31.7 million at December 31, 2001. The
change reflects a seasonal increase in commercial, principally leisure related,
businesses accounts. The Company has also seen an increase in retail checking
and savings accounts. Time deposits in denominations of $100,000 or more
decreased to $23.1million at June 30, 2002 from $27.4 million at December 31,
2001, due to scheduled maturities of school district and other municipal
deposits. In addition to commercial checking accounts, the Company had $9.9
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.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) June 30, 2002 December 31, 2001
------------- -----------------
Non-interest bearing demand $ 33,732 $ 31,715
Interest bearing demand 39,071 34,939
Money Market 37,536 34,360
Savings 48,337 44,894
Time 123,729 129,015
-------- -------
Total $282,405 $274,923
======== ========
11
Stockholders' Equity and Capital Ratios
- ---------------------------------------
At June 30, 2002, stockholders' equity totaled $37.6 million, a net
increase of $2.5 million from December 31, 2001. The net increase in
stockholders' equity was primarily due to $2,070,000 in net income, that was
partially offset by $746,000 of dividends declared. In addition, accumulated
other comprehensive income increased $1,035,000 due to the increase in fair
value of securities in the available for sale portfolio. This increase in fair
value is the result of a decrease in interest rates, which favorably impact the
value of the securities. Because of interest rate volatility, the Company's
accumulated other comprehensive income could materially fluctuate for each
interim and year-end period.
A comparison of the Company's capital ratios is as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Tier 1 Capital
(To average assets) 9.87% 9.75%
Tier 1 Capital
(To risk-weighted assets) 14.30% 13.78%
Total Capital
(To risk-weighted assets) 15.82% 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 with
FRB, FDIC and PDB capital requirements at June 30, 2002 and December 31, 2001.
12
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended June 30,
-----------------------------------------------------------------
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 $ 18,391 $ 77 1.67% $ 7,420 $ 76 4.10%
Interest bearing deposits with banks 180 1 2.22 204 3 5.88
Securities held-to-maturity 6,220 138 8.87 7,004 152 8.68
Securities available for sale:
Taxable 85,877 1,178 5.49 72,863 1,145 6.29
Tax-exempt 13,622 247 7.25 10,960 202 7.37
-------- ------- ------- -------
Total securities available for sale 99,499 1,425 5.73 83,823 1,347 6.43
Loans receivable (4) (5) 211,955 3,923 7.40 215,061 4,543 8.45
-------- ------- ------- -------
Total interest earning assets 336,245 5,564 6.62 313,512 6,121 7.81
Non-interest earning assets:
Cash and due from banks. . . . . . . . . . . . . 8,321 7,225
Allowance for loan losses . . . . . . . . . . . (3,283) (3,285)
Other assets . . . . . . . . . . . . . . . . . . 14,340 14,195
-------- --------
Total non-interest earning assets 19,378 18,135
-------- --------
Total Assets $355,623 $331,647
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market. . . . $73,002 189 1.04% $64,475 355 2.20%
Savings . . . . .. . . . . . . . . . . . . . . 47,531 167 1.41 41,853 208 1.99
Time . . . . . . . . . . . . . . . . . . . . . 127,644 1,203 3.77 119,261 1,615 5.42
-------- ------- ------- -------
Total interest bearing deposits 248,177 1,559 2.51 225,589 2,718 3.86
Short-term borrowings 9,635 49 2.03 8,175 78 3.82
Long-term debt 23,000 321 5.58 28,000 385 5.50
-------- ------- ------- -------
Total interest bearing liabilities 280,812 1,929 2.75 261,764 2,641 4.04
Non-interest bearing liabilities:
Demand deposits 34,502 31,506
Other liabilities 3,777 5,551
-------- --------
Total non-interest bearing liabilities 38,279 37,057
Shareholders' equity 36,532 32,826
-------- --------
Total Liabilities and Shareholders' Equity $355,623 $331,647
======== ========
Net interest income (tax equivalent basis) 3,635 3.87% 3,480 3.77%
==== ====
Tax-equivalent basis adjustment (141) (119)
------- ------
Net interest income $ 3,494 $3,361
======= ======
Net interest margin (tax equivalent basis) 4.32% 4.44%
==== =====
(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)
-------------------
Three months ended June 30,2002 Compared to
-------------------------------------------
Three months ended June 30, 2001
--------------------------------
Variance due to
---------------
Volume Rate Net
-------------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ...................... $ 259 $ (258) $ 1
Interest bearing deposits with banks .... -- (2) (2)
Securities held to maturity ............. (34) 20 (14)
Securities available for sale:
Taxable .............................. 699 (666) 33
Tax-exempt securities ................ 67 (22) 45
------- ------ -------
Total securities .................. 766 (688) 78
Loans receivable ........................ (65) (555) (620)
------- ------ -------
Total interest earning assets ......... 926 (1,483) (557)
Interest bearing liabilities:
Interest-bearing demand deposits ....... 267 (433) (166)
Savings ................................ 141 (182) (41)
Time ................................... 659 (1,071) (412)
------- ------ -------
Total interest bearing deposits ..... 1,067 (1,686) (619)
Short-term borrowings ................... 73 (102) (29)
Long Term debt ........................... (102) 38 (64)
------- ------- -------
Total interest bearing liabilities ...... 1,038 (1,750) (712)
Net interest income (tax-equivalent basis) $ (112) $ 267 $ 155
======= ======= =======
(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 the Three months ended June 30, 2002 and
June 30, 2001.
- --------------------------------------------------------------------------------
General
- -------
For the three months ended June 30, 2002 net income was $1,041,000 compared
to $1,016,000 in 2001, an increase of $25,000 or 2.5%. The resulting basic EPS
was $.61 with a diluted EPS of $.60 compared to basic EPS of $.61 and diluted
EPS of $.60 for the second quarter of 2001. The return on average assets for the
three months of 2002 was 1.17%, with a return on average equity of 11.43%.
Net Interest Income
- -------------------
Net interest income (fte) for the three months ended June 30, 2002 was
$3,635,000, an increase of $155,000, or 4.5% over the similar period in 2001.
The net interest spread (fte) and net interest margin (fte) were 3.87% and 4.32%
respectively, compared to 3.77% and 4.44% respectively in 2001.
Interest income (fte) for the three months ended June 30, 2002 totaled
$5,564,000 with a yield of 6.62% compared to $6,121,000 and a yield of 7.81% in
the same period of 2001. The decrease in yield was principally due to the lower
interest rate environment in 2002. The change in asset mix also contributed to
the decrease in yield, with a higher percent of lower yielding federal funds
sold and securities available for sale, 35.1% of earning assets, increasing from
29.1% in 2001. This was partially offset by $22.7 million increase in earning
assets, which was funded by deposit growth.
Interest expense in the second quarter of 2002 totaled $1,929,000 with a
cost of interest-bearing liabilities of 2.75%, decreasing from $2,641,000 and
4.04% in 2001. All categories of interest-bearing deposits decreased in costs
with the lower interest rate environment. The Company also paid down $5,000,000
of long-term borrowings from the Federal Home Loan Bank, as compared to the
second quarter of 2001.
Other Income
- ------------
Other income totaled $931,000 for the three months ended June 30, 2002
compared to $694,000 in the second quarter of 2001. The increase was due to
$333,000 of gains on sales of securities, principally equity holdings in other
financial institutions, compared to $78,000 of such gains in 2001.
Other Expenses
- --------------
Other expenses totaled $2,856,000 in the second quarter of 2002 increasing
from $2,464,000 in 2001. The increase was due in part to higher losses on lease
residuals, $430,000 compared to $150,000. The Company did liquidate more autos
in 2002 and the loss level was also negatively impacted by a softer used car
market.
Income Taxes
- ------------
Income tax expense totaled $378,000 for an effective tax rate of 26.6% for
the three months ended June 30, 2002 compared to $375,000 and 27.0% in 2001.
15
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Six Months Ended June 30,
-----------------------------------------------------------------
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 $ 13,924 $ 116 1.67% $4,138 $ 87 4.20%
Interest bearing deposits with banks 167 1 1.20 155 4 5.16
Securities held-to-maturity 6,223 274 8.81 7,243 318 8.78
Securities available for sale:
Taxable 83,365 2,334 5.60 72,342 2,295 6.34
Tax-exempt 13,365 485 7.26 9,572 348 7.27
-------- ------- ------- -------
Total securities available for sale 96,730 2,819 5.83 81,914 2,643 6.45
Loans receivable (4) (5) 214,079 7,969 7.44 15,396 9,224 8.56
-------- ------- ------- -------
Total interest earning assets 331,123 11,179 6.75 308,846 12,276 7.95
Non-interest earning assets:
Cash and due from banks. . . . . . . . . . . . . 7,879 6,962
Allowance for loan losses. . . . . . . . . . . . (3,273) (3,275)
Other assets . . . . . . . . . . . . . . . . . . 14,143 14,346
-------- --------
Total non-interest earning assets 18,749 18,033
-------- --------
Total Assets $349,872 $326,879
======== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market. . . . $ 70,223 367 1.05% $ 61,886 720 2.33%
Savings . . . . .. . . . . . . . . . . . . . . 46,416 324 1.40 41,290 420 2.03
Time . . . . . . . . . . . . . . . . . . . . . 129,328 2,539 3.93 119,586 3,301 5.52
-------- ------- ------- -------
Total interest bearing deposits 245,967 3,230 2.63 222,762 4,441 3.99
Short-term borrowings 7,791 81 2.08 8,740 148 3.39
Long-term debt 23,464 650 5.54 27,862 808 5.80
-------- ------- ------- -------
Total interest bearing liabilities 277,222 3,961 2.86 259,364 5,397 4.16
Non-interest bearing liabilities:
Demand deposits 32,390 29,267
Other liabilities 4,099 5,910
-------- --------
Total non-interest bearing liabilities 36,489 35,177
Shareholders' equity 36,161 32,338
-------- --------
Total Liabilities and Shareholders' Equity $349,872 $326,879
======== ========
Net interest income (tax equivalent basis) 7,218 3.89% 6,879 3.79%
==== ====
Tax-equivalent basis adjustment (274) (232)
------- -------
Net interest income $ 6,944 $ 6,647
======= =======
Net interest margin (tax equivalent basis) 4.36% 4.45%
==== ====
(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.
16
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 30,2002 Compared to
-----------------------------------------
Six months ended June 30, 2001
------------------------------
Variance due to
---------------
Volume Rate Net
-------------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold.......................... $ 190 $ (161) $ 29
Interest bearing deposits with banks..... 1 (4) (3)
Securities held to maturity................. (47) 3 (44)
Securities available for sale:
Taxable ................................. 631 (592) 39
Tax-exempt securities.................... 139 (2) 137
-------- -------- -------
Total securities...................... 770 (594) 176
Loans receivable (56) (1,199) (1,255)
-------- -------- -------
Total interest earning assets............. 858 (1,955) (1,097)
Interest bearing liabilities:
Interest-bearing demand deposits........... 242 (595) (353)
Savings ................................... 122 (218) (96)
Time....................................... 671 (1,433) (762)
-------- -------- -------
Total interest bearing deposits......... 1,035 (2,246) (1,211)
Short-term borrowings ...................... (15) (52) (67)
Long Term debt... ........................... (123) (35) (158)
-------- -------- -------
Total interest bearing liabilities.......... 897 (2,333) 1,436
Net interest income (tax-equivalent basis) $ (39) $ 378 $ 339
======== ======== =======
(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.
17
Comparison of Operating Results for Six Months Ended June 30, 2002 and June 30,
2001
- --------------------------------------------------------------------------------
General
- -------
For the six months ended June 30, 2002 net income totaled $2,070,000 with a
basic earnings per share (EPS) of $1.22 and diluted EPS of $1.20. This compares
to $1,985,000 earned for the corresponding period in 2001 with basic EPS of
$1.19 and diluted EPS of $1.18. The resulting return on average equity and
average assets for six months of 2002 were 11.54% and 1.19% respectively
compared to 12.28% and 1.21% respectively in 2001.
Net Interest Income
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the six
months ended June 30, 2002 was $7,218,000, compared to $6,879,000 in 2001, an
increase of $339,000 or 4.9%. The resultant fte net interest spread and net
interest margin for 2002 were 3.89% and 4.36% respectively, compared to 3.79%
and 4.45% respectively in 2001.
Interest income (fte) for the six months ended June 30, 2002 totaled
$11,179,000, compared to $12,276,000. The decrease was principally due to lower
interest rates, with the prime interest rate at 4.75% and federal funds rate at
1.75% on June 30, 2002 compared to prime rate of 6.75% and Federal Funds at
3.75% at June 30, 2001. The yield on earning assets declined 120 basis points to
6.75% in 2002 from 7.95% in 2001.
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 Federal Funds sold and
securities available for sale represented 33.4% of total earning assets and
loans were 64.7% with loans decreasing from 69.7% in 2001
Securities available for sale averaged $96.7 million with income of
$2,819,000 and fte yield of 5.83% compared to $81.9 million, $2,643,000 and
6.45% in 2001. The increase was principally in shorter-term obligations of US
Government agencies, including callable bonds, and mortgage-backed securities.
The increase was funded by deposit growth.
Average loans for the six-month period were $214.1 million, compared to
$215.4 million in 2001. The yield on loans declined to 7.44% in 2002 from 8.56%
in 2001, as a result of the lower prime rate in 2002.
Interest expense for six months ended June 30, 2002 totaled $3,961,000 with
a rate of 2.86% declining from $5,397,000 and 4.16% in 2001. All deposit
categories showed a decrease in costs with total interest-bearing deposits at
2.63% in 2002 down from 3.99%. Interest-bearing deposits increased $23.2
million. The proceeds were used to purchase securities, as previously mentioned,
pay down other borrowings which declined $4.4 million, with the remaining
invested in Federal Funds sold, which increased $9.8 million to $13.9 million in
2002.
18
Other Income
- ------------
Other income totaled $1,629,000 for the six months ended June 30, 2002
compared to $1,360,000 for the same period in 2001. The increase was principally
due to $344,000 of net realized gains on sales of securities compared to $89,000
in 2001. The gains were generated from the sale of equity holdings in other
financial holding companies. Service charges and fees increased $42,000 due to
growth in ATM and debit card activity. Income from fiduciary activities totaled
$107,000 in 2002 declining from $151,000 in 2001, due to non-recurring estate
fees in 2001.
Other Expense
- -------------
Other expense for six months ended June 30, 2002 totaled $5,424,000
compared to $4,914,000 in 2001, an increase of $510,000. The increase was due in
part to higher losses on lease residuals of $610,000 in 2002, an increase of
$280,000 from 2001. Salaries and employee benefit costs increased $172,000 or
7.5%, principally due to increase in retirement and health insurance plan costs.
Income Tax Expense
- ------------------
Income tax expense for the six months ended June 30, 2002 was $749,000 for
an effective rate of 26.6% compared to $738,000 and an effective rate of 27.1%
in 2000. The decrease in the effective rate is due to a higher level of tax
exempt income on municipal securities.
19
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Market Risk
- -----------
There were no significant changes for the six months ended June 30, 2002
from the information presented in the Form 10-k for the year-ended December 31,
2001.
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 23, 2002.
The following incumbent directors were nominated and duly elected to the Board
of Directors for a three year term expiring in 2005:
For Withheld
--- --------
Daniel J. O'Neill 1,365,584.23 18,931.50
Dr. Kenneth A. Phillips 1,367,900.23 16,615.50
Gary P. Rickard 1,370,120.23 14,395.50
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 seven 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***
99.0 Certification pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002
(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.
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: August 12, 2002 By: /s/ William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2002 By: /s/ Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22