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 quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 0-28366
Norwood Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
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 9, 2003
- --------------------------------------- 1,771,756
common stock, par value $0.10 per share --------------------------------
1
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
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 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
Certifications 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
2003 2002
--------- ---------
ASSETS
Cash and due from banks $ 11,069 $ 9,579
Interest bearing deposits with banks 144 230
Federal funds sold 10,680 6,435
--------- ---------
Cash and cash equivalents 21,893 16,244
Securities available for sale 110,480 114,843
Securities held to maturity, fair value 2003
$6,505, 2002 $6,504 6,206 6,204
Loans receivable (net of unearned income) 220,426 217,970
Less: Allowance for loan losses 3,212 3,146
--------- ---------
Net loans receivable 217,214 214,824
Investment in FHLB Stock 1,832 1,637
Bank premises and equipment, net 5,861 5,986
Foreclosed real estate 11 21
Accrued interest receivable 1,687 1,799
Other assets 5,444 5,910
--------- ---------
TOTAL ASSETS $ 370,628 $ 367,468
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 34,419 $ 33,453
Interest-bearing 261,495 258,399
--------- ---------
Total deposits 295,914 291,852
Short-term borrowings 7,951 9,016
Long-term debt 23,000 23,000
Accrued interest payable 1,597 1,654
Other liabilities 1,603 1,821
--------- ---------
TOTAL LIABILITIES 330,065 327,343
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
Issued 2003: 2,705,736, 2002: 1,803,824 shares 270 180
Surplus 4,714 4,762
Retained earnings 34,779 34,082
Treasury stock, at cost: 2003: 48,102 shares,
2002: 31,506 shares (666) (640)
Unearned ESOP shares (701) (750)
Accumulated other comprehensive income 2,167 2,491
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 40,563 40,125
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 370,628 $ 367,468
========= =========
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
-------------------
2003 2002
------ ------
INTEREST INCOME
Loans receivable, including fees $3,636 $4,040
Securities 1,256 1,403
Other 33 39
------ ------
Total interest income 4,925 5,482
INTEREST EXPENSE
Deposits 1,305 1,671
Short-term borrowings 25 32
Long-term debt 317 329
------ ------
Total interest expense 1,647 2,032
------ ------
NET INTEREST INCOME 3,278 3,450
PROVISION FOR LOAN LOSSES 165 180
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,113 3,270
OTHER INCOME
Service charges and fees 442 419
Income from fiduciary activities 50 63
Net realized gains on sales of securities 143 11
Gains on sale of loans 140 56
Other 113 149
------ ------
Total other income 888 698
OTHER EXPENSES
Salaries and employee benefits 1,230 1,246
Occupancy, furniture & equipment, net 356 310
Data processing related 144 132
Losses on lease residuals - 180
Taxes, other than income 82 78
Professional fees 49 59
Other 605 563
------ ------
Total other expenses 2,466 2,568
INCOME BEFORE INCOME TAXES 1,535 1,400
INCOME TAX EXPENSE 425 371
------ ------
NET INCOME $1,110 $1,029
====== ======
BASIC EARNINGS PER SHARE $ 0.43 $ 0.41
====== ======
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.40
====== ======
Dividends per share $ 0.16 $ 0.15
====== ======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
Three months ended March 31, 2002 and 2003
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance, December 31, 2001 $180 $4,687 $31,265 ($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,
$.15 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
==== ====== ======= ======= ===== ==== =======
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income(loss) Total
----- ------- -------- ----- ------ ------------ -----
Balance, December 31, 2002 $180 $4,762 $34,082 ($640) ($750) $2,491 $40,125
Comprehensive income:
Net Income 1,110 1,110
Net change in unrealized
gains (losses) on
securities available for
sale, net of
reclassification
adjustment and tax effects (324) (324)
-------
Total comprehensive income 786
-------
Cash dividends declared,
$.16 per share (413) (413)
Stock options exercised (1) 20 19
Three-for-two stock split in the
form of a 50% dividend 90 (90) -
Tax benefit of stock options exercised 4 4
Acquisition of treasury stock (46) (46)
Release of earned ESOP shares 39 49 88
---- ------ ------- ----- ----- ------ -------
Balance, March 31, 2003 $270 $4,714 $34,779 ($666) ($701) $2,167 $40,563
==== ====== ======= ===== ===== ====== =======
See accompanying notes to the unaudited financial statements
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,110 $ 1,029
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 165 180
Depreciation 159 146
Amortization of intangible assets 44 44
Deferred income taxes (387) (395)
Net amortization of securities premiums and discounts 110 24
Net realized gain on sales of securities (143) (11)
Earnings on life insurance policy (29) (54)
Gain (loss) on sale of foreclosed real estate, net - (1)
Net gain on sale of mortgage loans (140) (56)
Mortgage loans originated for sale (3,729) (4,013)
Proceeds from sale of mortgage loans 3,869 4,069
Tax benefit of stock options exercised 4 5
Release of ESOP shares 89 79
Decrease in accrued interest receivable and other assets 686 397
Increase in accrued interest payable and other liabilities 276 222
-------- --------
Net cash provided by operating activities 2,804 1,665
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 6,122 3,954
Proceeds from maturities and principal reductions on
mortgage-backed securities 23,542 9,779
Purchases (25,759) (9,793)
(Increase) decrease in investment in FHLB stock (195) 150
Net (increase) decrease in loans (2,679) 233
Purchase of bank premises and equipment, net (32) (63)
Proceeds from sales of foreclosed real estate 10 44
-------- --------
Net cash used in investing activities $ 1,009 4,304
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,062 3,159
Net decrease in short term borrowings (1,065) (84)
Repayments of long- term debt - (2,000)
Stock options exercised 19 44
Acquisition of treasury stock (46) (5)
Repurchase of ESOP shares (1) (48)
Cash dividends paid (413) (373)
-------- --------
Net cash provided by (used in) financing activities 2,556 693
-------- --------
Increase (decrease) in cash and cash equivalents 5,649 6,662
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,244 17,336
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,893 $ 23,998
======== ========
See accompanying notes to the unaudited financial statements
6
Notes to Unaudited Consolidated Financial Statements
- ----------------------------------------------------
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and WTRO Properties. All significant intercompany transactions have been
eliminated in consolidation.
2. Estimates
---------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month period ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003 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, 2002.
3. Stock Dividend and Earnings Per Share
-------------------------------------
On April 8, 2003, the Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend on common stock outstanding, payable
June 16, 2003 to shareholders of record on May 30, 2003. The stock split
resulted in the issuance of 901,912 additional common shares. The effect of this
stock split has been recorded as of March 31, 2003. All per share data has been
adjusted for the effect of the stock split.
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.
7
For the Three Months Ended
--------------------------
March 31
--------
2003 2002
----- -----
(In Thousands)
Basic EPS weighted average
Shares outstanding 2,589 2,541
Dilutive effect of stock options 37 35
----- -----
Diluted EPS weighted average
Shares outstanding 2,626 2,576
===== =====
4. Stock Option Plans
------------------
The Company accounts for stock option plans under the recognition and
measurement principles of APB opinion No. 25, "Accounting For Stock Issued to
Employees", and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123 "Accounting for Stock-Based Compensation",
to stock based employee compensation.
(in thousands, except for per share data) Three Months ended March 31
---------------------------
2003 2002
--------- ---------
Net income as reported $ 1,110 $ 1,029
Total stock-based employee compensation
determined under fair value based method for all
awards, net of taxes (15) (22)
--------- ---------
$ 1,095 $ 1,007
========= =========
Earnings per share (basic)
As Reported .43 .41
Pro forma .42 .40
Earnings per share (assuming dilution)
As Reported .42 .40
Pro forma .42 .39
During the first quarter of 2003, a director exercised stock options to acquire
1,000 shares of stock at a weighted average exercise price of $19.28 per share.
5. 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 ended March 31, 2003 and 2002
were $1,704,000 and $2,149,000 respectively. Cash payments for income taxes in
2003 were $1,400 compared to $4,450 in
8
2002. Non-cash investing activity for 2003 and 2002 included repossession of
other assets of $124,000 and $228,000.
6. Comprehensive Income
--------------------
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities such as unrealized gains and losses on available for
sale securities, are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are components of
comprehensive income. The components of other comprehensive income and related
tax effects are as follows.
(in thousands) Three Months Ended March 31
---------------------------
2003 2002
------ ------
Unrealized holding losses
on available for sale securities $(346) $(269)
Reclassification adjustment for gains
realized in income (143) (11)
----- -----
Net Unrealized Losses (489) (280)
Income tax (benefit) (165) (95)
----- -----
Other comprehensive income (loss) $(324) $(185)
===== =====
7. 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. Recent Accounting Standards
---------------------------
In October 2002 the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial Institutions." This
Statement provides guidance on accounting for the acquisition of a financial
institution, including the acquisition of part of a financial institution. The
Statement defines criteria for determining whether the acquired financial
institution meets the conditions for a "business combination". If the
acquisition meets the conditions of a "business combination", the specialized
accounting guidance under Statement No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" will not apply after September 30, 2002 and
the amount of any unidentifiable intangible asset will be reclassified to
goodwill upon adoption of Statement No. 147. The transition provisions were
effective on October 1, 2002. At March 31, 2003, the Company had intangible
assets with a net book value of $416,000, 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, 2003 and 2002.
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
9
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement became effective for the
Company on January 1, 2003 and did not have any impact on the Company's
financial condition or results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
Which nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This Statement delays recognition of these
costs until liabilities are incurred, rather than at the date of commitment to
the plan, and requires fair value measurement. It does not impact the
recognition of liabilities incurred in connection with a business combination or
the disposal of long-lived assets. The provisions of this Statement are
effective for exit or disposal activities initiated after December 31, 2002 and
are not expected to have a significant impact on the Company's financial
condition or results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies." In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party, which would include financial standby
letters of credit. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this Interpretation, including, among
others, guarantees related to commercial letters of credit and loan commitments.
The disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
accounting recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did
not have a significant impact on the Company's financial condition or results of
operations.
Outstanding letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. The Company had $1,286,000 of
standby letters of credit as of March 31, 2003. The Bank uses the same credit
policies in making conditional obligations as it does for on-balance sheet
instruments.
The majority of these standby letters of credit expire within the next twelve
months. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending other loan commitments. The Company requires
collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation
of such collateral and the enforcement of personal guarantees would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The current
10
amount of the liability as of March 31, 2003 for guarantees under standby
letters of credit issued after December 31, 2002 is not material.
In April 2003, the Financial Accounting Standards Board issued Statement No.,
149, "Amendment of Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities". This statement clarifies the definition of a derivative and
incorporates certain decisions made by the Board as part of the Derivatives
Implementation Group process. This statement is effective for contracts entered
into or modified, and for hedging relationships designated after June 30, 2003
and should be applied prospectively. The provisions of the Statement that relate
to implementation issues addressed by the Derivatives Implementation Group that
have been effective should continue to be applied in accordance with their
respective effective dates. Adoption of this standard is not expected to have a
significant impact on the Corporation's financial condition or results of
operations.
Item 2. Management's 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.
Critical Accounting Policies
- ----------------------------
Note 2 to the Company's consolidated financial statements (incorporated
by reference in Item 8 of the 10-K) lists significant accounting policies used
in the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company and its results of operations.
The most significant estimates in the preparation of the Company's
financial statements are for the allowance for loans losses and accounting for
stock options. Please refer to the discussion of the allowance for loan losses
calculation under "Non-performing Assets and Allowance for Loan Losses" in the
"Financial Condition" section below. The Company accounts for their stock option
plans under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation is reflected in net income, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the grant date. The Company currently has no intentions of adopting the
expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
11
Changes in Financial Condition
- ------------------------------
General
- -------
Total assets at March 31, 2003 were $370.6 million compared to $367.5
million at year-end 2002.
Securities
- ----------
The fair value of securities available for sale at March 31, 2003 was
$110.5 million, compared to $114.8 million at December 31, 2002. Total purchases
for the period were $25.8 million with securities called and principal
reductions of $23.5 million and sales of $6.1 million. The purchases were
principally obligations of U.S. Government Agencies, including
mortgage-backed-securities.
Loans
- -----
Total loans receivable were $220.4 million at March 31, 2003, compared
to $218.0 million at December 31, 2002. The increase was principally due to
growth in the commercial real estate portfolio which increased $5.0 million or
6.3%. The Company sold $3.9 million of long-term fixed rate residential
mortgages into the secondary market, at a gain of $140,000, included in other
income. The Company saw a continued decline in its indirect automobile
portfolio, included in consumer loans, which declined $2.1 million to $37.3
million. The decrease is due to competition from larger banks, automakers,
finance companies and a slow down in the market.
The Company no longer originates automobile leases, and as a result,
the portfolio declined $491,000 from December 31, 2002 to $1,101,000 at March
31, 2003, which includes residual value of $957,000. The Company liquidates its
returned off-lease vehicles through various used car dealers and automobile
auction centers. At March 31, 2003 the Company had an inventory of vehicles to
liquidate of $199,000, declining significantly from $814,000 at March 31, 2002.
Total provision for losses incurred on off-lease vehicles, included in other
expense, was $-0- for the quarter, compared to $180,000 for the first quarter of
2002. The Company's reserve for future residual value losses was $159,000 at
March 31, 2003 compared to $213,000 at December 31, 2002.
12
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, 2003 December 31, 2002
------------------ -----------------
$ % $ %
-------- ---- -------- ----
Real Estate-Residential $ 66,807 30.3 $ 69,040 31.6
Commercial 84,715 38.3 79,623 36.5
Construction 3,831 1.7 4,109 1.9
Commercial, financial and agricultural 17,798 8.1 15,074 6.9
Consumer loans to individuals 46,587 21.1 48,951 22.4
Lease financing, net of unearned income 1,101 0.5 1,592 0.7
-------- ----- -------- ----
Total loans 220,839 100.0% 218,389 100.0%
Less:
Unearned income and deferred fees 413 419
Allowance for loan losses 3,212 3,146
-------- --------
Total loans, net $217,214 $214,824
======== ========
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
---------------------
2003 2002
------- -------
Balance, beginning $ 3,146 $ 3,216
Provision for loan losses 165 180
Charge-offs (133) (153)
Recoveries 34 29
------- -------
Net charge-offs (99) (124)
------- -------
Balance, ending $ 3,212 $ 3,272
======= =======
Allowance to total loans 1.46% 1.53%
Net charge-offs to average loans
(annualized) .18% .23%
The allowance for loan losses totaled $3,212,000 at March 31, 2003
and represented 1.46% of total loans, compared to $3,146,000 at year-end, and
$3,272,000 at March 31, 2002. Net charge-offs for the three month period ended
March 31, 2003, totaled $99,000 and consisted principally of losses on the sale
of repossessed automobiles. The Company's loan review process assesses the
adequacy of the allowance for loan losses on a quarterly basis. The process
includes an analysis of the risks inherent in the loan portfolio. It includes an
analysis of impaired loans and an historical review of credit losses by loan
type. Other factors considered include: concentration of credit in specific
industries; economic and industry conditions; trends in delinquencies, large
dollar exposures and loan growth. Management
13
considers the allowance adequate at March 31, 2003 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 March 31, 2003, non-performing loans totaled $170,000, which is
..08% of total loans compared to $221,000, or .10% of total loans at December 31,
2002 and $1,027,000 and .48% at March 31, 2002. The following table sets forth
information regarding non-performing loans and other real estate owned at the
date indicated:
(dollars in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Loans accounted for on a non-accrual
basis:
Commercial and all other $ - $ -
Real Estate 125 213
Consumer 1 3
---- ----
Total 126 216
Accruing loans which are contractually
past due 90 days or more 44 5
---- ----
Total non-performing loans $170 $221
Foreclosed real estate 11 21
---- ----
Total non-performing assets $181 $242
==== ====
Allowance for loan losses as a
percent of non-performing loans 1,889.41% 1,423.5%
Non-performing loans to total loans .08% .10%
Non-performing assets to total assets .05% .07%
Deposits
- --------
Total deposits at March 31, 2003 were $295.9 million compared to
$291.9 million at December 31, 2002. Non-interest bearing demand deposits at
March 31, 2003 were $33.5 million compared to $33.5 million at December 31,
2002. Time deposits in denominations of $100,000 or more increased to $33.4
million at March 31, 2003 from $29.5 million at December 31, 2002 due to growth
in short-term time deposits from school districts within the Company's market
area. The Company, as of March 31, 2003, had $7.4 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.
14
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) March 31, 2003 December 31,2002
-------------- ----------------
Non-interest bearing demand $ 34,419 $ 33,453
Interest bearing demand 39,143 40,407
Money Market 37,277 38,908
Savings 53,530 51,629
Time 131,545 127,455
-------- --------
Total $295,914 $291,852
======== ========
Stockholders' Equity and Capital Ratios
- ---------------------------------------
At March 31,2003, total stockholders' equity totaled $40.6 million, a
net increase of $438,000 from December 31, 2002. The net increase in
stockholders' equity was primarily due to $1,110,000 in net income, that was
partially offset by $413,000 of dividends declared. In addition, accumulated
other comprehensive income decreased $324,000 due to decrease in fair value of
securities in the available for sale portfolio. This decrease in fair value is
the result of a change 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 regulatory capital ratios is as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Tier 1 Capital
(To average assets) 10.49 % 10.13%
Tier 1 Capital
(To risk-weighted assets) 15.27% 15.06%
Total Capital
(To risk-weighted assets) 16.78% 16.57%
The minimum capital requirements imposed by the FDIC on the Bank 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, 2003 and
December 31, 2002.
15
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
-----------------------------------------------------------------------
2003 2002
---------------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 11,102 $ 33 1.19% $ 9,407 $ 38 1.62%
Interest bearing deposits with banks 293 1 1.37 152 1 2.63
Securities held-to-maturity 6,205 136 8.77 6,227 136 8.74
Securities available for sale:
Taxable 97,746 982 4.02 80,784 1,156 5.72
Tax-exempt 14,642 276 7.54 13,104 238 7.26
-------- ------ -------- ------
Total securities available for sale (1) 112,388 1,258 4.48 93,888 1,394 5.94
Loans receivable (4) (5) 218,466 3,651 6.68 216,226 4,046 7.48
-------- ------ -------- ------
Total interest earning assets 348,454 5,078 5.83 325,900 5,615 6.89
Non-interest earning assets:
Cash and due from banks. . . . . . . . . . . . . 7,925 7,434
Allowance for loan losses . . . . . . . . . . (3,206) (3,263)
Other assets. . . . . . . . . . . . . . . . . . 13,115 13,987
-------- --------
Total non-interest earning assets 17,834 18,158
-------- --------
Total Assets $366,288 $344,058
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market . . . . $76,129 141 0.74% $ 67,413 178 1.06%
Savings . . . . .. . . . . . . . . . . . . . . 52,535 134 1.02 45,289 157 1.39
Time . . . . . . . . . . . . . . . . . . . . . 130,175 1,030 3.16 131,031 1,336 4.08
-------- ------ -------- ------
Total interest bearing deposits 258,839 1,305 2.02 243,733 1,671 2.74
Short-term borrowings 7,790 25 1.28 5,923 32 2.16
Long-term debt 23,000 317 5.51 23,933 329 5.50
-------- ------ -------- ------
Total interest bearing liabilities 289,629 1,647 2.27 273,589 2,032 2.97
Non-interest bearing liabilities:
Demand deposits 32,858 30,255
Other liabilities 3,331 4,429
-------- --------
Total non-interest bearing liabilities 36,189 34,684
Stockholders' equity 40,470 35,785
-------- --------
Total Liabilities and Stockholders' Equity $366,288 $344,058
======== ========
Net interest income (tax equivalent basis) 3,431 3.55% 3,583 3.92%
==== ====
Tax-equivalent basis adjustment (153) (133)
----- ------
Net interest income $3,278 $3,450
====== ======
Net interest margin (tax equivalent basis) 3.94% 4.40%
==== ====
(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)
--------------------------------------------
Three months ended March 31,2003 Compared to
--------------------------------------------
Three months ended March 31, 2002
--------------------------------------------
Variance due to
--------------------------------------------
Volume Rate Net
--------------------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ........................ $ (3) $ (3) $ (6)
Interest bearing deposits with banks ...... 3 (3) -
Securities held to maturity ............... (2) 2 -
Securities available for sale:
Taxable ................................ 1,067 (1,241) (174)
Tax-exempt securities .................. 29 9 38
------- ------- -------
Total securities .................... 1,096 (1,232) (136)
Loans receivable .......................... (14) (381) (395)
------- ------- -------
Total interest earning assets ........... 1,080 (1,617) (537)
Interest bearing liabilities:
Interest-bearing demand deposits ......... 117 (154) (37)
Savings .................................. 116 (139) (23)
Time ..................................... (10) (296) (306)
------- ------- -------
Total interest bearing deposits ....... 223 (589) (366)
Short-term borrowings ..................... 42 (49) (7)
Long Term debt ............................. (18) 6 (12)
------- ------- -------
Total interest bearing liabilities ........ 247 (632) (385)
Net interest income (tax-equivalent basis).. $ 833 $ (985) $ (152)
======= ======= =======
(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 Three Months Ended March 31, 2003 and March
31, 2002
General
- -------
For the three months ended March 31, 2003 net income totaled
$1,110,000 or $.43 per share basic, and $.42 per share diluted compared to
$1,029,000, or $.41 per share basic and $.40 diluted earned in the first quarter
of 2002. The resulting return on average assets and return on average equity for
the quarter were 1.23% and 11.12% respectively compared to 1.21% and 11.66%
respectively for the corresponding period in 2002.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the three months ended March 31, 2003 totaled $3,431,000 compared to $3,583,000
in 2002. The resultant fte net interest spread and net interest margin was 3.55%
and 3.94%, respectively, compared to 3.92% and 4.40%, respectively, for the 2002
period.
Interest income (fte) totaled $5,078,000 with a yield of 5.83% for
the period in 2003, compared to $5,615,000 and 6.89% in 2002. The decrease in
yield was due in part to lower interest rates in 2003, with prime rate at 4.25%
and Federal Funds rate at 1.25% as of March 31 ,2003, declining from 4.75% and
1.75%, respectively, as of March 31, 2002. The earning asset yield was also
unfavorably impacted by a change in asset mix, as a result of deposits
increasing faster than loans. Average loans for the three months ended March 31,
2003 represented 62.7% of average earning assets compared to 66.4% for the three
months ended March 31, 2002.
Interest expense for the three months ended March 31, 2003 totaled
$1,647,000 at a rate of 2.27%, compared to $2,032,000 and 2.97% in 2002. All
categories of liability costs decreased in the lower interest rate environments.
Average interest-bearing deposits increased $15.1 million, with the proceeds
principally invested in federal funds and other short-term investments. These
types of short-term investments yield less than what is earned on loans.
Other Income
- ------------
Other income totaled $888,000 for the three months ended March 31,
2003 compared to $698,000 for the period in 2002, an increase of $190,000 or
27.2%. Net realized gains on securities transactions were $143,000 for the first
quarter of 2003 compared to $11,000 in 2002, with the increase principally due
to the sale of corporate bonds in 2003. The Company also sold $3.9 million of
long- term mortgages, for interest rate risk management, for a gain of $140,000,
compared to $56,000 of gains on sales of $4.1 million of mortgage loans in 2002.
Other Expense
- -------------
Other expense for the three months ended March 31, 2003 totaled
$2,466,000, a decrease of $102,000 or 4.0%, from $2,568,000 for the three months
ended March 31, 2002. The decrease was principally due to lower losses on lease
residuals of $180,000, for the first quarter of 2003, compared to the similar
period in 2002.
18
Income Tax Expense
- ------------------
Income tax expense totaled $425,000 for an effective tax rate of
27.7% for the period ending March 31, 2003, compared to $371,000 and 26.5% in
the first quarter of 2002. The effective tax rate increased due to a lower 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, 2003 from the information presented in the Form 10-k for the year-ended
December 31, 2002.
Item 4: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Registrant's principal executive Officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
the Registrant's internal controls, or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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
Not applicable
Item 5. Other Information
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
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. 55-1350, as adopted pursuant to 55.906 of
Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K
None
20
- ---------------------------
* 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 20, 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: May 13, 2003 By:/s/William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13 2003 By:/s/Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
SECTION 302 CERTIFICATION
I, William W. Davis, Jr., certify that:
1. I have reviewed this quarterly report on Form 10- Q of Norwood Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/William W. Davis, Jr.
--------------------------------------------
Signature
Title: President and Chief Executive Officer
23
SECTION 302 CERTIFICATION
I, Lewis J. Critelli, certify that
1. I have reviewed this quarterly report on Form 10- Q of Norwood Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13 , 2003 /s/Lewis J. Critelli
-----------------------------------
Signature
Title: Executive Vice President and
Chief Financial Officer
24