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 June 30, 2005
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-28366
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Norwood Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
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(State or otherjurisdiction 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
-----------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate 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 August 12, 2005
- --------------------------------------- ----------------------------------
common stock, par value $0.10 per share 2,692,079
1
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits 25
Signatures 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, December 31,
2005 2004
-------- ----------
(Unaudited)
ASSETS
Cash and due from banks $ 11,895 $ 7,488
Interest bearing deposits with banks 119 118
Federal funds sold 5,290 13,060
--------- ---------
Cash and cash equivalents 17,304 20,666
Securities available for sale 111,497 116,933
Securities held to maturity, fair value 2005:
$3,415, 2004: $5,878 3,337 5,724
Loans receivable (net of unearned income) 275,558 254,757
Less: Allowance for loan losses 3,600 3,448
--------- ---------
Net loans receivable 271,958 251,309
Investment in FHLB Stock, at cost 1,973 2,225
Bank premises and equipment, net 5,434 5,489
Accrued interest receivable 1,715 1,641
Other Assets 9,337 7,639
--------- ---------
TOTAL ASSETS $ 422,555 $ 411,626
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 53,628 $ 44,450
Interest bearing 285,305 274,195
--------- ---------
Total deposits 338,933 318,645
Short-term borrowings 10,928 22,982
Long-term debt 23,000 23,000
Accrued interest payable 1,149 1,200
Other liabilities 1,714 114
--------- ---------
TOTAL LIABILITIES 375,724 365,941
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized 10,000,000
shares issued 2,705,715 shares 270 270
Surplus 5,525 5,336
Retained earnings 41,837 40,222
Treasury stock at cost: 2005: 15,979 shares, 2004:
8,913 (449) (149)
Unearned ESOP shares (249) (327)
Accumulated other comprehensive income (loss) (103) 333
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 46,831 45,685
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 422,555 $ 411,626
========= =========
See accompanying notes to the 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
------- -------
2005 2004 2004 2005
------- ------- ------- -------
INTEREST INCOME
Loans receivable, including fees $ 4,288 $ 3,564 $ 8,208 $ 7,116
Securities 1,020 1,021 2,061 2,151
Other 5 10 17 17
------- ------- ------- -------
Total interest income 5,313 4,595 10,286 9,284
INTEREST EXPENSE
Deposits 1,102 862 2,089 1,770
Short-term borrowings 112 34 211 59
Long-term debt 303 319 620 642
------- ------- ------- -------
Total interest expense 1,517 1,215 2,920 2,471
------- ------- ------- -------
NET INTEREST INCOME 3,796 3,380 7,366 6,813
PROVISION FOR LOAN LOSSES 90 165 190 290
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVSION FOR LOAN LOSSES 3,706 3,215 7,176 6,523
OTHER INCOME
Service charges and fees 603 473 1,182 914
Income from fiduciary activities 92 69 176 155
Net realized gains on sales of securities 3 84 80 262
Gain on sale of loans 15 5 55 62
Other 152 131 292 308
------- ------- ------- -------
Total other income 865 762 1,785 1,701
OTHER EXPENSES
Salaries and employee benefits 1,334 1,262 2,721 2,564
Occupancy, furniture & equipment, net 365 338 749 690
Data processing related 153 156 313 302
Losses on lease residuals -- -- -- 90
Taxes, other than income 109 92 207 183
Professional fees 139 71 248 156
Other 577 525 1,090 1,054
------- ------- ------- -------
Total other expenses 2,677 2,444 5,328 5,039
INCOME BEFORE INCOME TAXES 1,894 1,533 3,633 3,185
INCOME TAX EXPENSE 564 406 1,060 858
------- ------- ------- -------
NET INCOME $ 1,330 $ 1,127 $ 2,573 $ 2,327
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.50 $ 0.43 $ 0.96 $ 0.88
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.49 $ 0.42 $ 0.94 $ 0.86
======= ======= ======= =======
Cash dividends per share $ 0.18 $ 0.17 $ 0.36 $ 0.34
======= ======= ======= =======
See accompanying notes to the consolidated financial statements.
4
NORWOOD FINANCIAL CORP
Consolidated statement of changes in stockholders' equity (unaudited)
(dollars in thousands, except per share
data) Number of
shares Common Retained Treasury
issued Stock Surplus Earnings Stock
------ ----- ------- -------- -----
Balance December 31, 2003 2,705,715 $270 $4,933 $37,042 ($295)
Comprehensive Income:
Net Income 2,327
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects
Total comprehensive income
Cash dividends declared, $.34 per share (902)
Stock options exercised (26) 162
Tax benefit of stock options exercised 9
Acquisition of treasury stock (95)
Release of earned ESOP shares 165
--------- ---- ------ ------- -----
Balance, June 30, 2004 2,705,715 $270 $5,081 $38,467 ($228)
========= ==== ====== ======= ======
(dollars in thousands, except per share Accumulated
data) Unearned Other
ESOP Comprehensive
Shares Income(Loss) Total
------ ------------ -----
Balance December 31, 2003 ($550) $ 1,431 $42,831
Comprehensive Income:
Net Income 2,327
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects (1,793) (1,793)
-------
Total comprehensive income 534
-------
Cash dividends declared, $.34 per share (902)
Stock options exercised 136
Tax benefit of stock options exercised 9
Acquisition of treasury stock (95)
Release of earned ESOP shares 100 265
----- ----- -------
Balance, June 30, 2004 ($450) ($362) $42,778
===== ====== =======
Number of
shares Common Retained Treasury
Issued Stock Surplus Earnings Stock
------ ----- ------- -------- -----
Balance December 31, 2004 2,705,715 $270 $5,336 $40,222 ($149)
Comprehensive Income:
Net Income 2,573
Change in unrealized gains (losses)on
securities available for sale, net of
reclassification adjustment and tax
effects
Total comprehensive income
Cash dividends declared $.36 per share (958)
Stock options exercised (3) 86
Tax benefit of stock options exercised 13
Release of Treasury Stock for ESOP 22
Acquisition of treasury stock (408)
Release of earned ESOP shares 179
--------- ---- ------ ------- -----
Balance, June 30, 2005 2,705,715 $270 $5,525 $41,837 ($449)
========= ==== ====== ======= =====
Accumulated
Unearned Other
ESOP Comprehensive
Shares Income (Loss) Total
------ ------------- -----
Balance December 31, 2004 ($327) $333 $45,685
Comprehensive Income:
Net Income 2,573
Change in unrealized gains (losses)on
securities available for sale, net of
reclassification adjustment and tax
effects (436) (436)
--------
Total comprehensive income 2,137
-------
Cash dividends declared $.36 per share (958)
Stock options exercised 83
Tax benefit of stock options exercised 13
Release of Treasury Stock for ESOP 22
Acquisition of treasury stock (408)
Release of earned ESOP shares 78 257
---- ----- -------
Balance, June 30, 2005 ($249) ($103) $46,831
===== ===== =======
See accompanying notes to the Consolidated Financial Statements
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Six Months Ended June 30,
-------------------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $2,573 $2,327
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 190 290
Depreciation 268 136
Amortization of intangible assets 26 26
Deferred income taxes (159) (168)
Net amortization of securities premiums and discounts 227 260
Net realized gain on sales of securities (79) (262)
Earnings on life insurance policy (126) (158)
Net gain on sale of mortgage loans (55) (62)
Proceeds from sale of Bank equipment (2) 6
(Gain) loss on sale of bank premises and equipment and foreclosed real estate -- (19)
Mortgage loans originated for sale (5,099) (3,837)
Proceeds from sale of mortgage loans 5,154 3,899
Tax benefit of stock options exercised 13 9
Release of ESOP shares 279 265
(Increase)decrease in accrued interest receivable and other assets (3) 275
Increase in accrued interest payable and other liabilities 336 71
------- -------
Net cash provided by operating activities 3,543 3,058
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 5,097 6,622
Proceeds from maturities and principal reductions on mortgage-backed securities 6,242 26,045
Purchases (6,748) (27,050)
Securities held to maturity proceeds 2,420 35
Decrease in investment in FHLB stock 252 26
Net increase in loans (20,906) (12,892)
Purchase of bank premises and equipment (220) (242)
Proceeds from sale of bank premises and equipment and foreclosed real estate 9 41
------- -------
Net cash used in investing activities (13,854) (7,415)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 20,288 11,330
Net increase (decrease) in short term borrowings (12,054) 2,181
Repayments of long-term debt (5,000) --
Proceeds from long-term debt 5,000 --
Stock options exercised 83 136
Acquisition of treasury stock (408) (95)
Cash dividends paid (960) (897)
------- -------
Net cash provided by (used in) financing activities 6,949 12,655
------- -------
Increase (decrease) in cash and cash equivalents (3,362) 8,435
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,666 9,174
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $17,304 $17,609
======= =======
See accompanying notes to the unaudited consolidated 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 and six month periods ended
June 30, 2005 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2005 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, 2004.
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.
The following table sets forth the computations of basic and diluted
earnings per share:
(in thousands)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Basic EPS weighted average shares outstanding 2,671 2,642 2,668 2,639
Dilutive effect of stock options 57 57 58 57
------ ------ ------ ------
Diluted EPS weighted average shares outstanding 2,728 2,699 2,726 2,696
====== ====== ====== ======
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.
7
Three Months Six Months
(In thousands, except for per share data) ended June 30, ended June 30,
2005 2004 2005 2004
------ ------ ------ ------
Net income as reported $1,330 $1,127 $2,573 $2,327
Total stock based employee compensation determined
Under fair value based method for all awards, net of taxes (49) (36) (98) (72)
------ ------ ------ ------
Pro forma net income $1,281 $1,091 $2,475 $2,255
====== ====== ====== ======
Earnings per share (basic)
As Reported $ .50 $ .43 $ .96 $ .88
Pro forma .48 .41 .93 .85
Earnings per share (assuming dilution)
As Reported .49 .42 .94 .86
Pro forma .47 .40 .91 .84
During the first six months ended June 30, 2005, there were 4,286 stock options
exercised at an average exercise price of $19.18 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 periods ended June 30, 2005 and 2004
were $2,971,000 and $2,722,000 respectively. Cash payments for income taxes in
2005 were $1,118,000 compared to $954,000 in 2004. Non-cash investing activity
for 2005 and 2004 included foreclosed mortgage loans and repossession of other
assets of $67,000 and $140,000, respectively.
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.
8
(in thousands) Three Months Six Months
------------ ----------
Ended June 30 Ended June 30
------------- -------------
2005 2004 2005 2004
------- ------- ------ -------
Unrealized holding gains/(losses)
on available for sale securities $ 791 ($3,186) $(584) ($2,457)
Reclassification adjustment for gains
Realized in income (3) (84) (80) (262)
------- ------- ----- -------
Net unrealized gains/(losses) $ 788 (3,270) (664) (2,719)
Income tax (benefit) 267 (1,112) (228) (926)
------- ------- ----- -------
Other comprehensive income (loss) $ 521 $(2,158) $(436) $(1,793)
======= ======= ===== =======
7. OFF BALANCE SHEET FINANCIAL INSTRUMENTS AND GUARANTEES
------------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Bank's financial instrument commitments is as follows:
June 30
-------
2005 2004
------- -------
Commitments to grant loans $11,000 $11,734
Unfunded commitments under lines of credit 33,634 29,472
Standby letters of credit 1,679 1,930
------- -------
$46,313 $43,136
======= =======
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the customer and generally consists of real
estate.
The Bank does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have
9
expiration dates within one year. The credit risk involved in issuing letters of
credit is essentially the same as those that are involved in extending loan
facilities to customers. The Bank, generally, holds collateral and/or personal
guarantees supporting these commitments. Management believes that the proceeds
obtained through a liquidation of collateral and the enforcement of guarantees
would be sufficient to cover the potential amount of future payment required
under the corresponding guarantees. The current amount of the liability as of
June 30, 2005 for guarantees under standby letters of credit issued is not
material.
8. 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.
9. RECENT ACCOUNTING STANDARDS
---------------------------
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of SFAS No. 143,"
("FIN 47"). This Interpretation provides clarification with respect to the
timing of liability recognition for legal obligations associated with the
retirement of tangible long-lived assets when the timing and/or method of
settlement of the obligation are conditional on a future event. FIN 47 is
effective for all fiscal years ending after December 15, 2005 (December 31,
2005, for calendar-year companies). Retrospective application for interim
financial information is permitted but is not required. Early adoption of this
Interpretation is encouraged. We do not expect the adoption of FIN 47 to
materially impact our condensed consolidated financial statements.
In May 2005, FASB issued SFAS 154, "Accounting Changes and Error
Corrections". The Statement requires retroactive application of a voluntary
change in accounting principle to prior period financial statements unless it is
impracticable. SFAS 154 also requires that a change in method of depreciation,
amortization, or depletion for long lived, non-financial assets be accounted for
as a change in accounting estimate that is affected by a change in accounting
principle. SFAS 154 replaces APB Opinion 20, "Accounting Changes", and SFAS 3,
"Reporting Accounting Changes in Interim Financial Statements". SFAS 154 will be
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management currently believes that adoption
of the provisions of SFAS 154 will not have a material impact on the Company's
condensed consolidated financial statements.
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
10
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 "Allowance for Loan Losses and Non-performing Assets" and in
the "Changes in 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."
CHANGES IN FINANCIAL CONDITION
- ------------------------------
GENERAL
- -------
Total assets as of June 30, 2005 were $422.6 million compared to $411.6
million as of December 31, 2004.
SECURITIES
- ----------
The fair value of securities available for sale as of June 30, 2005 was
$111.5 million declining from $116.9 million as of December 31, 2004. The
decrease was principally due to cash flow received from mortgage backed
securities of $4.9 million. In addition, the held-to-maturity portfolio which
consists of municipal bonds decreased $2.4 million to $3.3 million, due to calls
of bonds. The Company is using cash flow from the securities portfolios to fund
loan growth.
The Company has securities in an unrealized loss position. In
management's opinion, the unrealized losses reflect changes in interest rates
subsequent to the acquisition of specific securities. Management believes that
the unrealized losses represent temporary impairment of the securities, as the
company has the intent and ability to hold these investments until maturity or
market price recovery.
LOANS RECEIVABLE
- ----------------
Total loans receivable were $275.6 million as of June 30, 2005, an
increase of $20.8 million, or 8.2%, compared to $254.8 million as of December
31, 2004.
Commercial real estate loans increased $16.8 million to $128.0 million
as of June 30, 2005. The growth was principally in the Monroe County Market
Area. Residential real estate increased $1.1 million with home equity financings
increasing $2.8 million. This offset a decrease in residential mortgages which
was principally due to the sale of $5.1 million of 30 year fixed rate loans. The
loans were sold for interest rate risk purposes. The Company had a gain of
$55,000 on sales, which is included in Other Income. Commercial term loans
increased $5.1 million due to equipment loans and seasonal usage of lines of
credit. Indirect loans, included in consumer loans to individuals, decreased
$1.8 million to $18.4 million, approximately $10.1 million is automobile, with
$8.3 million of marine, recreational vehicles, motorcycle, and other.
11
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, 2005 December 31, 2004
------------- -----------------
$ % $ %
-------- ----- -------- -----
Real Estate-Residential $ 91,700 33.2% $ 90,606 35.5%
Commercial 128,004 46.4 111,164 43.6
Construction 4,393 1.6 4,890 1.9
Commercial, financial and agricultural 25,360 9.2 20,263 7.9
-------- ----- -------- -----
Consumer loans to individuals 26,459 9.6 28,193 11.1
Total loans 275,916 100.0% 255,116 100.0%
Deferred fees (358) (359)
-------- --------
275,558 254,757
Allowance for loan losses (3,600) (3,448)
-------- --------
Net loans receivable $271,958 $251,309
======== ========
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 Months Six Months
------------ ----------
Ended June 30 Ended June 30
------------- -------------
(dollars in thousands) 2005 2004 2005 2004
------- ------- ------- -------
Balance, beginning $ 3,523 $ 3,302 $ 3,448 $ 3,267
Provision for loan losses 90 165 190 290
Charge-offs (34) (111) (81) (209)
Recoveries 21 6 43 14
Net charge-offs (13) (105) (38) (195)
------- ------- ------- -------
Balance, ending $ 3,600 $ 3,362 $ 3,600 $ 3,362
======= ======= ======= =======
Allowance to total loans 1.31% 1.37% 1.31% 1.37%
Net charge-offs to average loans
(annualized) .02% .17% .03% .16%
The allowance for loan losses totaled $3,600,000 as of June 30, 2005
and represented 1.31% of total loans compared to $3,448,000 and 1.35% as of
December 31, 2004. Net charge-offs for the six months ended June 30, 2005
totaled $38,000 declining from $195,000 for the similar period in 2004. The
decrease was principally due to lower level of repossessed automobiles, as the
Company has lowered its exposure to indirect automobile lending. As a result of
the lower net charge-offs, the provision for loan losses was less for the six
months ended June 30, 2005, $190,000, compared to $290,000 for the similar
period in 2004.
The Company 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 a 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.
12
Management considers the allowance adequate at June 30, 2005 based on the
Company's criteria. 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.
As of June 30, 2005, non-performing loans totaled $97,000, which is
..04% of total loans compared to $67,000, or .02% of total loans at December 31,
2004. The increase is due to one credit secured by real estate. The following
table sets forth information regarding non-performing loans and foreclosed real
estate at the date indicated:
June 30, 2005 December 31, 2004
------------- -----------------
(dollars in thousands)
Loans accounted for on a non accrual basis:
Commercial and all other $ -
$ -
Real Estate 87 32
Consumer 6 8
Total 93 40
Accruing loans which are contractually
Past due 90 days or more 4 27
Total non-performing loans 97 67
Foreclosed real estate - -
----- ----
Total non-performing assets $ 97 $ 67
===== ====
Allowance for loan losses
coverage of non-performing loans 38.0x 51.5x
Non-performing loans to total loans .04% .03%
Non-performing assets to total assets .02% .02%
DEPOSITS
- --------
Total deposits as of June 30, 2005 were $338.9 million increasing
from $318.6 million as of December 31, 2004. The increase in non-interest
bearing and interest bearing demand is due in part to new commercial accounts
and the seasonality of certain corporate and municipal accounts. Time deposits
less than $100,000 increased $4.9 million as a result of retail CD growth.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) June 30, 2005 December 31, 2004
------------- -----------------
Non-interest bearing demand $ 53,628 $ 44,450
Interest bearing demand 46,092 41,336
Money Market 53,519 51,125
Savings 57,330 60,064
Time deposits <$100,000 93,330 88,387
Time deposits >$100,000 35,034 33,283
-------- --------
Total $338,933 $318,645
======== ========
SHORT-TERM BORROWINGS
- ---------------------
Short-term borrowings as of June 30, 2005 were $10.9 million compared
to $23.0 million as of December 31, 2004. The decrease was due to the pay-off of
short-term borrowings from the FHLB, with the funds provided by the increase in
deposits.
13
OFF BALANCE SHEET ARRANGEMENTS
- ------------------------------
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Company's financial instrument
commitments is as follows:
June 30, December 31,
2005 2004
---- ----
(In thousands)
Commitments to grant loans $11,000 $15,748
Unfunded commitments under lines of credit 33,634 30,611
Standby letters of credit 1,679 1,791
------- --------
$46,313 $48,150
------- --------
STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
- ---------------------------------------
At June 30, 2005, total stockholders' equity totaled $46.8 million, a
net increase of $1,146,000 from December 31, 2004. The net change in
stockholders' equity was primarily due to $2,573,000 in net income, that was
partially offset by $958,000 of dividends declared. In addition, accumulated
other comprehensive income decreased $436,000 due to a 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 impact the fair 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 regulatory capital ratios is as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Tier 1 Capital
(To average assets) 11.21% 11.11%
Tier 1 Capital
(To risk-weighted assets) 15.45% 15.91%
Total Capital
(To risk-weighted assets) 16.80% 17.34%
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 as of June 30, 2005 and
December 31, 2004.
14
LIQUIDITY
- ---------
As of June 30, 2005, the Company had cash and cash equivalent of
$17.3 million in the form of cash, due from banks, federal funds sold and
short-term deposits with other institutions. In addition, the Company had total
securities available for sale of $111.5 million which could be used for
liquidity needs. This totals $128.8 million and represents 30.4% of total assets
compared to $137.6 million and 33.4% of total assets as of December 31, 2004.
The Company also monitors other liquidity measures, all of which were within the
Company's policy guidelines as of June 30, 2005 and December 31, 2004. Based
upon these measures, the Company believes its liquidity is adequate.
The Company maintains established lines of credit with the Federal
Home Loan Bank of Pittsburgh (FHLB), the Atlantic Central Bankers Bank (ACBB)
and other correspondent banks, which are available to support liquidity needs.
The approximate borrowing capacity from the FHLB was $143 million, of which $23
million was outstanding as of June 30, 2005 and $31 million as of December 31,
2004.
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 June 30,
-----------------------------------------------------------------------
2005 2004
---------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 707 $ 4 2.26% $ 4,212 $ 9 0.85%
Interest bearing deposits with banks 121 1 3.31 139 1 2.88
Securities held-to-maturity (1) 4,047 122 12.06 5,740 127 8.85
Securities available for sale:
Taxable 97,856 771 3.15 101,144 753 2.98
Tax-exempt 18,679 257 5.50 17,563 276 6.29
-------- ------- ------- -----
Total securities available for sale (1) 116,535 1,028 3.53 118,707 1,029 3.47
Loans receivable (4) (5) 271,614 4,326 6.37 241,343 3,598 5.96
-------- ------- ------- -------
Total interest earning assets 393,024 5,481 5.58 370,141 4,764 5.15
Non-interest earning assets:
Cash and due from banks 8,662 9,160
Allowance for loan losses (3,577) (3,330)
Other assets 16,606 14,740
-------- ------
Total non-interest earning assets 21,691 20,570
-------- --------
Total Assets $414,715 $390,711
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $ 90,163 209 0.93% $ 87,497 127 0.58
Savings 58,795 69 0.47 57,336 67 0.47
Time 124,359 824 2.65 118,121 668 2.26
------- ------- -------- -------
Total interest bearing deposits 273,317 1,102 1.61 262,954 862 1.31
Short-term borrowings 17,550 112 2.55 12,977 34 1.05
Long-term debt 23,000 303 5.27 23,000 319 5.55
------ ------- -------- -------
Total interest bearing liabilities 313,867 1,517 1.93 298,931 1,215 1.63
Non-interest bearing liabilities:
Demand deposits 51,604 46,793
Other liabilities 2,743 1,554
----- --------
Total non-interest bearing liabilities 54,347 48,347
Stockholders' equity 46,501 43,433
------ --------
Total Liabilities and Stockholders' Equity $414,715 $390,711
======== ========
Net interest income (tax equivalent basis) 3,964 3.65% 3,549 3.52%
===== ====
Tax-equivalent basis adjustment (168) (169)
------- ------
Net interest income $ 3,796 $3,380
======= ======
Net interest margin (tax equivalent basis) 4.03% 3.84%
==== ====
(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.
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.
Increase/(Decrease)
-------------------
Three months ended June 30, 2005 Compared to
--------------------------------------------
Three months ended June 30, 2004
--------------------------------
Variance due to
---------------
Volume Rate Net
--------------------------
(dollars in thousands)
Interest earning assets:
Federal funds sold $ (41) $ 36 $ (5)
Interest bearing deposits with banks (1) 1 --
Securities held to maturity (167) 162 (5)
Securities available for sale:
Taxable (119) 137 18
Tax-exempt securities 86 (105) (19)
----- ----- -----
Total securities (33) 32 (1)
Loans receivable 471 257 728
----- ----- -----
Total interest earning assets 229 488 717
Interest bearing liabilities:
Interest-bearing demand and money market 4 78 82
Savings 2 -- 2
Time 37 119 156
----- ----- -----
Total interest bearing deposits 43 197 240
Short-term borrowings 15 63 78
Other borrowings -- (16) (16)
----- ----- -----
Total interest bearing liabilities 58 244 302
----- ----- -----
Net interest income (tax-equivalent basis) $ 171 $ 244 $ 415
===== ===== =====
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2005 TO JUNE
- --------------------------------------------------------------------------------
30, 2004
- --------
GENERAL
- -------
For the three months ended June 30, 2005, net income totaled
$1,330,000, an increase of $203,000, or 18.0% over the $1,127,000 earned in the
similar period of 2004. Earnings per share for the current period were $.50
basic and $.49 on a diluted basis compared to $.43 basic and $.42 on a diluted
basis for the three months ended June 30, 2004. The resulting annualized return
on average assets and return on average equity for the three months ended June
30, 2005 were 1.29% and 11.48%, respectively, improving from 1.16% and 10.41%
respectively, for the similar period in 2004.
17
The following table sets forth changes in net income:
(Dollars in thousands) Three months ended
------------------
June 30, 2005 to June 30, 2004
------------------------------
Net income three months ended June 30, 2004 $ 1,127
-------
Net interest income 416
Provision for loan losses 75
Net realized gains on sales of securities (81)
Gains on sale of loans 10
All other income 174
Salaries and employee benefits (72)
All other expenses (161)
Income tax effect (158)
-------
Net income three months ended June 30, 2005 $ 1,330
=======
NET INTEREST INCOME
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the
three months ended June 30, 2005 totaled $3,964,000, an increase of $415,000 or
11.7% over the similar period in 2004. The fte net interest spread and net
interest margin were 3.65% and 4.03%, respectively, increasing from 3.52% and
3.84%, respectively, for the three months ended June 30, 2004.
Interest income (fte) totaled $5,481,000 with an average yield of
5.58%, increasing from $4,764,000 and 5.15% for the 2004 period. The increase
was principally due to growth in the loan portfolio. Average loans increased
$30.3 million and represented 69.1% of average earning assets for the 2005
period compared to 65.2% of average earning assets for the similar period in
2004. The average fte yield on loans also increased to 6.37% for the three
months ended June 30, 2005 compared to 5.96% for the similar period in 2004. The
increase was due to increase in the prime interest rate, which was 6.25% as of
June 30, 2005 compared to 4.00% as of June 30, 2004.
Interest expense for the three months ended June 30, 2005 totaled
$1,517,000 at an average cost of 1.93% increasing from $1,215,000 and 1.63% for
the similar period in 2004. The increase was principally due to the increase in
short term interest rates with the Federal Funds rate at 3.25% as of June 30,
2005 and 1.00% as of June 30, 2004. As a result, the Company increased rates
paid on money market accounts and short-term time deposits. In addition, the
cost of short-term borrowings increased with an average cost of 2.55% for the
2005 period increasing from 1.05% for the similar period in 2004.
OTHER INCOME
- ------------
Other income totaled $865,000 for the three months ended June 30,
2005, an increase of $103,000 or 13.5%, over the $762,000 for the similar period
in 2004. Net realized gains on the sales of securities were $3,000 for the 2005
period, declining from $84,000 in the similar period of 2004. This was more than
offset by $130,000 increase in service charges and fees. The increase was
principally due to additional overdraft fees as a result of increased volume of
overdrafts in 2005 related to the Bank's Overdraft Manager Service. Income from
fiduciary activities increased $23,000 due in part to estate fees collected in
the 2005 period.
18
OTHER EXPENSES
- --------------
Other expenses for the three months ended June 30, 2005 totaled
$2,677,000, an increase of $233,000 or 9.5%, over the $2,444,000 for the similar
period in 2004. Salaries and employee benefit expenses increased $72,000
principally due to increased costs related to the Bank's employee stock
ownership plan and incentive compensation plans. Professional fees increased
$68,000 due in part to expenses related to the Sarbanes-Oxley internal control
documentation project.
INCOME TAX EXPENSE
- ------------------
Income tax expense totaled $564,000 for the three months ended June
30, 2005, for an effective tax rate of 29.8% compared to $406,000 and an
effective tax rate of 26.5% for the similar period in 2004. The effective tax
rate increased as a result of higher pretax income, which increased $361,000, or
23.5%.
19
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,
-----------------------------------------------------------------------
2005 2004
---------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 1,278 $ 16 2.50% $ 3,461 $ 16 0.92%
Interest bearing deposits with banks 99 1 2.02 122 1 1.64
Securities held-to-maturity (1) 4,725 251 10.62 5,744 253 8.81
Securities available for sale:
Taxable 100,006 1,558 3.12 102,586 1,596 3.11
Tax-exempt 18,622 512 5.50 18,060 581 6.43
-------- ------- -------- -------
Total securities available for sale (1) 118,628 2,070 3.49 120,646 2,177 3.61
Loans receivable (4) (5) 265,034 8,276 236,604 7,169 6.06
-------- ------- 6.25 -------- -------
Total interest earning assets 389,764 10,614 5.45 366,577 9,616 5.25
Non-interest earning assets:
Cash and due from banks 8,096 8,637
Allowance for loan losses (3,537) (3,316)
Other assets 15,563 14,858
-------- --------
Total non-interest earning assets 20,122 20,179
-------- --------
Total Assets $409,886 $386,756
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $ 89,462 376 0.84% $ 86,968 258 0.59
Savings 59,134 138 0.47 56,853 132 0.46
Time 124,133 1,575 2,54 119,715 1,380 2.31
-------- ------- -------- -------
Total interest bearing deposits 272,729 2,089 1.53 263,536 1,770 1.34
Short-term borrowings 17,334 211 2.43 11,930 59 0.99
Long-term debt 23,000 620 5.39 23,000 642 5.58
-------- ------- -------- -------
Total interest bearing liabilities 313,063 2,920 1.87 298,466 2,471 1.66
Non-interest bearing liabilities:
Demand deposits 48,658 42,936
Other liabilities 1,917 1,867
-------- --------
Total non-interest bearing liabilities 50,575 44,803
Stockholders' equity 46,248 43,487
-------- --------
Total Liabilities and Stockholders' Equity $409,886 $386,756
======== ========
Net interest income (tax equivalent basis) 7,694 3.58% 7,145 3.59%
====== ======
Tax-equivalent basis adjustment (328) (332)
------- -------
Net interest income $ 7,366 $ 6,813
======= =======
Net interest margin (tax equivalent basis) 3.95% 3.90%
====== ======
(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.
20
Rate/Volume Analysis
The following table shows the fully taxable equivalent effect of changes in
volumes and rates on interest income and interest expense. 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.
Increase/(Decrease)
-------------------
Six months ended June 30, 2005 Compared to
------------------------------------------
Six months ended June 30, 2004
------------------------------
Variance due to
---------------
Volume Rate Net
------- ------- -------
(dollars in thousands)
Interest earning assets:
Federal funds sold $ (28) $ 28 $ --
Interest bearing deposits with banks -- -- --
Securities held to maturity (97) 95 (2)
Securities available for sale:
Taxable (44) 6 (38)
Tax-exempt securities 47 (116) (69)
------- ------- -------
Total securities 3 (110) (107)
Loans receivable 882 225 1,107
------- ------- -------
Total interest earning assets 760 238 998
Interest bearing liabilities:
Interest-bearing demand and money market 8 110 118
Savings 5 1 6
Time 51 144 195
------- ------- -------
Total interest bearing deposits 64 255 319
Short-term borrowings 36 116 152
Other borrowings -- (22) (22)
------- ------- -------
Total interest bearing liabilities 100 349 449
------- ------- -------
Net interest income (tax-equivalent basis) $ 660 $ (111) $ 549
======= ======= =======
COMPARISON OF OPERATING RESULTS FOR SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30,
2004.
GENERAL
- -------
Net income for the six months ended June 30, 2005 totaled $2,573,000,
increasing $246,000, or 10.6% over the $2,327,000 earned in the similar period
in 2004. Basic and diluted earnings per share were $.96 and $.94, respectively,
in the 2005 period compared to $.88 and $.86, respectively, for the period in
2004. The resulting annualized return on average for the six months ended June
30, 2005 was 1.27%, with an annualized return on average equity of 11.22%.
21
The following table sets forth changes in net income:
(Dollars in thousands)
Net income six months ended June 30, 2004 $ 2,327
-------
Net interest income 553
Provision for loan losses 100
Net realized gains on sales of securities (182)
All other income 266
Salaries and employee benefits (157)
Losses on lease residuals 90
All other expenses (222)
Income tax effect (202)
-------
Net income six months ended June 30, 2005 $ 2,573
=======
NET INTEREST INCOME
- -------------------
Net interest income on a fully taxable equivalent (fte) basis for the
six months ended June 30, 2005, totaled $7,694,000, an increase of $549,000, or
7.7%, over $7,145,000 for the similar period in 2004. The fte net interest
spread and net interest margin for the 2005 period were 3.58% and 3.95%,
respectively, compared to 3.59% and 3.90%, respectively, for the 2004 period.
Interest income (fte) totaled $10,614,000 with an average yield of
5.45% for the six months ended June 30, 2005, increasing from $9,616,000 with an
average yield of 5.25% for the similar period in 2004. The increase is
principally due to growth in average loans. For the 2005 period average loans
totaled $265.0 million and represented 68.0% of average earning assets,
increasing from $236.6 of average loans and 64.5% for the 2004 period.
Interest income has also been favorably impacted by the increase in
short term interest rates and the prime interest rate. The Company has $80
million in floating rate loans which have benefited from the prime rate
increasing from 4.00% to 6.25% over the past twelve months.
Interest expense for the six months ended June 30, 2005 totaled
$2,920,000 at an average cost of 1.87% increasing from $2,471,000 and an average
cost of 1.66% for the similar period in 2004. The increase is due in part to
rising short-term interest rates which have caused increases in money market
accounts and time deposits. In addition, the Company funded a portion of its
loan growth with short-term borrowings. These short-term borrowings averaged
$17.3 million at an average cost of 2.43% for the 2005 period, increasing from
$11.9 million at an average cost of 0.99% in 2004.
OTHER INCOME
- ------------
Other income totaled $1,785,000 for the six months ended June 30,
2005, an increase of $84,000 over the $1,701,000 earned in the similar period of
2004. Net realized gains on sales of securities totaled $80,000 in the 2005
period, decreasing $182,000 from the $262,000 in gains for the 2004 period. The
decline is principally due to lower level of securities sold. This was offset by
$268,000 increase in service charges and fees. The increase was principally due
to fees on overdrafts, with more volume in the 2005 period related to the bank's
Overdraft Manager service.
22
OTHER EXPENSE
- -------------
Other expense totaled $5,328,000 for the six months ended June 30,
2005, an increase of $289,000, or 5.7%, over the $5,039,000 for the similar
period in 2004. Salaries and employee benefits increased $157,000, 6.1%, due in
part to increased costs related to the bank's Employee Stock Ownership plan and
incentive compensation. Professional fees increased $92,000 due to costs related
to internal control documentation required by Sarbanes-Oxley, consulting fees
for a profitability analysis and legal fees related to strategic analysis. The
Company had $90,000 in losses on lease residuals in the 2004 period, with no
expense in the 2005 period. The Company anticipates no additional expenses
related to leasing as the final vehicles were liquidated in 2004.
INCOME TAX EXPENSE
- ------------------
Income tax expense totaled $1,060,000 for an effective tax rate of
29.2% for the six months ended June 30, 2005 compared to $858,000 and an
effective tax rate of 26.9% for the similar period in 2004. The increase in
taxes was principally due to $448,000, or 14.1%, increase in pre-tax income.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
- -----------
Interest rate sensitivity and the repricing characteristics of assets
and liabilities are managed by the Asset and Liability Management Committee
(ALCO). The principal objective of ALCO is to maximize net interest income
within acceptable levels of risk, which are established by policy. Interest rate
risk is monitored and managed by using financial modeling techniques to measure
the impact of changes in interest rates.
Net interest income, which is the primary source of the Company's
earnings, is impacted by changes in interest rates and the relationship of
different interest rates. To manage the impact of the rate changes, the balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities at approximately the same time intervals. The Company uses net
interest simulation to assist in interest rate risk management. The process
includes simulating various interest rate environments and their impact on net
interest income. As of June 30, 2005, the level of net interest income at risk
in a 200 basis points change in interest rates was within the Company's policy
limits. The Company's policy allows for a decline of no more than 8% of net
interest income.
Imbalance in repricing opportunities at a given point in time reflect
interest-sensitivity gaps measured as the difference between rate-sensitive
assets and rate-sensitive liabilities. These are static gap measurements that do
not take into account any future activity, and as such are principally used as
early indications of potential interest rate exposures over specific intervals.
As of June 30, 2005, the Bank had a positive 90 day interest
sensitivity gap of $43.4 million or 10.3% of total assets, increasing from $32.5
million, 7.9% of total assets as of December 31, 2004. A positive gap means that
rate-sensitive assets are greater than rate-sensitive liabilities at the time
interval. This would indicate that in a rising rate environment, the yield on
interest-earning assets would increase faster than the cost of interest-bearing
liabilities in the 90 day time frame. The repricing intervals are managed by
ALCO strategies, including adjusting the average life of the investment
portfolio, pricing of deposit liabilities to attract longer term time deposits,
loan pricing to encourage variable rate products and evaluation of loan sales of
long term fixed rate mortgages.
23
June 30, 2005
- -------------
Rate Sensitivity Table
- ----------------------
3 Months 3-12 Months 1 to 3 Years 3 Years Total
-------- ----------- ----------- ------- -----
Federal funds sold and interest bearing deposits 5,409 5,409
Securities 8,933 20,100 67,942 17,859 114,834
Loan Receivable 104,789 45,896 55,172 69,701 275,558
Total RSA 119,131 65,996 123,114 87,560 395,801
Non-maturity interest-bearing deposits 27,366 35,208 94,367 156,941
Time Deposits 27,165 46,536 46,540 8,123 128,364
Other 21,228 3,413 9,287 33,928
Total RSL 75,759 85,157 150,194 8,123 319,233
Interest Sensitivity Gap 43,372 (19,161) (27,080) 79,437 76,568
Cumulative gap 43,372 24,211 (2,869) 76,568
RSA/RSL-Cumulative 157.2% 115.0% 99.1% 124.0%
December 31,2004
Interest Sensitivity Gap 32,500 (31,732) (3,389) 72,946 70,325
Cumulative gap 32,500 768 (2,621) 70,325
RSA/RSL-cumulative 139.0% 100.4% 99.2% 122.0%
ITEM 4: CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over
financial reporting that occurred during the Company's last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
24
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Issuer Purchases of Equity Securities
-------------------------------------
Maximum number
--------------
Total number of of shares (or approximate
--------------- -------------------------
shares purchased dollar value) that may yet
---------------- --------------------------
Total number Average price as part of publicly be purchased
------------ ------------- -------------------- -------------
of shares paid per announced plans under the plans
--------- -------- --------------- ---------------
purchased share or programs or programs
--------- ----- ----------- -----------
April 1 - April 30, 2005 - - - -
May 1 - May 30, 2005 - - - -
June 1 - June 30, 2005 10,000 $33.00 10,000 124,000
------ ------ ------ -------
10,000 $33.00 10,000 124,000
====== ====== ====== =======
(1) On June 15, 2005, the Company announced the adoption of an open-market
stock repurchase program for up to 134,000 shares.
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 26, 2005.
The following incumbent directors were nominated and duly elected to the Board
of Directors for a three-year term expiring in 2008.
FOR WITHHELD
Daniel J. O'Neill 2,244,650 42,475
Dr. Kenneth A. Phillips 2,242,757 44,368
Gary P. Rickard 2,246,433 40,692
There were no abstentions or broker non-votes.
Ratify the appointment of Beard Miller Company LLP as independent accountant of
the Company for the fiscal year ending December 31, 2005.
FOR AGAINST ABSTAIN
--- ------- -------
2,270,614 141 16,370
There were no broker non-votes.
25
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(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***
10.10 Salary Continuation Agreement between the Bank and Joseph A. Kneller****
10.11 Salary Continuation Agreement between the Bank and John H. Sanders****
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32 Section 1350 Certification
- ---------------------------
* 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 identically numbered exhibits
of the Registrant's Form 10-K filed with the Commission on March 31,
1997.
*** Incorporated herein by reference into the identically numbered exhibits
of the Registrant's Form 10-K filed with the Commission on March 20,
2000.
**** Incorporated herein by reference to the identically numbered exhibit
to the Registrants Form 10-K filed with the Commission on March 22,
2004.
26
SIGNATURES
- ----------
Pursuant to the requirements of the Securities 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 9, 2005 By: /s/ William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2005 By: /s/ Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
27