SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 1998
------------------------------------------
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 other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717)253-1455
----------------------------
N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicated by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1998
- --------------------------------------- 1,781,430
common stock, par value $0.10 per share -------------------------------
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
Number
Part I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, December 31,
1998 1997
--------- ---------
ASSETS
Cash and due from banks $ 12,240 $ 6,571
Interest bearing deposits with banks 263 4,353
Securities available for sale 56,643 49,372
Securities held-to-maturity (fair value of $8,528
and $8,156) 8,158 8,159
Loans receivable (net of unearned income) 186,804 185,640
Less: Allowance for loan losses 3,260 3,250
--------- ---------
Net loans receivable 183,544 182,390
Bank premises and equipment, net 7,070 7,300
Other real estate 1,063 537
Accrued interest receivable 1,367 1,358
Other assets 3,585 3,210
--------- ---------
TOTAL ASSETS $ 273,933 $ 263,250
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 27,023 $ 24,065
Interest-bearing deposits 198,389 202,689
--------- ---------
Total deposits 225,412 226,754
Short-term borrowings 14,284 4,990
Other borrowings 2,000 2,000
Accrued interest payable 1,940 2,365
Other liabilities 4,190 2,547
--------- ---------
TOTAL LIABILITIES 247,826 238,656
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1998 1,803,824 shares and
1997 1,801,592 shares 180 180
Surplus 4,504 4,384
Retained earnings 21,952 20,844
Treasury stock, at cost (22,394 shares) (344) (344)
Unearned ESOP shares (1,652) (1,750)
Net unrealized appreciation on securities 1,467 1,280
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 26,107 24,594
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 273,933 $ 263,250
========= =========
See accompanying notes to the unaudited consolidated financial statements
3
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
INTEREST INCOME
Loans receivable including fees $4,049 $4,036 $8,026 $7,903
Securities 956 905 1,858 1,829
Federal funds sold and deposits
with banks 13 36 68 81
------ ------ ------ ------
Total interest income 5,018 4,977 9,952 9,813
INTEREST EXPENSE
Deposits 1,961 2,020 4,001 4,079
Short-term borrowings 110 139 165 190
Other borrowed funds 30 56 60 110
------ ------ ------ ------
Total interest expense 2,101 2,215 4,226 4,379
------ ------ ------ ------
NET INTEREST INCOME 2,917 2,762 5,726 5,434
PROVISION FOR LOAN LOSSES 180 300 360 550
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,737 2,462 5,366 4,884
OTHER INCOME
Service charges and fees 262 218 492 388
Income from fiduciary activities 27 38 68 85
Net realized gain on sales of securities -- 63 15 63
Other 119 57 191 113
----- ------ ------ ------
Total other income 408 376 766 649
OTHER EXPENSES
Salaries and employee benefits 963 905 1,926 1,852
Occupancy, furniture & equipment, net 302 308 629 622
Taxes, other than income 62 60 125 119
Other real estate owned operations 57 123 76 169
Other 627 577 1,212 1,173
----- ------ ------ ------
Total other expenses 2,011 1,973 3,968 3,935
INCOME BEFORE INCOME TAXES 1,134 865 2,164 1,598
INCOME TAX EXPENSE 343 221 653 397
------ ------ ------ ------
NET INCOME $ 791 $ 644 $1,511 $1,201
====== ====== ====== ======
BASIC AND DILUTED
EARNINGS PER SHARE* $ 0.47 $ 0.39 $0 .90 $0 .73
====== ====== ====== ======
Dividends per share* $ 0.12 $0.105 $ 0.24 $ 0.21
====== ====== ====== ======
Reflects adjustment for two-for-one stock split in the form of a 100% stock
dividend, paid February 2, 1998.
4
NORWOOD FINANCIAL CORP.
Statements of Comprehensive Income (unaudited)
(dollars in thousands)
Six months ended June 30
------------------------
1998 1997
---- ----
Net Income $ 1,511 $ 1,201
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising
during the period 298 360
Less reclassification adjustments for
gains included in net income (15) (63)
------- -------
Other comprehensive income before income
taxes 283 297
Income tax expense 96 101
------- -------
Other comprehensive income 187 196
------- -------
Comprehensive income $ 1,698 $ 1,397
======= =======
5
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
Net
Unearned Unrealized
Common Retained Treasury ESOP Appreciation
Stock Surplus Earnings Stock Shares on Securities Total
----- ------- -------- ----- ------ ------------- -----
Balance, December 31, 1997 $180 $4,384 $20,844 ($344) ($1,750) $1,280 $ 24,594
Net Income 1,511 1,511
Cash dividends declared (403) (403)
Net change in unrealized appreciation
on securities 187 187
Stock options exercised 33 33
Release of earned ESOP shares 87 98 185
---- ------ ------- ----- ------- ------ --------
Balance, June 30, 1998 $180 $4,504 $21,952 ($344) ($1,652) $1,467 $ 26,107
==== ====== ======= ====== ======== ====== ========
See accompanying notes to the unaudited financial statements
6
XXXXXXXX
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,511 $ 1,201
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 360 550
Depreciation 330 335
Amortization of intangible assets 136 142
Deferred income taxes 1,399 186
Net realized gain on sales of securities (15) (63)
Gain(loss) on sale of other real estate, net 1 58
Net gain on sale of mortgage loans (62) (31)
Mortgage loans originated for sale (4,539) (2,976)
Proceeds from sale of mortgage loans 4,602 3,007
Decrease (increase) in accrued interest receivable (9) 197
Increase (decrease) in accrued interest payable (434) (401)
Other, net 217 943
-------- --------
Net cash provided by operating activities 3,496 1,947
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 876 5,980
Proceeds from maturities and principal reductions on
mortgage-backed securities 4,702 1,523
Purchases (12,590) (2,156)
Securities held to maturity:
Proceeds from maturities -- --
Purchases -- --
Net decrease (increase) in loans (2,562) (11,603)
Purchase of bank premises and equipment, net (100) (450)
Proceeds from sales of other real estate 73 1,377
-------- --------
Net cash used in investing activities (9,600) (5,329)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in deposits (1,342) (8,875)
Net increase (decrease) in short term borrowings 9,293 8,798
Repayments of other borrowings -- --
Proceeds from other borrowings -- --
Stock options exercised 37 --
Acquisition of treasury stock -- --
Proceeds from issuance of treasury stock -- --
Release of ESOP shares 98 100
Net cash dividends paid (402) (352)
-------- --------
Net cash provided by (used) in financing activities 7,683 (329)
-------- --------
Increase (Decrease) in cash and cash equivalents 1,579 (2,510)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,924 15,109
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,503 $ 12,599
======== ========
See accompanying notes to consolidated financial statement
7
Notes to Unaudited Consolidated Financial Statements
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1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and WTRO Properties. All significant intercompany transactions have been
eliminated in consolidation. The investments in subsidiaries on the Company's
financial statements are carried at the Company's equity in the underlying net
assets.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month and six month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998 or any other period.
For additional information and disclosure required under generally
accepted accounting principals, reference is made to the Company's 1997 Annual
Report filed on Form 10-K (File No.
0-28366).
2. Earnings Per Share
------------------
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of stock options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the Statement No. 128 requirements.
On December 9, 1997, the Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend on common stock outstanding,
payable on February 2, 1998 to shareholders of record on January 15, 1998. The
stock split resulted in the issuance of 900,796 additional common shares. The
effect of this stock split has been recorded as of December 31, 1997. All per
share data has been adjusted for the effect of the stock split.
3. Comprehensive Income
--------------------
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income", in June 1997. The Company adopted the
provisions of the new standard in the first quarter of 1998. In accordance with
the statement, prior year financial statements have been reclassified in order
to be consistent with the current year presentation. The only comprehensive
income item that the Company has is unrealized gains (losses) on securities
available for sale.
8
4. Cash Flow Information
---------------------
For the purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold.
Cash payments for interest for the six month period ended June 30, 1998
and 1997 were $4,435,000 and $4,473,000 respectively. There were cash payments
for income taxes in 1998 of $15,000 and none in 1997. Non-cash investing
activity for 1998 and 1997 include foreclosed mortgage loans transferred to real
estate owned of $600,000 and $210,000 respectively.
5. Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for prior years have been reclassified to
conform to current year presentation. Such reclassifications did not affect net
income.
6. Recently Issued Financial Standards
-----------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activity." The new
statement requires all derivatives to be recorded on the balance sheet at fair
values and establishes "special accounts" for three different types of hedges.
The Company does not have any derivative financial instruments, and therefore,
this new standard will have no impact on the financial statements.
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
- -------------------
General
- -------
Total assets at June 30, 1998 were $273.9 million, compared to $263.3
million at year-end 1997. The Company experienced a modest growth in loans and a
slight decline in deposits during the period reflecting seasonality of its
customer base. Growth in the securities portfolio was funded by short-term
borrowings.
Securities
- ----------
The fair value of securities available for sale at June 30, 1998 was
$56.6 million, an increase of $7.3 million from December 31, 1997. The increase
was principally in government agency issued mortgage-backed securities. For the
six months ended June 30, 1998, maturities and calls on available for sale
securities totaled $4.7 million with purchases of $12.6 million. In the current
interest rate environment, the Company has experienced increased cash-flow from
higher pre-payment speeds on its mortgage-backed securities. This increased cash
flow has been principally reinvested in low-coupon, shorter duration
mortgage-backed securities.
Loans
- -----
Total loans at June 30, 1998 were $186.8 million compared to $185.6
million at year-end. During the six month period, the Company has experienced
refinancing of its adjustable rate mortgages into fixed rate product. Certain
fixed rate loans are subsequently sold into the secondary market with sales
totaling $4.6 million for the period ended June 30,1998. Floor plan loans
decreased $1.2 million due to pay-offs. These decreases were offset by increase
in home
9
equity loans of $629,000 to $15.9 million and indirect auto financing growth of
$3.6 million to $31.5 million. The Company provides indirect financing and
automobile leasing to over sixty automobile dealers in five counties in
Northeastern Pennsylvania.
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, 1998 December 31, 1997
------------------------ ------------------------
$ % $ %
-------- -------- -------- -------
Commercial, financial and agricultural $ 25,525 13.6% $ 26,589 14.2%
Real Estate-construction 2,464 1.3 2,046 1.1
Real Estate-residential 52,715 28.0 54,227 29.0
Real Estate-commercial 32,193 17.1 32,986 17.7
Leases to individuals 34,589 18.4 33,877 18.1
Installment loans to individuals 40,469 21.5 37,082 19.9
-------- --------
Total loans 187,955 100.0% 186,807 100.0%
Less unearned income 1,151 1,167
Allowance for loan losses 3,260 3,250
-------- --------
Total loans, net $183,544 $182,390
======== ========
10
Allowance for Loan Losses and Non-performing Assets
- ---------------------------------------------------
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
At or for the Three At or for the Six
(dollars in thousands) Months Ended June 30 Months Ended June 30
---------------------------- --------------------
1998 1997 1998 1997
--------- -------- ---- ----
Balance at beginning of period $ 3,289 $ 2,740 $3,250 $2,616
Provision for loan losses 180 300 360 550
Charge-offs (234) (150) (397) (299)
Recoveries 25 50 47 73
------- ------- ------ ------
Net charge-offs (209) (100) (350) (226)
------- ------- ------ ------
Balance at end of period $ 3,260 $ 2,940 $3,260 $2,940
======= ======= ====== ======
Allowance to total loans 1.75% 1.58% 1.75% 1.58%
Net charge-offs to average loans
(annualized) .45% .22% .38% .25%
The allowance for loan losses totaled $3,260,000 at June 30, 1998 and
represented 1.75% of total loans, compared to $3,250,000 and 1.75% at year-end,
and $2,940,000 and 1.58% at June 30, 1997. The provision for loan losses for the
current quarter was $180,000, compared to $300,000 for the second quarter of
1997. The Company's loan review function accesses the adequacy of the allowance
for loan losses on a quarterly basis. The process includes a review of the risks
inherent in the loan portfolio. It includes a credit review and gives
consideration to areas of exposure such as concentration of credit, economic and
industry conditions, trends in delinquencies, collections and collateral value
coverage. General reserve percentages are identified by loan type and credit
grading and allocated accordingly. Larger credit exposures are individually
analyzed. While management considers the allowance adequate at June 30, 1998
based on the loan mix and level of classifications, there can be no assurances
that future provisions will not be made to the allowance, and that such losses
will not exceed estimated amounts.
At June 30, 1998, the recorded investment in loans which are
considered to be impaired in accordance with Statement of Financial Accounting
Standards Nos. 114 and 118 was $1,314,000. This was comprised of $373,000 with
related allowance of $13,000 and loans of $941,000 with no related allowance for
loan losses. Impaired loans are commercial and commercial real estate loans for
which it is probable that the Company will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The Company
estimates credit losses on impaired loans based on present value of expected
cash flows or the fair value of the underlying collateral if loan repayment is
expected to come from the sale of such collateral.
11
At June 30, 1998, non-performing loans totaled $1,075,000 which is
.58% of total loans decreasing from $2,175,000, or 1.17% of total loans at
December 31, 1997. The following table sets forth information regarding
non-performing loans and other real estate owned at the date indicated:
(dollars in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Loans accounted for on a non-accrual
Basis:
Commercial and all other $ 559 $ 963
Real Estate 486 1,112
Consumer 13 33
------- ------
Total 1,058 2,108
Accruing Loans which are contractually
past due 90 days or more 17 44
------- ------
Total non-performing loans $ 1,075 $2,175
Other real estate owned 1,063 537
------- ------
Total non-performing assets $ 2,138 $2,712
======= ======
Allowance for loan losses as a
percent of non-performing loans 308.1% 149.4%
Non-performing loans to total loans .58% 1.17%
Non-performing assets to total assets .78% 1.03%
During the second quarter, the Bank's subsidiary WTRO Properties,
Inc. acquired, through foreclosure action, the real estate related to a large
non-performing loan relationship. The increase in other real estate from
$537,000 at year-end to $1,063,000 at June 30, 1998 is principally related to
this transaction, with the property carried at $434,000. The property consists
of three parcels, one of which was sold prior to July 30, with the remaining
contracted to settle prior to September 30. The Company's largest non-performing
loan relationship consists of the real estate of a marina. During the second
quarter the Bank liquidated the inventory and anticipates the sale of the real
estate during the third quarter.
Deposits and Other Borrowings
- -----------------------------
Total deposits at June 30, 1998 were $225.4 million compared to
$226.8 million at year-end. The decrease was principally due to $8.9 million of
maturities of short-term time deposits of school district and other public funds
off-set by growth in core deposits. Non-interest bearing demand deposits
represented 12.1% of total deposits at June 30, improving from 10.6% at
year-end. Money market deposit accounts totaled $31.4 million, increasing $2.6
million from year-end principally due to growth in high yield Investor Account.
Interest bearing checking increased $3 million from year-end, to total $24.4
million at June 30, 1998.
The Company substituted short-term borrowings, principally cash
management accounts which represent customers excess funds invested in overnight
repurchase agreements and borrowings from the Federal Home Loan Bank, for
short-term jumbo CDs. Repurchase agreements totaled $5.2 million at June 30
compared to $2.8 million at year-end. The Company believes such accounts are a
stable source
12
of funds as they represent substitutes for core deposits for larger commercial
and governmental agency customers.
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at June 30, 1998, was $26,107,000 compared
to $24,594,000 at December 31, 1997. A comparison of the Company's capital
ratios is as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Tier 1 Capital
(To average assets) 8.77% 8.34%
Tier 1 Capital
(To risk-weighted assets) 11.65% 11.27%
Total Capital
(To risk-weighted assets) 12.90% 12.53%
The minimum capital requirements imposed by the FDIC for leverage,
Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has
similar capital requirements imposed by the Board of Governors of the Federal
Reserve System. 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
both FDIC and PDB capital requirements at June 30, 1998 and December 31, 1997.
Liquidity
- ---------
Maintenance of liquidity is coordinated by ALCO. Liquidity can be
viewed as the ability to fund customers borrowing needs and their deposit
withdrawal requests while supporting asset growth. The Company's primary sources
of liquidity include deposit generation, asset maturities and cash flow from
loans and securities.
At June 30, 1998, the Company had cash and cash equivalents of $12.5
million in the form of cash, due from banks and interest bearing deposits with
other institutions. In addition, the Company had total securities available for
sale of $56.6 million which could be used for liquidity needs. This totals $69.1
million and represents 25.2% of total assets, increasing from 22.5% at year-end.
The Company also monitors other liquidity measures all of which were within
Company policy guidelines at June 30, 1998. The Company believes its liquidity
position is adequate.
The Company maintains established lines of credit with the Federal
Home Loan Bank of Pittsburgh (FHLB) and other correspondent banks which support
liquidity needs. The short-term borrowing capacity from FHLB is in excess of $53
million. At June 30, 1998 the Company had $2 million borrowing from the FHLB
with a scheduled maturity in December 1999, and $8.1 million of overnight
borrowings.
13
Results of Operation
Comparison of Operating Results for Six Months Ended June 30, 1998 and
- ----------------------------------------------------------------------
June 30, 1997
- --------------
General
- -------
For the six months ended June 30, 1998, net income totaled $1,511,000
or $.90 per share compared to $1,201,000 or $.73 earnings per share for the
prior year. Return on average assets and return on average equity were 1.15% and
11.91%, respectively, improving from .93% and 10.99%, respectively in 1997.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the first six months of 1998 was $5,867,000, an increase of $236,000, or 4.2%
over 1997. The fte net interest spread and net interest margin for six months
1998 was 4.05% and 4.71% respectively compared to 4.11% and 4.68%, respectively
in 1997.
The decrease in net interest spread was principally the result of
lower yields on earning assets, 8.11% decreasing from 8.31%, or a 20 basis point
decline. The cost of interest-bearing liabilities decreased 14 basis points to
4.06% for the six months of 1998. Net interest margin increased, despite the
decrease in net interest spread, due to a higher earning asset ratio of 94.4% in
1998 compared to 92.9% in 1997, and lower levels of non-performing loans. Net
interest margin was also favorably impacted by growth in non-interest bearing
funding, including increase in average capital of $3.5 million.
Interest income on an fte basis totaled $10,093,000 for the six
months of 1998, compared to $10,010,000 in 1997. The yield on the securities
available for sale portfolio decreased from 6.67% in 1997 to 6.20% principally
due to lower interest rate environment and shortening of the average repricing
term of the portfolio to 3.5 years from 5.0 years at June 30, 1997. Total loans
averaged $184.7 million for the period with interest income of $8,032,000 and
yield of 8.69% compared to $179.7 million average, $7,907,000 income and 8.80%
yield in 1997. The growth in loans was principally in lower yielding retail
loans and lease financing with a decrease in higher yielding commercial related
credits.
Total interest expense for the six months of 1998 was $4,226,000
compared to $4,379,000 in 1997. The average cost of interest-bearing liabilities
was 4.06% in 1998 decreasing from 4.20% in 1997. During the period, the Company
decreased rates paid on certain deposit products including interest-bearing
checking, savings and money market accounts. This was partially offset by
increased cost on retail CDs, reflecting a lengthening of maturities. The mix of
interest-bearing deposits shifted to lower costing funds with time deposits
representing 52.9% in 1998, down from 54.7% in 1997.
Other Income
- ------------
Other income, excluding gains on sales of securities, totaled
$751,000 for the six months of 1998, an increase of $165,000 or 28% over the
corresponding period in 1997. During the period the Company sold $4.6 million in
fixed rate residential
14
mortgages into the secondary market for a gain of $62,000 compared to $31,000 in
1997. Revenues generated from sales of mutual funds and annuities were $68,000
on $2.3 million of product increasing from $33,000 in 1997. Other increases were
principally due to additional fees on deposit-related products including a new
checking account product and improvements in collection of overdraft fees.
During the period, the Company sold an equity holding in another
financial institution for a gain on sale of $15,000 compared to $63,000 in
securities gains in 1997.
Other Expenses
- --------------
Other expenses totaled $3,968,000 for the six months of 1998 compared
to $3,935,000 in 1997. Salary and employee benefit costs were $1,926,000, an
increase of 4% over 1997, principally due to expenses related to retirement
plans. Total full-time equivalent employees at June 30, 1998 were 111 compared
to 117 at June 30, 1997. Cost associated with other real estate properties
decreased to $76,000 from $169,000 principally due to lower levels of losses
incurred on sales. The Company's data processing related expenses increased
during the period principally due to growth in the automobile leasing portfolio
and costs related to planning for core application systems conversion. See also
"Year 2000".
The efficiency ratio for the period improved to 59.9% from 63.2% in
1997.
Income Tax Expense
- ------------------
Income tax expense for the six months of 1998 was $653,000, for an
effective tax rate of 30.2% compared to $397,000 and an effective rate of 24.8%
in 1997. The increase in the effective rate is due to a higher level of pre-tax
income and lower levels of tax-exempt municipal investments.
Comparison of Operating Results for the Three Months ended June 30, 1998
- ------------------------------------------------------------------------
and June 30, 1997
- -----------------
General
- -------
For the three months ended June 30, 1998, net income was $791,000 an
increase of $147,000 or 22.8% over the $644,000 earned in 1997. Basic and
diluted earnings per share for the period were $.47 compared to $.39 in 1997.
The resultant return on assets and return on equity for the second quarter of
1998 were 1.19% and 12.29%, respectively, improving from .99% and 11.75%
respectively in 1997.
Net Interest Income
- -------------------
Net interest income (fte) for the second quarter of 1998 totaled
$2,986,000 compared to $2,844,000 in 1997. Net interest spread and net interest
margin were 4.08% and 4.76% respectively compared to 4.12% and 4.71%,
respectively in 1997.
Total interest income for the second quarter of 1998 was $5,087,000
with a yield on earning assets of 8.12% compared to $5,069,000 and 8.35% in
1997. The yield on earning assets declined 23 basis points impacted by both
lower yields on investment securities and loans. Interest income on loans for
the period was
15
$4,051,000 compared to $4,034,000, with a decline in yield to 8.73% from 8.83%.
This is principally due to shift in loan mix to lower yielding consumer loans
and less higher yielding commercial loans.
For the second quarter of 1998, interest expense totaled $2,101,000
decreasing from $2,215,000 in the prior year. The cost of interest-bearing
liabilities likewise decreased to 4.04% from 4.23% in 1997. The decrease was
principally due to lower rates paid on interest-bearing checking and savings
deposits as well as lower levels of higher costing time deposits.
The net interest margin increased to 4.76% in 1998 from 4.71% in 1997
despite the lower yield on earning asset. This was due to higher ratio of
earning asset 94% compared to 92.9%, lower level of non-performing loans and
increases in capital as service of funding earning asset growth.
Other Income
- ------------
Other income excluding gains on securities sales totaled $408,000 for
the second quarter of 1998, an increase of $95,000 or 30% over 1997. Gains on
sales of mortgages were $35,000 in 1998 on sales of $1.5 million increasing from
$11,000 in 1997. Revenues from sales of mutual funds and annuities improved to
$54,000 in the second quarter of 1998 from $23,000 in 1997. Fees on deposit
related services improved due to new checking account products. There were no
gains on sales of securities in 1998 compared to $63,000 recorded in the second
quarter of 1997.
Other Expenses
- --------------
Other expenses were $2,011,000 for the second quarter of 1998
increasing $38,000 from the $1,973,000 in the second quarter of 1997. Salary and
employee benefit expenses increased $58,000 or 6.4% to 963,000 principally due
to higher retirement plan costs. Other real estate costs were $57,000 in 1998,
declining from $123,000 the prior year. The Company incurred $20,000 of costs
related to its core application system conversions scheduled for the fourth
quarter of 1998. There will be additional costs in the third and fourth quarter
related to the conversion project of approximately $100,000. See also "Year
2000". The efficiency ratio for the 1998 period was 59.2% improving from 62.3%
in 1997.
Income Tax
- ----------
Income tax expense for the second quarter of 1998 was $343,000 for an
effective tax rate of 30.2% compared to $221,000 and an effective tax rate of
25.6% in 1997. The increase in the effective rate was due to higher level of
pre-tax income, $269,000, and lower amount of tax-exempt municipal securities.
Year 2000
- ---------
Timely and accurate data processing are critical to the operation of
the Company. Issues regarding the Year 2000 arise out of the fact that many
existing computer programs use only two digits to identify a year in the date
field. Any of the Company's programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures.
The Company has developed a Year 2000 project plan to manage the
issues
16
involved. The plan is administered by a senior executive of the company and is
overseen by the Board of Directors. The Company has entered into a new seven
year $2.2 million agreement with a data servicing provider for its core
application systems. The conversion is planned to occur in the fourth quarter of
1998 and will address Year 2000 issues. Substantially all systems will be tested
by year-end 1998. During the second quarter, the Company contracted to purchase
$300,000 of personal computers to replace existing networks which may not have
effectively handled the Year 2000.
In addition, certain commercial customers could experience problems
with their operations which could negatively effect their cash flow and ability
to handle their debt service. The Company is analyzing its portfolio and
surveying its commercial customers to determine the risks associated with the
Year 2000. The Company is also surveying its major fund providers and vendors
for their Year 2000 plans. The Year 2000 project plan could be changed based on
the results of this analysis of funds providers, and vendors and other business
partners. Customer awareness is a component of the Year 2000 Plan, and the
Company is drafting brochures for distribution to its customers in the third
quarter.
Contingency and business resumption plans are also being developed.
The contingency plans will address actions the company may take as a result of
system failure. At this time, management believes its level of preparedness for
Year 2000 is appropriate.
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 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. ALCO monitors these
repricing characteristics and identifies strategies; including management of
liability costs and maturities, structure of the investment portfolio, and
various lending activities to insulate net interest income from the effects of
changes in interest rates. 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. At June 30, 1998, the
level of net interest income at risk in a 200 basis points increase or decrease
was within the Company's policy limits.
Imbalance in repricing opportunities at a given point in time reflect
interest- sensitivity gaps measured as the difference between interest-sensitive
assets and
17
interest-sensitive liabilities. An asset or liability is considered
interest-sensitive if the rate it yields is subject to change or if it produces
a cash-flow in a given period which must be redeployed by the Company. 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.
At June 30, 1998, the Bank had a positive 30 day gap position of $10
million, or 3.8% of total assets. A positive gap means that interest-sensitive
assets are higher than interest-sensitive liabilities at the time interval. This
would generally indicate that in a declining rate environment, the yield on
earning assets would decrease faster than the cost of interest-bearing
liabilities in the 30 day time frame. This risk is managed by ALCO strategies,
including investment portfolio structure, pricing of deposit liabilities, loan
pricing and structure of fixed and variable rate products.
The Company analyzes and measures the time periods in which
interest-earning assets and interest-bearing liabilities will mature or reprice
in accordance with their contractual terms and assumptions. Management believes
that the assumptions used are reasonable. The interest rate sensitivity of
assets and liabilities could vary substantially if differing assumptions were
used or if actual experience differs from the assumptions used in the analysis.
For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in differing degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates. Further,
in the event of a significant change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed.
Finally, the ability of borrowers to service their adjustable-rate debt may
decrease in the event of an interest rate increase. The operating results of the
Company are not subject to foreign currency exchange or commodity price risk,
nor does the Company have any off-balance sheet derivatives.
18
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Six Months Ended June 30,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold............................... $ 312 $ 9 5.77% $2,034 $57 5.60%
Interest bearing deposits with banks 2,333 59 5.06 878 24 5.47
Investment Securities............................ 8,158 342 8.38 8,806 375 8.52
Investment Securities available for sale:
Taxable ....................................... 51,553 1,593 6.18 44,457 1,452 6.53
Tax-exempt .................................... 1,746 58 6.64 4,917 195 7.93
----- ------- ------ ---
Total Investment securities available for sale 53,299 1,651 6.20 49,374 1,647 6.67
Loans and Leases............................... 184,861 8,032 8.69 179,747 7,907 8.80
------- ----- ------- -----
Total interest earning assets............... 248,963 10,093 8.11 240,839 10,010 8.31
Non-interest earning assets:
Cash and due from banks.......................... 6,138 6,017
Allowance for loan losses........................ (3,258) (2,771)
Other assets..................................... 11,785 15,191
------ ------
Total non-interest earning assets................ 14,665 18,437
------ -------
Total Assets........................................ $263,628 $259,276
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits................. $51,062 641 2.51 % $45,279 585 2.58
Savings deposits................................. 42,593 532 2.50 44,362 601 2.71
Time deposits.................................... 105,345 2,828 5.37 108,381 2,893 5.34
------- ----- -------- ------
Total interest bearing deposits............... 199,000 4,001 4.02 198,022 4,079 4.12
Short-term borrowings............................... 7,234 165 4.56 7,822 190 4.86
Other borrowings ................................... 2,000 60 6.00 2,444 110 9.00
----- ------- ------- ---
Total interest bearing liabilities............... 208,234 4,226 4.06 208,288 4,379 4.20
Non-interest bearing liabilities:
Demand deposits.................................. 24,835 24,733
Other liabilities................................ 5,193 4,402
----- -----
Total non-interest bearing liabilities........ 30,028 29,135
------ ------
Stockholders' equity............................. 25,366 21,862
------ -------
Total Liabilities and Stockholders' Equity.......... $263,628 $259,285
======= =======
Net interest income (tax equivalent basis).......... 5,867 4.05% 5,631 4.10%
===== =====
Tax-equivalent basis adjustment..................... (141) (197)
----- ------
Net interest income................................. $5,726 $5,434
====== ======
Net interest margin (tax equivalent basis).......... 4.71% 4.68%
==== ====
- ----------
(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.
19
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
-----------------------------------------
Six months ended June 30,1998 Compared to
Six months ended June 30, 1997
-------------------------------------
Variance due to
------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (53) $ 5 $ (48)
Interest bearing deposits with banks 40 (5) 35
Securities (27) (6) (33)
Securities available for sale:
Taxable 339 (198) 141
Tax-exempt (109) (28) (137)
----- ----- -----
Total securities available for sale 230 (226) (4)
Loans receivable 359 (234) 125
----- ----- -----
Total interest earning assets 549 (466) 83
Interest bearing liabilities:
Interest bearing demand deposits 100 (44) 56
Savings deposits (23) (46) (69)
Time deposits (109) 44 (65)
----- ----- -----
Total interest bearing deposits (32) (46) (78)
Other borrowed funds (14) (11) (25)
Other borrowings (18) (32) (50)
----- ----- -----
Total interest bearing liabilities (63) (90) (153)
Net interest income (tax-equivalent basis) $ 613 $(377) $ 236
===== ===== =====
- -------------
(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.
20
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and use of proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on April 28, 1998.
The following incumbent Class II directors were nominated for and duly elected
to the Board of Directors for a three-year term expiring in 2001:
Russell L. Ridd, 1,457,707 for, 13,272 withheld; Harold A. Shook, 1,452,297
for, 18,536 withheld; John J. Weidner, 1,433,281 for, 37,552 withheld
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-Financial Data Schedule
(In electronic filing only)
(b) Reports on Form 8-k
None.
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: 8/3/98 By: /s/ William W. Davis, Jr.
------ ------------------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: 8/3/98 By: /s/ Lewis J. Critelli
------ ------------------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
22