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 September 30,1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28366
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Norwood Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
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(State or other (I.R.S. employer identification no.)
jurisdiction of
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
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N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicated by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of October 30, 1998
- --------------------------------------- ----------------------------------
common stock, par value $0.10 per share 1,781,430
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash and due from banks $ 7,839 $ 6,571
Interest bearing deposits with banks 1,200 4,353
Federal funds sold 9,575 --
Securities available for sale 53,786 49,372
Securities held-to-maturity (fair value of $8,028
and $9,098) 7,659 8,159
Loans receivable (net of unearned income) 187,211 185,640
Less: Allowance for loan losses 3,227 3,250
--------- ---------
Net loans receivable 183,984 182,390
Bank premises and equipment, net 7,129 7,300
Other real estate 435 537
Accrued interest receivable 1,414 1,358
Other assets 3,806 3,210
--------- ---------
TOTAL ASSETS $ 276,827 $ 263,250
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 30,775 $ 24,065
Interest-bearing deposits 205,563 202,689
--------- ---------
Total deposits 236,338 226,754
Short-term borrowings 4,897 4,990
Other borrowings 2,000 2,000
Accrued interest payable 1,902 2,365
Other liabilities 4,762 2,547
--------- ---------
TOTAL LIABILITIES 249,899 238,656
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 4,524 4,384
Retained earnings 22,640 20,844
Treasury stock, at cost (22,394 shares) (344) (344)
Unearned ESOP shares (1,602) (1,750)
Net unrealized appreciation on securities 1,530 1,280
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TOTAL STOCKHOLDERS' EQUITY 26,928 24,594
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 276,827 $ 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 Nine Months Ended
September 30 September 30
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- -------
INTEREST INCOME
Loans receivable including fees $ 4,131 $ 4,143 $12,157 $12,046
Securities 939 809 2,797 2,638
Federal funds sold and deposits
with banks 8 31 76 112
-------- ------- ------- -------
Total interest income 5,078 4,983 15,030 14,796
INTEREST EXPENSE
Deposits 1,960 1,984 5,961 6,063
Short-term borrowings 11 126 280 316
Other borrowed funds 30 55 90 165
-------- ------- ------- -------
Total interest expense 2,105 2,165 6,331 6,544
-------- ------- ------- -------
NET INTEREST INCOME 2,973 2,818 8,699 8,252
PROVISION FOR LOAN LOSSES 180 555 540 1,105
-------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,793 2,263 8,159 7,147
OTHER INCOME
Service charges and fees 29 238 788 626
Income from fiduciary activities 59 42 127 127
Net realized gain on sales of securities 11 7 26 70
Gain on termination of pension plan -- 616 -- 616
Other 92 69 283 182
-------- ------- ------- -------
Total other income 45 972 1,224 1,621
OTHER EXPENSES
Salaries and employee benefits 96 884 2,888 2,736
Occupancy, furniture & equipment, net 314 342 943 964
Taxes, other than income 62 61 187 180
Other real estate owned operations 82 84 251
Other 631 643 1,843 1,816
-------- ------- ------- -------
Total other expenses 1,977 2,012 5,945 5,947
INCOME BEFORE INCOME TAXES 1,274 1,223 3,438 2,821
INCOME TAX EXPENSE 384 443 1,037 840
-------- ------- ------- -------
NET INCOME $ 890 $ 780 $ 2,401 $ 1,981
======= ======= ======= =======
BASIC AND DILUTED
EARNINGS PER SHARE* $ 0.53 $ 0.47 $ 1.43 $ 1.20
======= ======= ======= =======
Dividends per share* $ 0.12 $ 0.105 $ 0.36 $ 0.32
======= ======= ======= =======
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)
Nine months ended
-------------------
September 30
-------------------
1998 1997
-------- -------
Net Income $ 2,401 $ 1,981
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising
during the period 405 934
Less reclassification adjustments for
gains included in net income (26) (63)
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Other comprehensive income before income
taxes 379 871
Income tax expense 129 296
------- -------
Other comprehensive income 250 575
------- -------
Comprehensive income $ 2,651 $ 2,556
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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 2,401 2,401
Cash dividends declared (605) (605)
Net change in unrealized appreciation
on securities 250 250
Stock options exercised 33 33
Release of earned ESOP shares 107 148 255
---- ------ ------- ----- ------- ----------- -------
Balance, September 30, 1998 $180 $4,524 $22,640 ($344) ($1,602) $1,530 $ 26,948
==== ====== ======= ====== ======== ===== =======
See accompanying notes to the unaudited financial statements
6
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,401 $ 1,981
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 540 1,105
Depreciation 5 577
Amortization of intangible assets 175 224
Deferred income taxes 1,816 1,630
Net realized gain on sales of securities (26) (70)
Gain(loss) on sale of other real estate, net (20) 56
Net gain on sale of mortgage loans (89) (52)
Mortgage loans originated for sale (5,808) (3,781)
Proceeds from sale of mortgage loans 5,897 3,833
Decrease (increase) in accrued interest receivable (56) 154
Increase (decrease) in accrued interest payable (471) (213)
Other, net 249 (27)
-------- --------
Net cash provided by operating activities 5,103 5,417
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CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 4,990 9,423
Proceeds from maturities and principal reductions on
mortgage-backed securities 8,533 3,799
Purchases (17,602) (6,681)
Securities held to maturity:
Proceeds from maturities 500 --
Purchases -- --
Net decrease (increase) in loans (3,339) (16,020)
Purchase of bank premises and equipment, net (325) (206)
Proceeds from sales of other real estate 758 1,688
-------- --------
Net cash used in investing activities (6,485) (7,997)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in deposits (9,584) (777)
Net increase (decrease) in short term borrowings (94) 6,263
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 148 100
Net cash dividends paid (603) (523)
-------- --------
Net cash provided by (used) in financing activities 9,072 5,063
-------- --------
Increase (Decrease) in cash and cash equivalents 7,690 2,483
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,924 15,109
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,614 $ 17,592
======== ========
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 nine month period
ended September 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 nine month period ended September
30, 1998 and 1997 were $6,432,000 and $6,315,000 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 $636,000 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
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General
- -------
Total assets at September 30, 1998 were $276.8 million, compared to
$263.3 million at year-end 1997. The Company experienced a modest growth in
loans of $1.6 million and a greater increase in deposits of $9.6 million during
the period reflecting the seasonality of its customer base. The Company used the
deposits to fund shorter term investments.
Securities
- ----------
The fair value of securities available for sale at September 30, 1998
was $53.8 million, an increase of $4.4 million from December 31, 1997. The
increase was principally in government agency issued mortgage-backed securities.
For the nine months ended September 30, 1998, maturities and calls on available
for sale securities totaled $8.5 million with purchases of $17.6 million. In the
current interest rate environment, the Company has experienced increased
cash-flow from higher pre-payment speeds on its mortgage-backed securities. In
addition the Company sold $5 million of higher coupon mortgage-backed securities
at a small gain which were pre-paying at an accelerated pace. The increased cash
flow and proceeds from the sales have been principally reinvested in low-coupon,
shorter duration mortgage-backed securities.
Loans
- -----
Total loans at September 30, 1998 were $187.2 million compared to
$185.6 million at year-end. During the nine month period, the Company has
experienced refinancing of its
9
adjustable rate mortgages into fixed rate product. Certain fixed rate loans are
subsequently sold into the secondary market with sales totaling $6 million for
the nine month period ended September 30,1998. Floor plan loans decreased $1.0
million due to pay-offs. Commercial loans have decreased $2.4 million
principally due to two large pay-downs in September. These decreases were offset
by increase in home equity loans of $2 million to $17 million and indirect auto
financing growth of $5.2 million to $34.3 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)
September 30, 1998 December 31, 1997
------------------- -------------------
$ % $ %
-------- ------ -------- ------
Commercial, financial and agricultural $ 24,241 12.9% $ 26,589 14.2%
Real Estate-construction 2,999 1.6 2,046 1.1
Real Estate-residential 53,298 28.3 54,227 29.0
Real Estate-commercial 31,498 16.7 32,986 17.7
Leases to individuals 34,067 18.1 33,877 18.1
Installment loans to individuals 42,058 22.4 37,082 19.9
------- ------
Total loans 188,161 100.0% 186,807 100.0%
Less unearned income 950 1,167
Allowance for loan losses 3,227 3,250
------- -------
Total loans, net $183,984 $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 Months At or for the Nine Months
(dollars in thousands) Ended September 30 Ended September 30
-------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Balance at beginning of period $ 3,260 $ 2,940 $ 3,250 $ 2,616
Provision for loan losses 180 555 540 1,140
Charge-offs (280) (436) (677) (735)
Recoveries 67 21 114 95
------- ------- ------- -------
Net charge-offs (213) (415) (563) (640)
------- ------- ------- -------
Balance at end of period $ 3,227 $ 3,080 $ 3,227 $ 3,080
======= ======= ======= =======
Allowance to total loans 1.72% 1.63% 1.72% 1.63%
Net charge-offs to average loans
(annualized) .45% .89% .40% .47%
The allowance for loan losses totaled $3,227,000 at September 30,
1998 and represented 1.72% of total loans, compared to $3,250,000 and 1.75% at
year-end, and $3,080,000 and 1.63% at September 30, 1997. The provision for loan
losses for the nine months of 1998 was $540,000, compared to $1,105,000 for the
same period in 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
September 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 September 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 $565,000. There was no related allowance for loan
losses on these collateral dependent loans. 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 September 30, 1998, non-performing loans totaled $569,000 which is
.30% 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) September 30, 1998 December 31, 1997
------------------ -----------------
Loans accounted for on a non-accrual
Basis:
Commercial and all other $ 69 $ 963
Real Estate 432 1,112
Consumer 59 33
------ ------
Total 560 2,108
Accruing Loans which are contractually
past due 90 days or more 9 44
------ ------
Total non-performing loans $ 569 $2,175
Other real estate owned 435 537
------ ------
Total non-performing assets $1,004 $2,712
====== ======
Allowance for loan losses as a
percent of non-performing loans 576.3% 149.4%
Non-performing loans to total loans .30% 1.17%
Non-performing assets to total assets .36% 1.03%
During the third quarter the Company disposed of its two largest
non-performing assets. The inventory of a marina was liquidated in the second
quarter and the real estate was sold in the third quarter. The Company sold a
commercial property acquired through foreclosure at a gain of $37,000.
Deposits and Other Borrowings
- -----------------------------
Total deposits at September 30, 1998 were $236.3 million compared to
$226.8 million at year-end 1997, an increase of $9.6 million or 4.2%. The
increase was due in part to seasonal public fund deposits of local
municipalities' real estate tax receipts. Core deposits also increased during
the period with retail interest-bearing checking accounts increasing $5.5
million to $27 million and money market accounts increasing $3.7 million to
$32.5 million. Non-interest bearing demand deposits, principally business
accounts, represented 13% of total deposits at September 30, 1998 improving from
10.6% at year-end.
The Company had no overnight borrowings from other financial
institutions at September 30, 1998 compared to $1.2 million at December 31,
1997. The Company does have $2 million term borrowing from the Federal Home Loan
Bank of Pittsburgh (FHLB). The borrowing matures in December 1999. Repurchase
agreements totaled $4.6 million at September 30, 1998 increasing from $2.8
million at year-end. The Company believes such accounts are a stable source of
funds as they represent substitutes for demand deposits for larger commercial
and municipal customers.
12
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at September 30, 1998, was $26,928,000
compared to $24,594,000 at December 31, 1997. A comparison of the Company's
capital ratios is as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Tier 1 Capital
(To average assets) 8.98% 8.34%
Tier 1 Capital
(To risk-weighted assets) 12.09% 11.27%
Total Capital
(To risk-weighted assets) 13.69% 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 September 30, 1998 and December 31,
1997.
Liquidity
- ---------
Maintenance of liquidity is coordinated by the Asset/Liability
Committee (ALCO). The Company views liquidity 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 September 30, 1998, the Company had cash and cash equivalents of
$18.6 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 $53.9 million which could be used for liquidity needs. This totals
$72.5 million and represents 26.2% 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 September 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 $55
million. At September 30, 1998 the Company had $2 million borrowing from the
FHLB with a scheduled maturity in December 1999, and no overnight borrowings.
13
Results of Operation
Comparison of Operating Results for Nine Months Ended September 30, 1998 and
- ----------------------------------------------------------------------------
September 30, 1997
- -------------------
General
- -------
For the nine months ended September 30, 1998, net income totaled
$2,401,000 or $1.43 basic and diluted earnings per share compared to $1,981,000
or $1.20 basic and diluted earnings per share for the prior year. Return on
average assets and return on average equity were 1.21% and 12.43%, respectively,
improving from 1.02% and 11.86%, respectively in 1997.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the first nine months of 1998 was $8,912,000, an increase of $388,000, or 4.6%
over 1997. The fte net interest spread and net interest margin for nine months
1998 was 4.08% and 4.75% respectively compared to 4.12% and 4.71%, respectively
in 1997.
The decrease in net interest spread was principally the result of
lower yields on earning assets, 8.12% decreasing from 8.33%, or a 21 basis point
decline. The cost of interest-bearing liabilities decreased 17 basis points to
4.04% for the nine months of 1998. Net interest margin increased, despite the
decrease in net interest spread, due to a higher earning asset ratio of 94.3% in
1998 compared to 93.1% in 1997, and lower levels of non-performing loans. Net
interest margin was also favorably impacted by growth in non-interest bearing
funding, which increased $4.6 million on average from 1997.
Interest income on an fte basis totaled $15,243,000 for the nine
months of 1998, compared to $15,068,000 in 1997. The yield on the securities
available for sale portfolio decreased from 6.62% in 1997 to 6.17% principally
due to lower interest rate environment and shortening of the average repricing
term of the portfolio to 3.1 years from 4.8 years at September 30, 1997. Total
loans averaged $186.2 million for the period with interest income of $12,165,000
and yield of 8.71% compared to $182.4 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. The decrease in prime rate from 8.50% to 8.00% will impact loan
yields in the fourth quarter.
Total interest expense for the nine months of 1998 was $6,331,000
compared to $6,544,000 in 1997. The average cost of interest-bearing liabilities
was 4.04% in 1998 decreasing from 4.21% 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% in 1998, down from 53.5% in 1997.
14
Other Income
- ------------
Other Income totaled $1,224,000 for nine months of 1998 compared to
$1,621,000 in 1997. Nine months of 1997 includes $616,000 non-recurring gain on
termination of pension plan and $70,000 in gains on securities sales compared to
$26,000 in 1998. Adjusting for non-recurring gains, other income increased
$263,000 or 28.1%. Service charges and fees were $788,000 in 1998, an increase
of $162,000 over prior year. The increase was principally due to deposit-related
products and increases in collection of overdraft fees. After a survey of
competition, the Company increased selected service charges as of August 1,
1998. Revenue on sales of annuities and mutuals totaled $96,000 increasing from
$56,000 in 1998. For 1998, fee income represented 12.1% of total revenues,
improving from 10.2% in 1997.
Other Expenses
- --------------
Other expenses totaled $5,945,000 for the nine months of 1998
compared to $5,947,000 in 1997. Salary and employee benefit costs were
$2,888,000, an increase of 5.6% over 1997. The increase was principally due to
expenses related to retirement plans. Total full-time equivalent employees at
September 30, 1998 were 112 compared to 120 at September 30 1997. Expenses
related to other real estate properties declined to $84,000 in 1998 from
$251,000 in 1997 principally due to lower levels of losses incurred on sales and
less properties owned. Legal costs related to non-performing loans has decreased
$50,000 from 1997. The Company's data processing related costs totaled $193,000
in 1998 compared to $109,000 in 1997. The increase was principally due to cost
related to core application systems conversion of October 31, 1998.
See also "Year 2000."
The efficiency ratio for the period improved to 58.8% from 62.9% in 1997.
Income Tax Expense
- ------------------
Income tax expense for the nine months of 1998 was $1,037,000 for an
effective tax rate of 30.2% compared to $840,000 and an effective rate of 29.8%
in the prior year. The 1997 period includes the effect of a 20% excise tax on a
portion of the gain on the termination of the pension plan.
Comparison of Operating Results for the Three Months ended September 30, 1998
- -----------------------------------------------------------------------------
and September 30, 1997
- ----------------------
General
- -------
For the three months ended September 30, 1998, net income was
$890,000 an increase of $110,000 or 14.1% over the $780,000 earned in 1997.
Basic and diluted earnings per share for the period were $.53 compared to $.47
in 1997. The resultant return on assets and return on equity for the third
quarter of 1998 were 1.32% and 13.43%, respectively, compared to 1.20% and
13.52% respectively in 1997.
15
Net Interest Income
- -------------------
Net interest income (fte) for the third quarter of 1998 totaled
$3,045,000 compared to $2,893,000 in 1997, an increase of 5.3%. Net interest
spread and net interest margin were 4.14% and 4.81% respectively in 1998,
compared to 4.14% and 4.78% respectively, in 1997. A 22 basis point decline in
earning asset yield to 8.14% in 1998 was offset by a similar 22 basis point
decline in cost of interest-bearing liabilities to 4.00%.
Total interest income for the third quarter of 1998 was $5,150,000
with a yield of 8.14% compared to $5,058,000 and 8.36% in the 1997 period. The
yield on earning assets was impacted by lower yields on investments due to
declining interest rate environment and lower yields on loans due to shift in
loan mix to lower yielding consumer loans. The decrease in prime rate from 8.50%
to 8.00% will lower loan yields in the fourth quarter.
Interest expense for the third quarter of 1998 totaled $2,105,000 at
4.00% cost compared to $2,165,000 at 4.22% in 1997. The decrease was principally
due to lower rates paid on transaction accounts and a lower costing mix of
deposits with less time deposits.
Other Income
- ------------
Other income for the third quarter of 1998 was $458,000 compared to
$872,000 in 1997. The 1997 period includes a non-recurring gain on termination
of pension plan of $616,000. Excluding this item; other income increased $98,000
or 29% over 1997. Service charges and fees increased $58,000 to $296,000
principally due to new checking products and increase in selected fees as of
August 1, 1998. Gains on sales of securities were $11,000 in 1998 compared to
$7,000 in 1997.
Other Expenses
- --------------
Other expenses totaled $1,977,000 for the third quarter of 1998
decreasing from $2,012,000 in 1997. The decrease was principally due to lower
expenses related to other real estate, $8,000 in 1998 compared to $82,000 in
1997. Salary and employee benefit costs totaled $962,000 for 1998 period
compared to $884,000 in 1997. The increase was principally due to expenses
related to employee benefit plans. The Company incurred $25,000 of costs related
to its core application system conversion which occurred on October 31, 1998.
There will be on-going costs of approximately $80,000 per quarter beginning in
1999. See also "Year 2000". The efficiency ratio for the third quarter of 1998
was 56.6% compared to 62.1% in 1997.
Income Tax
- ----------
Income tax expense for the second quarter of 1998 was $384,000 for an
effective tax rate of 30.1% compared to $443,000 with a rate of 36.2%. The third
quarter of 1997 included $61,000 excise tax related to the gain on termination
of the pension plan.
16
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 or miscalculations.
The Company has developed a Year 2000 project plan to manage the
issues 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, Fiserv for its
core application systems. The conversion occurred on October 31, 1998.
Substantially all systems will be tested by year-end 1998. The Company has also
purchased $300,000 of personal computers to replace existing networks which may
not have effectively handled the Year 2000. The Company has entered into a new
agreement with Mellon Network Services to drive its ATM Network with conversion
scheduled for the second quarter of 1999. Also, the Company is converting its
auto leasing operation to a new provider in early 1999. Both of these
conversions should strengthen Year 2000 preparedness.
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 has analyzed its portfolio and
surveyed its commercial customers to determine the risks associated with the
Year 2000. The Company has also surveyed its major fund providers and vendors
for their Year 2000 plans. Customer awareness is also a component of the Year
2000 Plan, and the Company has distributed a brochures to its customers.
Contingency and business resumption plans have been developed. The
contingency plans 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.
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. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipates events.
17
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 September 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 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 September 30, 1998, the Bank had a positive 30 day gap position of
$19 million, or 6.9% 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.
18
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.
19
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Nine Months Ended September 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............................... $ 320 $12 5.00% $1,939 $82 5.64%
Interest bearing deposits with banks 1,868 64 4.57 789 30 5.07
Securities....................................... 8,135. 512 8.39 8,806 561 8.49
Securities available for sale:
Taxable ....................................... 51,986 2,401 6.16 43,024 2,098 6.50
Tax-exempt .................................... 1,781 89 6.66 4,354 256 7.84
----- ------- ------ ---
Total securities available for sale......... 53,767 2,490 6.17 47,378 2,354 6.62
Loans receivable (4) (5)....................... 186,224 12,165 8.71 182,380 12,041 8.80
------- ------ ------- ------
Total interest earning assets............... 250,314 15,243 8.12 241,292 15,068 8.33
Non-interest earning assets:
Cash and due from banks.......................... 6,233 6,254
Allowance for loan losses........................ (3,263) (2,844)
Other assets..................................... 12,206 14,535
------ ------
Total non-interest earning assets................ 15,176 17,945
------ -------
Total Assets........................................ $265,490 $259,237
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits................. $52,306 978 2.49% $46,306 905 2.61
Savings deposits................................. 43,231 799 2.46 44,866 909 2.70
Time deposits.................................... 103,395 4,184 5.40 105,112 4,249 5.39
------- ----- -------- ------
Total interest bearing deposits............... 198,932 5,961 4.00 196,284 6,063 4.12
Short-term borrowings............................... 8,002 280 4.67 8,547 316 4.93
Other borrowings ................................... 2,000 90 6.00 2,448 165 8.99
----- ------- ------- ---
Total interest bearing liabilities............... 208,934 6,331 4.04 207,279 6,544 4.21
Non-interest bearing liabilities:
Demand deposits.................................. 25,469 25,662
Other liabilities................................ 5,337 4,027
----- -----
Total non-interest bearing liabilities........ 30,806 29,689
------ ------
Stockholders' equity............................. 25,750 22,269
------ -------
Total Liabilities and Stockholders' Equity.......... $265,490 $259,237
======= =======
Net interest income (tax equivalent basis).......... 8,912 4.08% 8,524 4.12%
===== =====
Tax-equivalent basis adjustment..................... (213) (272)
----- ------
Net interest income................................. $8,699 $8,252
====== ======
Net interest margin (tax equivalent basis).......... 4.75% 4.71%
==== ====
- ----------------
(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.
Increase/(Decrease)
-----------------------------------------------
Nine months ended September 30,1998 Compared to
Nine months ended September 30, 1997
-----------------------------------------------
Variance due to
-----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (62) $ (8) $(70)
Interest bearing deposits with banks 39 (5) 34
Securities (42) (7) (49)
Securities available for sale:
Taxable 478 (175) 303
Tax-exempt (133) (34) (167)
----- ----- -----
Total securities available for sale 344 (208) 136
Loans receivable 308 (184) 124
----- ----- -----
Total interest earning assets 588 (413) 175
Interest bearing liabilities:
Interest bearing demand deposits 133 (60) 73
Savings deposits (32) (78) (110)
Time deposits (72) (7) (65)
----- ----- -----
Total interest bearing deposits 28 (130) (102)
Short term borrowings (20) (16) (36)
Other borrowings (27) (48) (75)
Total interest bearing liabilities (18) (195) (213)
----- ----- -----
Net interest income (tax-equivalent basis) $ 606 $(218) $ 388
===== ===== =====
- -------------------------
(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.
21
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and use of proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of Norwood Financial Corp.*
3.2 Bylaws of Norwood Financial Corp.*
4.0 Specimen Stock Certificate of Norwood Financial Corp.*
10.1 Employment Agreement with William W. Davis, Jr., President an Chief
Executive Officer**
10.2 Employment Agreement with Lewis J. Critelli, Chief Financial Officer**
10.3 Form of Change-in-Control Severance Agreement with 9 key employees of
the Bank***
10.4 Consulting Agreement with Russell L. Ridd**
10.5 Wayne Bank Stock Option Plan*
11.0 Statement regarding computation of earnings per share
(see Note 2 to the Notes to Unaudited Consolidated
Financial Statements in this Report)
27.0 Financial Data Schedule****
22
- -------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form 10, Registration Statement initially filed with the Commission on
April 29, 1996, Registration No. 28366.
** Incorporated herein by reference into this document from the Exhibits to
the Registrant's Form 10-K filed with the Commission on March 31, 1997,
File No. 0-28366.
*** Incorporated herein by reference into this document from the Exhibit to the
Registrant's Form 10-K filed with the Commission on March 31, 1998 (File
No. 0-28366).
**** Only in electronic filing.
(b) Reports on Form 8-k
None.
23
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: November 2, 1998 By: /s/ William W. Davis, Jr.
----------------------- --------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 2, 1998 By: /s/ Lewis J. Critelli
------------------------ --------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
24