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 March 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28366
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Norwood Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 April 30, 1999
- --------------------------------------- 1,781,477
common stock, par value $0.10 per share --------------------------------
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Page
Number
Part I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Materially Important Events 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
March 31, December 31,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 5,826 $ 7,954
Interest bearing deposits with banks 1,540 1,284
Federal funds sold -- 3,360
Securities available for sale 62,670 62,270
Securities held-to-maturity (fair value of $8,113
and $8,498) 7,647 7,645
Loans receivable (net of unearned income) 191,535 186,919
Less: Allowance for loan losses 3,342 3,333
--------- ---------
Net loans receivable 188,193 183,586
Bank premises and equipment, net 6,977 7,077
Other real estate 212 204
Accrued interest receivable 1,469 1,441
Other assets 4,245 4,196
--------- ---------
TOTAL ASSETS $ 278,779 $ 279,017
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 24,355 $ 27,264
Interest-bearing deposits 203,736 206,503
--------- ---------
Total deposits 228,091 233,767
Short-term borrowings 10,938 7,776
Other borrowings 4,000 2,000
Accrued interest payable 2,398 2,283
Other liabilities 5,549 5,463
--------- ---------
TOTAL LIABILITIES 250,976 251,289
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued 1,802,824 shares 180 180
Surplus 4,558 4,542
Retained earnings 23,817 23,240
Treasury stock, at cost (22,394 shares) (343) (343)
Unearned ESOP shares (1,524) (1,546)
--------- ---------
Accumulated other comprehensive income 1,115 1,655
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TOTAL STOCKHOLDERS' EQUITY 27,803 27,728
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 278,779 $ 279,017
========= =========
See accompanying notes to the unaudited consolidated financial statements
3
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended
March 31
--------------------
1999 1998
---- ----
INTEREST INCOME
Loans receivable including fees $ 3,902 $ 3,977
Securities 988 902
Federal funds sold and deposits
with banks 31 55
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Total interest income 4,921 4,934
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INTEREST EXPENSE
Deposits 1,983 2,040
Short-term borrowings 68 55
Other borrowed funds 47 30
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Total interest expense 2,098 2,125
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NET INTEREST INCOME 2,823 2,809
PROVISION FOR LOAN LOSSES 130 180
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,693 2,629
OTHER INCOME
Service charges and fees 279 230
Income from fiduciary activities 79 41
Net realized gains on sales of securities 24 15
Other 75 72
------- -------
Total other income 457 358
OTHER EXPENSES
Salaries and employee benefits 989 963
Occupancy, furniture & equipment, net 270 327
Taxes, other than income 63 63
Other real estate owned operations (4) 19
Other 666 585
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Total other expenses 1,984 1,957
INCOME BEFORE INCOME TAXES 1,166 1,030
INCOME TAX EXPENSE 352 310
------- -------
NET INCOME $ 814 $ 720
======= =======
BASIC AND DILUTED
EARNINGS PER SHARE $ 0.48 $ 0.43
======= =======
Dividends per share $ 0.14 $ 0.12
======= =======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Surplus Earnings Stock Shares Income Total
----- ------- -------- ----- ------ ------ -----
Balance, December 31, 1998 $ 180 $ 4,542 $23,240 ($ 343) ($1,546) $ 1,655 $27,728
Net Income 814 814
Net change in unrealized gains (losses)
on securities available for sale, net of
Reclassification adjustment and tax effects (540) (540)
-------
Total comprehensive income 274
Cash dividends declared, $.14 per share (237) (237)
Release of earned ESOP shares 16 22 38
------- ------- ------- ------- ------- ------- -------
Balance, March 31, 1999 $ 180 $ 4,558 $23,817 ($ 343) ($1,524) $ 1,115 $27,803
======= ======= ======= ======= ======= ======= =======
See accompanying notes to the unaudited financial statements
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 814 $ 720
Adjustments to reconcile net income to net cash provided
by operating
activities:
Provision for loan losses 130 180
Depreciation 166 175
Amortization of intangible assets 52 68
Deferred income taxes 325 981
Net realized gain on sales of securities (24) (15)
Gain (loss) on sale of other real estate, net (8) (4)
Net gain on sale of mortgage loans (3) (27)
Mortgage loans originated for sale (409) (1,881)
Proceeds from sale of mortgage loans 412 1,908
Decrease (increase) in accrued interest receivable (28) (76)
Increase (decrease) in accrued interest payable 115 25
Other, net 316 (113)
-------- --------
Net cash provided by operating activities 1,857 1,942
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CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 3,371 15
Proceeds from maturities and principal reductions on
mortgage-backed securities 7,463 1,740
Purchases (12,055) (5,502)
Securities held to maturity:
Proceeds from maturities 0 0
Purchases 0 0
Net decrease (increase) in loans (5,155)
1,637
Purchase of bank premises and equipment, net (66) (60)
Proceeds from sales of other real estate 83 6
-------- --------
Net cash used in investing activities (6,359) (2,165)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in deposits (5,676) (3,243)
Net increase in short term borrowings 5,162 2,194
Stock options exercised 0 20
Release of ESOP shares 22 48
Cash dividends paid (236) (201)
-------- --------
Net cash used in financing activities (729) (1,182)
-------- --------
Decrease in cash and cash equivalents (5,231) (1,405)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,598 10,924
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,366 $ 9,519
======== ========
See accompanying notes to consolidated financial statement
6
Notes to Unaudited Consolidated Financial Statements
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1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and WTRO Properties. All significant intercompany transactions have been
eliminated in consolidation. The investments in subsidiaries on the Company's
financial statements are carried at the Company's equity in the underlying net
assets.
2. Estimate
--------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999 or any other period.
For additional information and disclosure required under generally
accepted accounting principals, reference is made to the Company's 1998 Annual
Report filed on Form 10-K (File No. 0-28366).
3. Earnings Per Share
------------------
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and are determined using the treasury stock
method.
4. Cash Flow Information
---------------------
For the purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest-bearing deposits with
banks and federal funds sold.
Cash payments for interest for the period March 31, 1999 and 1998 were
$1,968,000 and $2,014,000 respectively. Cash payments for income taxes in 1999
were $20,000 compared to $0 in 1998. Non-cash investing activity for 1999 and
1998 included foreclosed mortgage loans transferred to real estate owned of
$83,000 and $0, 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.
7
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Forward Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes, "anticipates," "contemplates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. 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 unanticipated events.
Financial Condition
- -------------------
General
- -------
Total assets at March 31, 1999 were $278.8 million, compared to $279.0
million at year-end 1998. The Company funded a $4.6 million growth in loans with
a reduction in Federal Funds sold and other cash equivalents. Deposits decreased
during the period due to scheduled maturities of time deposits of various local
school districts.
Securities
- ----------
The fair value of securities available for sale at March 31, 1999 was
$62.7 million, compared to $62.3 million at year-end 1998. The Company sold $3.4
million of securities for a gain on sale of $24,000. The proceeds were
principally reinvested in lower coupon mortgage- backed securities. Total
purchases for the period were $12.1 million with maturities and cashflow
received from mortgage-backed securities of $7.5 million.
Loans
- -----
Total loans receivable, which includes automobile leases, were $191.5
million at March 31, 1999 compared to $186.9 million at December 31, 1998, an
increase of $4.6 million or 2.5%. Commercial loans increased $2.9 million during
the period which includes $1.8 million of short-term tax anticipation notes for
local municipalities. The Company continued to experience pay-offs in its
residential adjustable rate mortgage portfolio which was offset by fixed rate
origination for net growth in residential real estate of $1.5 million.
The Company has reduced the volume of automobile lease originations to
monitor its experience in early terminations, amount of off-lease vehicles
returned and the actual value of vehicles returned compared to residual values.
Total leases declined $1.3 million from December 31, 1998 to $32.6 million at
March 31, 1999. Residual losses totaled $79,000 for the quarter. The Company
maintains a reserve for residual losses which totaled $307,000 at March 31, 1999
with residual value of $23.6 million.
8
Set forth below is selected data relating to the composition of the
loan portfolio at the dates indicated:
Types of loans
(dollars in thousands)
March 31, 1999 December 31, 1998
-----------------------------------------------
$ % $ %
-----------------------------------------------
Commercial, financial and agricultural $ 29,279 15.3% $ 25,539 13.6%
Real Estate-Construction 2,935 1.5 3,046 1.6
Residential 52,148 27.2 52,038 27.8
Commercial 30,162 15.7 30,555 16.3
Lease financing, net of unearned income 32,573 17.0 33,860 18.1
Consumer loans to individuals 44,720 23.3 42,266 22.6
-------- ----- -------- -----
Total loans 191,817 100.0% 187,304 100.0%
Less: Unearned income 282 385
Allowance for loan losses 3,342 3,333
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Total loans, net $188,193 $183,586
======== ========
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
(dollars in thousands) Months Ended March 31
- ---------------------- ---------------------
1999 1998
------- -------
Balance at beginning of period $ 3,333 $ 3,250
Provision for loan losses 130 180
Charge-offs (155) (163)
Recoveries 34 22
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Net charge-offs (121) (141)
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Balance at end of period $ 3,342 $ 3,289
======= =======
Allowance to total loans 1.74% 1.79%
Net charge-offs to average loans
(annualized) .26% .31%
The allowance for loan losses totaled $3,342,000 at March 31, 1999
and represented 1.74% of total loans, increasing from $3,333,000 at year-end,
and $3,289,000 at March 31, 1998. The provision for loan losses for the current
quarter was $130,000, compared to $180,000 for the first quarter of 1998. The
Bank's loan review function assess 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. The Company also
performs reviews of Year 2000 preparedness of its larger borrowers. See also
"Year 2000". Management considers the allowance adequate at March 31, 1999 based
on the loan mix and level of classifications.
9
At March 31, 1999, the recorded investment in loans which are
considered to be impaired in accordance with Statement of Financial Accounting
Standards Nos. 114 and 118 was $562,000, 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.
At March 31, 1999, non-performing loans totaled $562,000 which is
.29% of total loans decreasing from $622,000, or .33% of total loans at December
31, 1998. The following table sets forth information regarding non-performing
loans and other real estate owned at the date indicated:
(dollars in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
Loans accounted for on a non-accrual
basis:
Commercial and all other $ 64 $ 65
Real Estate 445 503
Installment 23 20
---- ----
Total 532 588
Accruing loans which are contractually
past due 90 days or more 30 34
---- ----
Total non-performing loans $562 $622
Other real estate owned 212 204
---- ----
Total non-performing assets $774 $826
==== ====
Allowance for loan losses as a
percent of non-performing loans 594.6% 535.8%
Non-performing loans to total loans .29% .33%
Non-performing assets to total assets .28% .30%
Deposits and Other Borrowings
- -----------------------------
Total deposits at March 31, 1999 were $228.1 million compared to
$233.8 million at December 31, 1998. The decrease was principally due to
scheduled maturities of short-term time deposits of school districts and other
local municipalities. These accounts decreased to $23.5 million from $27.5
million at year-end 1998. The decrease was partially offset by growth in money
market deposit accounts of $1.8 million to $32.1 million at March 31, 1999.
The Company substituted Federal Funds purchased, which totaled $5.5
million at March 31, 1999 for short-term time deposits. There were no Federal
Funds purchased at December 31, 1998.
10
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at March 31, 1999, was $27,803,000 compared
to $27,728,000 at December 31, 1998. A comparison of the Company's capital
ratios is as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Tier 1 Capital
(To average assets) 9.17% 9.09%
Tier 1 Capital
(To risk-weighted assets) 12.45% 12.30%
Total Capital
(To risk-weighted assets) 14.10% 14.00%
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 March 31, 1999 and December 31, 1998.
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 March 31, 1999,
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.
11
At March 31, 1999, the Bank had a positive 90 day gap position of
$2.9 million, or 1% 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 90 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.
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 March 31, 1999, the Company had cash and cash equivalents of $7.4
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 $62.8 million which could be used for liquidity needs. This totals $70.2
million and represents 25.2% of total assets. The Company also monitors other
liquidity measures all of which were within Company policy guidelines at March
31, 1999. 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 was in excess of
$53 million. At March 31, 1999 the Company had $4 million in borrowings from the
FHLB with a scheduled maturity in December 1999.
12
Results of Operation
Comparison of Operating Results for Three Months Ended March 31, 1999 and March
- --------------------------------------------------------------------------------
31, 1998
- --------
General
- -------
For the three months ended March 31, 1999 net income totaled $814,000
or $.48 per share (basic and diluted) compared to $720,000, or $.43 per share
(basic and diluted) earned in the first quarter of 1998. The resulting return on
average assets and return on average equity for the quarter were 1.17% and
11.63% respectively increasing from 1.11% and 11.58% respectively for the
corresponding period in 1998. The Company paid dividends of $.14 per share in
1999 compared to $.12 per share in 1998.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (fte) for
the first quarter of 1999 was $2,900,000 compared to $2,881,000 for the similar
period in 1998. The resultant fte net interest spread and net interest margin
for the three months of 1999 was 3.78% and 4.45%, respectively compared to 4.02%
and 4.66% respectively in 1998.
The decrease in net interest spread was principally the result of
lower yields on earning assets, 7.67%, declining 43 basis points from 8.10% in
1998. This was partially offset by a decrease of 19 basis points in the cost of
interest-bearing liabilities, at 3.89% in the current period compared to 4.08%
in 1998.
Interest income on an fte basis totaled $4,998,000 for the three months
of 1999 compared to $5,006,000 in 1998. A $13.4 million increase in average
earning assets was offset by decline in asset yields.
Total loans averaged $189.8 million for the current period, with
interest income of $3,910,000 and a yield of 8.24% compared to $184.0 million,
$3,981,000 and 8.65% in the first quarter of 1998. The decrease in yield was
partially due to a lower prime rate of 7.75% down from 8.50% in 1998. The prime
rate changes immediately impact $31.5 million of floating rate loans. Also,
during the lower interest rate environment of the third and fourth quarter of
1998 higher yielding adjustable rate residential mortgages experienced
significant pre-payments and were replaced by lower yielding fixed rate
mortgages. At March 31, 1999, adjustable rate mortgages were $25.1 million with
$12.5 million of fixed rate residential mortgages compared to $34.9 million of
adjustable and $3.9 million of fixed at March 31, 1998.
Total interest expense for the quarter was $2,098,000 compared to
$2,125,000 in 1998, a decrease of $27,000. The Company has taken steps to reduce
its interest expense by decreasing rates paid on interest bearing checking money
market accounts and savings. As a result, the cost of interest-bearing deposits
decreased to 3.86% in the first quarter of 1999, from 4.06% in 1998.
Other Income
- ------------
Other income, excluding net realized gains on sales of securities of
$24,000, totaled $433,000 for the first quarter of 1999, an increase of $90,000
or 26.2% over $343,000 in 1998. Income from fiduciary activities was $79,000 for
the period compared to $41,000 in the 1998 quarter, with the increase
principally due to estate and trust termination fees. The Company,
13
through its subsidiary Norwood Investment Corp. generated revenues of $31,000 on
the commission from sales of annuities, mutual funds and discount brokerage,
increasing from $14,000 in 1998. For the quarter fee-based income represented
13.8% of total revenues improving from 11.3% in 1998.
Net realized gains on sales of securities transactions were $24,000
for the quarter compared to $15,000 in 1998.
Other Expense
- -------------
Other expenses totaled $1,984,000 for the period ending March 31,
1999, an increase of $27,000 or 1.4% over $1,957,000 in 1998. Staffing costs
were $989,000, increasing 2.7% with total full time equivalents of 114 at March
31, 1999 compared to 112 at March 31, 1998. Data processing expenses increased
to $90,000 from $51,000 principally due to recurring costs related to new
application systems installed in the fourth quarter of 1998. With a lower level
of non-performing assets, the Company reduced legal and costs to resolve
nonperforming assets by $51,000. For the period, provision for lease residual
losses and actual losses incurred totaled $79,000 increasing from $30,000 in
1998. The efficiency ratio improved to 59.5% for the quarter, from 62.6% in the
first quarter of 1998.
Income Tax Expense
- ------------------
Income tax expense totaled $352,000 for an effective tax rate of 30.2%
compared to $310,000 and 30.1% in 1998. The increase in income tax expense was
due to higher pre-tax income.
Year 2000
- ---------
The following discussion of the implications of the year 2000 problem
for the Bank contains forward looking statements based on uncertain information.
The cost of the project and the date on which the Bank plans to complete the
internal year 2000 modifications are based on management's estimates, utilizing
number of assumptions including the continued availability of internal and
external resources, third party modifications and other factors. However, there
can be no guarantee that failure to modify the systems would not have a material
adverse effect on the Bank or the Company.
The Company has implemented a Year 2000 project plan which is
administered by a Senior Executive and is overseen by the Board of Directors. As
a major component of its Year 2000 preparedness, during 1998, The Company
entered into a seven year $2.2 million agreement with a data servicing provider,
FiServ, for its core application systems. The conversion occurred on October 31,
1998. FiServ has represented that the software being utilized for the Company's
operations is Year 2000 compliant. Furthermore, software provided by FiServ is
supported by a contractual agreement that states the software will be Year 2000
compliant prior to January 1, 2000. The Company has also participated in testing
with FiServ in conjunction with its other bank clients. The Company has also
tested its IBM operating system, item processing software and the Federal
Reserve for wire transfer. Testing has been performed on the Sungard System
which processes the Company's trust accounts.
Since the beginning of 1998, the Company also purchased $400,000 of
personal computers and communications and network monitoring equipment to
replace existing networks which may not have effectively handled the Year 2000.
The Company has also recently
14
converted its ATM processing to the Mellon Network Services and its auto leasing
operations to a new processor.
Major commercial loans customers (loan balances in excess of
$500,000) have been contacted in writing and interviewed to determine any
potential exposure that might be present due to the customer's failure to
prepare adequately for the Year 2000. Any potential risk exposure will be
identified and adequate consideration given to adjusting the loan loss
provision. As a practical matter, individual mortgage loan, consumer loan and
smaller commercial loan customers were not contacted regarding their Year 2000
readiness. Further, most of these are individuals with adequate collateral for
their loans. Customer awareness is also a component of the Year 2000 plan, and
the Company has distributed brochures in the third quarter of 1998 and a second
mailing of new material occurred in the first quarter of 1999. The Company in a
joint effort with other local banks, is planning additional education efforts
throughout the remainder of 1999.
The Company has contacted all other material vendors and suppliers
regarding their Year 2000 readiness. These third parties have given assurance to
the Company that they expect to be Year 2000 compliant prior to the Year 2000.
The Company has also contacted all significant customers and non-information
technology suppliers (i.e. utility systems, telephone systems, etc.), regarding
their year 2000 state of readiness. No contracts, written assurances, or oral
assurances with the Company's material vendors, systems providers, and suppliers
include any type of remedy or penalty for breach of contract in the event that
any of these parties are not year 2000 compliant.
Contingency and business resumption plans have been developed and
will be tested during 1999. The contingency plans address actions the Company
may take as a result of failure in various systems. The Company's plans include
an evaluation of key services, prioritization of critical functions,
re-deployment and additions to staff, offsite plans and alternative procedures
for processing critical functions. The Company has also established liquidity
contingency plans.
The following, among other things, could negatively affect the Bank:
(a) utility service companies may be unable to provide the
necessary service to drive our data systems or provide
sufficient sanitary conditions for our offices;
(b) our primary software provider could have a major
malfunction in its system or their service could be
disrupted due to its utility providers, or some
combination of the two; or
(c) the Bank may have to transact its business manually.
The Bank will attempt to monitor these uncertainties by continuing to
request an update on all critical and important vendors throughout the remainder
of 1999. If the Bank identifies any concern related to any critical or important
vendor, the contingency plans will be implemented immediately to assure
continued service to the Bank's customers.
15
Despite the best efforts of management to address this issue, the
vast number of external entities that have direct and indirect business
relationships with the Bank, such as customers, vendors, payment system
providers and other financial institutions, makes it impossible to assure that a
failure to achieve compliance by one or more of these entities would not have
material adverse impact on the operations of the Bank.
16
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 2,390 $ 26 4.35% $ 537 $ 7 5.21%
Interest bearing deposits with banks 553 5 3.62 3,455 48 5.56
Securities held-to-maturity 7,645 164 8.58 8,159 172 8.43
Securities available for sale:
Taxable 57,743 852 5.90 49,305 770 6.25
Tax-exempt 2,472 41 6.63 1,646 28 6.80
------- ----- ------- -----
Total securities available for sale 60,215 893 5.93 50,951 798 6.26
Loans receivable (4) (5) 189,762 3,910 8.24 184,049 3,981 8.65
------- ----- ------- -----
Total interest earning assets 260,565 4,998 7.67 247,151 5,006 8.10
Non-interest earning assets:
Cash and due from banks 7,825 6,111
Allowance for loan losses (3,342) (3,268)
Other assets 13,607 10,527
------- -------
Total non-interest earning assets 18,090 13,370
------- -------
Total Assets $278,655 $260,521
======= =======
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 53,624 321 2.39% $ 49,844 316 2.54
Savings deposits 41,990 226 2.15 42,996 272 2.53
Time deposits 109,835 1,436 5.23 108,103 1,452 5.37
------- ----- ------- -----
Total interest bearing deposits 205,449 1,983 3.86 200,943 2,040 4.06
Short-term borrowings 6,291 68 4.32 5,138 55 4.28
Other borrowings 4,000 47 4.70 2,000 30 6.00
------- ----- ------- -----
Total interest bearing liabilities 215,740 2,098 3.89 208,081 2,125 4.08
Non-interest bearing liabilities:
Demand deposits 25,706 23,758
Other liabilities 8,038 3,795
------- -------
Total non-interest bearing liabilities 33,744 27,553
------- -------
Shareholders' equity 27,980 24,887
------- -------
Total Liabilities and Shareholders' Equity $277,464 $260,521
======= =======
Net interest income (tax equivalent basis) 2,900 3.78% 2,881 4.02%
==== ====
Tax-equivalent basis adjustment (77) (72)
----- -----
Net interest income $2,823 $2,809
===== =====
Net interest margin (tax equivalent basis) 4.45% 4.66%
==== ====
- ---------------
(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.
17
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
----------------------------------------------
Three months ended March 31,1999 Compared to
Three months ended March 31, 1998
----------------------------------------------
Variance due to
----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ........................ $ 27 $ (8) $ 19
Interest bearing deposits with banks ...... (30) (13) (43)
Securities held to maturity ............... (25) 17 (8
Securities available for sale:
Taxable ................................ 319 (237) 82
Tax-exempt securities .................. 18 (5) 13
----- ----- -----
Total securities .................... 337 (242) 95
Loans receivable .......................... 569 (640) (71)
----- ----- -----
Total interest earning assets .............. 878 (886) (8)
Interest bearing liabilities:
Interest-bearing demand deposits ......... 84 (79) 5
Savings .................................. (6) (40) (46)
Time ..................................... 110 (126) (16)
----- ----- -----
Total interest bearing deposits ....... 188 (245) (57)
Short-term borrowings ...................... 12 1 13
Other borrowings ........................... 57 (40) 17
----- ----- -----
Total interest bearing liabilities ....... 257 (284) (27)
Net interest income (tax-equivalent basis).. $ 621 $(602) $ 19
===== ===== =====
- --------------------
(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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See Item 2. "Market Risk."
18
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 27, 1999.
The following incumbent directors were nominated for and duly elected to the
Board of Directors for a three-year term expiring in 2002:
Daniel J. O'Neill: 1,403,703 for, 22,909 withheld; Kenneth A. Phillips:
1,405,719 for, 20,893 withheld; Gary P. Rickard: 1,408,967 for, 17,645 withheld.
Item 5. Other Materially Important Events
On April 26, 1999, the Company announced a repurchase plan for the Company's
stock. Under terms of the plan, the Company may purchase up to 3% or 53,400
shares of its stock over the next twelve months. The purchases would be made in
the open market subject to availability of stock, the terms of the plan and
other financial and market conditions. The repurchased stock could offset some
of the potentially dilutive effects of the Company's stock-based benefit plans
and would also be available for general corporate use.
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
19
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: 5/3/99 By: /s/ William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: 5/3/99 By: /s/ Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
20