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, 1999
----------------------------------------------
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 Main Street, Honesdale, Pennsylvania 18431
- --------------------------------------------------------------------------------
(Address of principal executiveoffices) (Zip Code)
Registrant's telephone number, including area code (570)253-1455
---------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicated by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate 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, 1999
- --------------------------------------- 1,749,878
common stock, par value $0.10 per share ----------------------------------
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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 21
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Materially Important Events 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Cash and due from banks $ 11,546 $ 7,954
Interest bearing deposits with banks 349 1,284
Federal funds sold 1,230 3,360
Securities available for sale 77,602 62,270
Securities held-to-maturity (fair value of $7,792 and 7,650 7,645
$8,528)
Loans receivable (net of unearned income) 200,052 186,919
Less: Allowance for loan losses 3,343 3,333
--------- ---------
Net loans receivable 196,709 183,586
Bank premises and equipment, net 6,850 7,076
Other real estate 99 204
Accrued interest receivable 1,602 1,441
Other assets 2,845 4,197
--------- ---------
TOTAL ASSETS $ 306,482 $ 279,017
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 31,745 $ 27,264
Interest-bearing deposits 208,268 206,503
--------- ---------
Total deposits 240,013 233,767
Short-term borrowings 7,696 5,776
Other borrowings 27,000 4,000
Accrued interest payable 1,895 2,283
Other liabilities 3,120 5,463
--------- ---------
TOTAL LIABILITIES 279,724 251,289
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized
10,000,000 shares issued 1,803,824 shares 180 180
Surplus 4,594 4,542
Retained earnings 25,120 23,240
Treasury stock, at cost 1999 51,146 shares, (1,012) (343)
1998 22,347 shares
Unearned ESOP shares (1,424) (1,546)
Accumulated other comprehensive income (700) 1,655
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 26,758 27,728
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 306,482 $ 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 Nine Months Ended
September 30 September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
INTEREST INCOME
Loans receivable including fees $ 4,143 $ 4,131 $ 12,029 $ 12,157
Securities 1,309 939 3,521 2,797
Federal funds sold and deposits with banks 15 8 62 76
-------- -------- -------- --------
Total interest income 5,467 5,078 15,612 15,030
INTEREST EXPENSE
Deposits 1,877 1,960 5,772 5,961
Short-term borrowings 82 115 221 280
Other borrowed funds 322 30 594 90
-------- -------- -------- --------
Total interest expense 2,281 2,105 6,587 6,331
-------- -------- -------- --------
NET INTEREST INCOME 3,186 2,973 9,025 8,699
PROVISION FOR LOAN LOSSES 110 180 340 540
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,076 2,793 8,685 8,159
OTHER INCOME
Service charges and fees 336 296 899 788
Income from fiduciary activities 72 59 210 127
Net realized gain on sales of securities 1 12 59 27
Other 116 91 246 282
-------- -------- -------- --------
Total other income 525 458 1,414 1,224
OTHER EXPENSES
Salaries and employee benefits 1,041 961 3,033 2,887
Occupancy, furniture & equipment, net 325 314 887 943
Taxes, other than income 63 62 189 187
Other real estate owned operations 5 (9) 5 67
Other 821 649 2,256 1,861
-------- -------- -------- --------
Total other expenses 2,255 1,977 6,370 5,945
INCOME BEFORE INCOME TAXES 1,346 1,274 3,729 3,438
INCOME TAX EXPENSE 426 384 1,147 1,037
-------- -------- -------- --------
NET INCOME $ 920 $ 890 $ 2,582 $ 2,401
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER $ 0.55 $ 0.53 $ 1.53 $ 1.43
======== ======== ======== ========
SHARE
Dividends per share $ 0.14 $ 0.12 $ 0.42 $ 0.36
======== ======== ======== ========
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of 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 2,582 2,582
Cash dividend declared
Change in unrealized gains (losses)
on securities available for sale,
net of reclassification adjustment
and tax effects (2,355) (2,355)
------
Total comprehensive income 227
Cash dividends declared $.42 per share (702) (702)
Stock options exercised (6) 49 43
Purchase of treasury stock (718) (718)
Release of earned ESOP shares 58 122 180
---- ------ ------- ------- ------- ----- -------
Balance, September 30, 1999 $180 $4,594 $25,120 $(1,012) $(1,424) $(700) $26,758
=== ===== ====== ====== ====== ==== ======
See accompanying notes to the unaudited consolidated financial statements
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Nine Months Ended September 30
------------------------------
1999 1998
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,582 $ 2,401
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 340 540
Depreciation 501 795
Amortization of intangible assets 141 175
Deferred income taxes (1,367) 1,816
Net realized gain on sales of securities (59) (26)
Gain (loss) on sale of other real estate, net (9) (20)
Net gain on sale of mortgage loans (6) (89)
Mortgage loans originated for sale (690) (5,808)
Proceeds from sale of mortgage loans 695 5,897
Decrease (increase) in accrued interest receivable (161) (56)
Increase (decrease) in accrued interest payable (543) (471)
Other, net 2,541 249
-------- --------
Net cash provided by operating activities 3,966 5,103
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 7,207 4,990
Proceeds from maturities and principal reductions on mortgage-
backed securities 11,925 8,533
Purchases (38,031) (17,602)
Securities held to maturity:
Proceeds from maturities -- 500
Purchases -- --
Net decrease (increase) in loans (14,387) (3,339)
Purchase of bank premises and equipment, net (262) (325)
Proceeds from sales of other real estate 197 758
-------- --------
Net cash used in investing activities (33,351) (6,485)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 6,246 (9,584)
Net increase (decrease) in short term borrowings 14,921 (94)
Repayments of other borrowings -- --
Proceeds from other borrowings 10,000 --
Stock options exercised 43 37
Acquisition of treasury stock (717) --
Release of ESOP shares 122 148
Net cash dividends paid (702) (603)
-------- --------
Net cash used in financing activities 29,912 9,072
-------- --------
Increase (decrease) in cash and cash equivalents 527 7,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,598 10,924
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,125 $ 18,614
======== ========
See accompanying notes to consolidated financial statement.
6
Notes to Unaudited Consolidated Financial Statements
- ----------------------------------------------------
1. Basis of Presentation:
----------------------
The consolidated financial statements include the accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and WTRO Properties. All significant intercompany transactions have been
eliminated in consolidation. The investments in subsidiaries on the Company's
financial statements are carried at the Company's equity in the underlying net
assets.
2. Estimates:
----------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month and nine month periods
ended September 30, 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 and due from banks and federal funds sold.
Cash payments for interest for the nine month periods ended September
30, 1999 and 1998 were $6,330,000 and $6,432,000 respectively. Cash payments for
income taxes in 1999 were $710,000 compared to $15,000 in 1998. Non-cash
investing activity for 1999 and 1998 included foreclosed mortgage loans
transferred to real estate owned of $83,000 and $636,000 respectively.
5. Recent Accounting Pronouncements:
---------------------------------
In June of 1999 the FASB issued Statement #137 which delayed the
7
implementation of Statement #133 "Accounting for Derivative Instruments and
Hedging Activities" until January 1, 2001.
6. 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.
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,
legislative and regulatory actions 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 September 30, 1999 were $306.5 million, compared to
$279.0 million at year-end 1998. The Company funded a $13.1 million growth in
loans and a $15.3 million increase in the securities with borrowings from the
Federal Home Loan Bank (FHLB) and growth in core deposits.
Securities
- ----------
The fair value of securities available for sale at September 30, 1999
was $77.6 million compared to $62.3 million at year-end. The Company utilized
borrowings from the FHLB to fund the purchase of $15 million of securities,
principally mortgage-backed issues. At current interest rate levels, the
transaction is expected to generate $142,000 of net interest income for 1999.
Any changes in interest rates could affect the yield and pre-payment rates on
such investments.
Interest rates increased during 1999 with the benchmark 30 year
treasury bill yielding over 6.25% compared to 5.00% in the fourth quarter of
1998. This increase caused a slow down in the cash flow from the repayment of
mortgage-backed securities and extended their average life. At September 30,
1999 the average life of the portfolio was 6.9 years compared to 4.2 years at
year-end. Securities available for sale are carried at fair value. Unrealized
gains and losses are reported in the equity section of the balance sheet as
other comprehensive income, net of related deferred tax effect. Generally, in a
raising rate environment the fair value of the Company's portfolio
8
decreases. See also, "Item 3. Quantitative and Qualitative Disclosure About
Market Risk."
Loans
- -----
Total loans receivable, which includes automobile leases, were $200.1
million at September 30, 1999 compared to $186.9 million at December 31, 1998,
an increase of $15.3 million or 8.2%. Commercial loans (including real estate)
increased $7.4 million during the period which includes $1.8 million of
short-term tax anticipation notes for local municipalities. Fixed rate mortgages
totaled $14.2 million at September 30, 1999 compared to $9.2 million at
year-end. With the increase in long-term interest rates during 1999 which
impacts residential mortgage rates, the Company could expect to see lower level
of mortgage originations in the fourth quarter of 1999 when compared to the
fourth quarter of 1998. There can be no assurances, however, as to the direction
of interest rates.
The Company has stopped 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 $6.1 million from December 31, 1998 to $27.7 million at September 30,
1999. Residual losses totaled $220,000 for the nine months. The Company
maintains a reserve for residual losses which totaled $382,750 at September 30,
1999 with residual value of $20.4 million. At September 30, 1999, the Company
had an inventory of 33 cars to liquidate with a carrying value of $595,000.
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, 1999 December 31, 1998
------------------------ ------------------------
$ % $ %
Commercial, financial and agricultural $ 32,025 16.0% $ 25,539 13.6%
Real Estate-construction 3,551 1.8 3,046 1.6
-residential 50,765 25.3 52,038 27.8
-commercial 31,386 15.7 30,555 16.3
Leases to individuals 27,714 13.8 33,860 18.1
Installment loans to individuals 55,048 27.54 42,266 22.6
------- ------ ------- ------
Total loans 200,489 100.0% 187,304 100.0%
Less: Unearned income 437 385
Allowance for loan losses 3,343 3,333
------- -------
Total loans, net $196,709 $183,586
======= =======
9
Allowance for Loan Losses and Non-performing Assets
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
(dollars in thousands) At or for the three Months At or for the Nine
Ended September 30 Months Ended September 30
-------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
Balance at beginning of period $ 3,326 $ 3,260 $ 3 333 $ 3,250
Provision for loans losses 110 180 340 540
Charge-offs (115) (280) (466) (677)
Recoveries 22 67 136 114
------- ------- ------- -------
Net charge-offs (93) (213) (330) (563)
------- ------- ------- -------
Balance at end of period $ 3,343 $ 3,227 $ 3,343 $ 3,227
======= ======= ======= =======
Allowance to total loans 1.67% 1.72% 1.67% 1.72%
Net charge-offs to average loans
(annualized) .19% .45% .23% .40%
The allowance for loan losses totaled $3,343,000 at September 30,
1999 and represented 1.67% of total loans, $3,333,000 at year-end and $3,227,000
at September 30, 1998. The provision for loan losses for the nine months was
$340,000, compared to $540,000 for the nine months 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 September 30, 1999
based on the loan mix and level of classifications.
At September 30, 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 $728,000 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.
10
At September 30, 1999, non-performing loans totaled $459,000
which is .23% 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:
September 30, 1999 December 31, 1998
------------------ -----------------
(dollars in thousands)
Loans accounted for on a non-accrual
Basis:
Commercial and all other $107 $ 65
Real Estate 235 503
Consumer -- 20
---- ----
Total 342 588
Accruing Loans which are contractually past due 90 days
or more
117 34
---- ----
Total non-performing loans $459 $622
Other real estate owned 99 204
---- ----
Total non-performing assets $558 $826
==== ====
Allowance for loan losses as a percent
of non-performing loans 728.3% 535.8%
Non-performing loans to total loans .23% .33%
Non-performing assets to total assets .18% .30%
Deposits and Other Borrowings
- -----------------------------
Total deposits at September 30, 1999 were $240.0 million compared to
$233.8 million at December 31, 1998. This represents an increase of $6.2 million
or 2.7%.
A new retail time deposit product with a 30 month term and
penalty-free withdrawal anytime after 12 months generated $10.6 million with
approximately $4 million of the funds from new retail accounts. Transaction
accounts which include interest-bearing checking and money market accounts
increased $14.1 million principally due to seasonal fluctuations in certain
large commercial balances, municipal tax accounts and increased retail accounts.
These increases were partially offset by scheduled maturities of short-term
deposits of local school districts. These accounts decreased to $12.5 million
from $27.5 million at year-end.
Other borrowings totaled $27 million at September 30, 1999 increasing
from $4 million at year-end. The increase consists of term borrowings from the
FHLB as follows:
11
Balance Original Term Rate Maturity
------- ------------- ---- --------
$2,000,000 2 year 6.04% 12/99
2,000,000 1 year 5.01 11/99
5,000,000 10 year/3 year call feature 5.07 4/02
3,000,000 90 day 5.35 11/99
5,000,000 10 year/2 year call feature 4.83 4/01
3,000,000 6 month 5.72 2/00
3,000,000 6 month 5.78 3/00
4,000,000 4 month 5.78 1/00
--------- ----
27,000,000 5.38%
==========
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at September 30, 1999, was $26,758,000
compared to $27,728,000 at December 31, 1998. A comparison of the Company's
capital ratios is as follows: The decrease in capital is due in part to stock
repurchase program announced in April to repurchase up to 3% of shares. As of
September 30, 1999, the Company had acquired 31,419 of its shares at a cost of
$718,000.
September 30, 1999 December 31, 1998
------------------ -----------------
Tier 1 Capital
(To average assets) 9.13% 9.09%
Tier 1 Capital
(To risk-weighted assets) 12.09% 12.30%
Total Capital
(To risk-weighted assets) 13.65% 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 September 30, 1999 and December 31,
1998.
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 September 30, 1999, the Company had cash and cash equivalents of
$13.1 million in the form of cash, due from banks, interest bearing deposits
with other institutions and Federal Funds sold. In addition, the Company had
total securities available for sale of $77.6 million which could be used for
liquidity needs. This totals
12
$90.7 million and represents 29.6% of total assets, increasing from 26.8% at
year-end. The Company also monitors other liquidity measures all of which were
within Company policy guidelines at September 30, 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 borrowing capacity from
FHLB was $61.5 million as of June 30, 1999. At September 30, 1999 the Company
had $27 million in borrowings from the FHLB.
13
Results of Operation
- --------------------
Comparison of Operating Results for Nine Months Ended September 30, 1999
- ------------------------------------------------------------------------
and September 30, 1998
- ----------------------
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Nine Months Ended September 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(1) (2) (3) (1) (2) (3)
Assets
Interest-earning assets:
Federal funds sold ............................ $1,506 47 4.16% $320 $12 5.00%
Interest bearing deposits with banks........... 911 15 2.20 1,868 64 4.57
Investment securities.......................... 7,647 491 8.56 8,135 512 8.39
Investment securities available for sale:
Taxable...................................... 67,164 3,107 6.17 51,986 2,401 6.16
Tax-exempt................................... 2,731 137 6.69 1,781 89 6.66
----- --- ----- --
Total Investment securities available for
sale.................................... 69,895 3,244 6.19 53,767 2,490 6.17
Loans receivable............................. 193,868 12,062 8.30 186,224 12,165 8.71
------- ------ ------- ------
Total interest earning assets............. 273,827 15,859 7.72 250,314 15,243 8.12
Non-interest earning assets:
Cash and due from banks........................ 7,056 6,233
Allowance for loan losses...................... (3,353) (3,263)
Other assets................................... 12,553 12,206
------ ------
Total non-interest earning assets.............. 16,256 15,176
------ ------
Total Assets...................................... $290,083 $265,490
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits............... $57,509 1,037 2.40 % $52,306 978 2.49
Savings deposits............................... 42,680 697 2.18 43,231 799 2.46
Time deposits.................................. 104,680 4,038 5.14 103,395 4,184 5.40
------- ----- ------- -----
Total interest bearing deposits............. 204,869 5,772 3.76 198,932 5,961 4.00
Short-term borrowings............................. 8,950 221 3.29 8,002 280 4.67
Other borrowings.................................. 15,016 594 5.27 2,000 90 6.00
------- ----- ------- -----
Total interest bearing liabilities............. 228,835 6,587 3.84 208,934 6,331 4.04
Non-interest bearing liabilities:
Demand deposits................................ 27,787 25,469
Other liabilities.............................. 5,922 5,337
------- -------
Total non-interest bearing liabilities...... 33,709 30,806
------- -------
Stockholders' equity........................... 27,539 25,750
------- -------
Total Liabilities and Stockholders' Equity........ $290,083 $265,490
======= =======
Net interest income (tax equivalent basis)........ 9,272 3.88% 8,912 4.08%
==== ====
Tax-equivalent basis adjustment................... (247) (213)
----- -----
Net interest income............................... $9,028 $8,699
====== ======
Net interest margin (tax equivalent basis)........ 4.51% 4.75%
==== ====
- -------------
(1) Average balances have been calculated based on daily balances.
(2) Interest and yields are presented on a tax-equivalent basis using a
marginal tax rate of 34%.
(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.
14
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, 1999
Compared to
Nine months ended Sepember 30, 1998
------------------------------------
Variance due to
------------------------------------
Volume Rate Net
---------- --------- -------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ 39 $ (4) $ 35
Interest bearing deposits with banks (24) (25) (49)
Securities (36) 15 (21)
Securities available for sale:
Taxable 702 4 706
Tax-exempt 48 -- 48
------- ------- -------
Total securities available for sale 750 4 374
Loans receivable 667 (770) (103)
Total interest earning assets 1,395 (779) 616
Interest bearing liabilities:
Interest bearing demand deposits 112 (53) 59
Savings deposits (10) (92) (102)
Time deposits 79 (225) (146)
------- ------- -------
Total interest bearing deposits 181 (370) (189)
Other borrowed funds 46 (105) (59)
Other borrowings 523 (19) 504
------- ------- -------
Total interest bearing liabilities 750 (494) 256
Net interest income (tax-equivalent basis) $ 645 $ (285) $ 360
======= ======= =======
(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.
General
- -------
For the nine months ended September 30, 1999, net income
totaled $2,582,000 or $1.53 per share (basic and diluted) compared to $2,401,000
or $1.43
15
earnings per share (basic and diluted)earned in 1998. The resulting return on
average assets and return on average equity were 1.19% and 12.50% respectively
compared to 1.21% and 12.43% respectively for the corresponding period in 1998.
The Company declared cash dividends of $.42 per share in 1999 compared to $.36
per share in 1998.
Net Interest Income
- -------------------
Net interest income on a fully taxable equivalent basis (fte)
for the nine months of 1999 was $9,272,000 compared to $8,912,000 for the
similar period in 1998, an increase of $360,000 or 4.0%. The resultant fte net
interest spread and net interest margin for 1999 was 3.88% and 4.51%,
respectively compared to 4.08% and 4.75%, respectively in 1998.
The decrease in net interest spread was principally the result
of lower yields on earning assets, 7.72%, declining 40 basis points from 8.12%
in 1998. This was partially offset by a 20 basis point decline in the cost of
interest bearing liabilities at 3.84% in the current period compared to 4.04% in
1998.
Interest income on an fte basis totaled $15,859,000 for the
nine months of 1999 increasing from $15,243,000 in the prior year. A growth in
average earning assets of $23.5 million was partially offset by decline in asset
yields.
Total loans averaged $193.9 million for nine months of 1999
with interest income of $12.1 million and yield of 8.30% compared to $186.2
million, $12.2 million and 8.71% in 1998. The decrease in yield was partially
due to lower prime rate on average in 1999, 7.85% compared to 8.40% in 1998.
However, the prime rate has increased from 7.75% at June 30, 1999 to 8.25% by
September 30, 1999. This immediately impacts $33.1 million of floating rate
loans.
Securities available for sale averaged $69.9 million in 1999
with interest income of $3.2 million and yield of 6.19% compared to $53.8
million, $2.5 million and 6.17%, respectively for nine months of 1998.
Total interest expense was $6,587,000 compared to $6,331,000
in 1998. The cost of interest bearing liabilities decreased to 3.84% from 4.04%
principally due to lower deposit costs. The Company partially funded earning
asset growth with other borrowings which averaged $15.1 million at a rate of
5.27% compared to $2 million in 1998.
Other Income
- ------------
Other income, excluding net realized gains on sales of
securities of $59,000, totaled $1,355,000 for 1999, an increase of $158,000 or
13.2% over $1,197,000 earned in 1998. Income from fiduciary activities was
$210,000 for the period compared to $127,000 in 1998, with the increase
principally due to estate and trust termination fees. The Company, through its
subsidiary Norwood Investment Corp. generated revenues of $114,000 on the
commissions from sales of annuities, mutual funds and discount brokerage
increasing from $96,000 in 1998 on an increase in annuity sales. Service
16
charges and fees increased to $899,000 from $788,000, an increase of 14.1%
principally due to a higher level of retail checking accounts, loan related fees
and ATM fees.
Other income represented 13.1% of total revenues in 1999
increasing from 12% in 1998. Net realized gains on sales of securities
transactions were $59,000 for the period compared to $27,000 in 1998.
Other Expenses
- --------------
Other expenses totaled $6,370,000 for the nine months ended
September 30, 1999 an increase of $425,000 or 7.2% over 1998. Staffing costs
were $3,033,000, increasing 5.1% over prior year with full-time equivalent
employees of 120 at September 30, 1999 compared to 112 at September 30, 1998.
The increase was principally due to the opening of a new branch in Stroudsburg,
Pennsylvania. Data processing costs totaled $313,000 compared to $193,000 in
1998 increasing principally due to recurring costs associated with the new
application systems installed in the fourth quarter of 1998 and one-time costs
related to ATM and leasing systems conversion. For the year, provision for lease
residual losses and losses incurred totaled $295,000 compared to $101,000 in
1998. With the improvement in loan quality, legal expense and other real estate
costs for 1999 were $42,000 decreasing from $146,000 in the prior year. The
Company opened a new branch in June of 1999 with expenses incurred, excluding
personnel related costs, through September 30, 1999 of $135,000.
Income Tax Expense
- ------------------
Income tax expense totaled $1,147,000 for an effective tax
rate of 30.8% compared to $1,037,000 and 30.2% in 1998. The increase in income
tax expense was due to higher pre-tax income.
Comparison of Operating Results for the Three Months ended September 30, 1999
- -------------------------------------------------------------------------------
and September 30, 1998
- ----------------------
General
- -------
For the three months ended September 30, 1999, net income was
$920,000 or $.55 per share (basic and diluted) compared to $890,000, or $.47 per
share (basic and diluted) earned in the third quarter of 1998. The resulting
return on average assets and return on average equity for the quarter were 1.23%
and 13.70% respectively compared to 1.32% and 13.43% respectively for the
corresponding period in 1998. The Company declared cash dividends of $.14 per
share in 1999 compared to $.12 per share in 1998.
Net Interest Income
- -------------------
Net interest income (fte) for the third quarter of 1999 was
$3,278,000 compared to $3,045,000 for the similar period of 1998, an increase of
$233,000 or 7.7%. The resultant fte net interest spread and net interest margin
for the quarter was 4.03% and 4.61% respectively compared to 4.14% and 4.81%
respectively in 1998.
The decrease in net interest spread was principally the result
of lower yields on earning assets, 7.92% to declining 22 basis points from 8.14%
in 1998. This was
17
partially offset by a decrease of 11 basis points in the cost of
interest-bearing liabilities.
Interest income on an fte basis totaled $5,559,000 for the
three months of 1999 compared to $5,150,000 in 1998. A $31.2 million increase in
average earning assets was partially offset by decline in asset yields.
Total interest expense for the quarter was $2,281,000 compared
to $2,105,000 in 1998. Average interest-bearing liabilities increased $30.4
million principally due to term borrowings from the Federal Home Loan Bank.
Other Income
- ------------
Other income, excluding net realized gains on sales of
securities of $1,000, totaled $524,000 for the third quarter of 1999, compared
to $446,000 in 1998. Income from fiduciary activities was $72,000 for the period
compared to $59,000 in the 1998 quarter. The Company, through its subsidiary
Norwood Investment Corp generated revenues of $65,000 on the commission from
sales of annuities, mutual funds and discount brokerage, compared to $27,000 in
1998. The increase was due to higher level of annuity sales in 1999.
Net realized gains on sales of securities transactions were
$1,000 for the quarter compared to $12,000 in 1998.
Other Expenses
- --------------
Other expenses totaled $2,255,000 for the third quarter of
1999 compared to $1,977,000 in 1998, an increase of $278,000. The quarter had
$104,000 of costs, including certain one-time costs, related to opening a new
branch office. Provision for lease residual losses and losses incurred totaled
$127,000 compared to $41,000 in 1998. These increases were partially offset by
legal and other costs related to non-performing assets were $15,000 declining
from $76,000 in 1998.
Income Tax
- ----------
Income tax expense totaled $426,000 for an effective tax rate
of 31.6% compared to $384,000 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
18
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 currently 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. The results of the testing
indicate the ability of systems to process after the century date change.
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 converted its ATM processing and
its auto leasing operations to a new processor that has indicated to the Company
that it is Year 2000 compliant.
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 of September 30, 1999, the Company has not allocated any allowance
for loan losses specifically for Year 2000. 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. An
additional letter was mailed to deposit customers in the third quarter of 1999
which indicated the current status of the Company's Y2K preparation. The Company
has also sent correspondence to its Trust Department clients. The Company in a
joint effort with other local banks, is advertising in various local media
regarding Y2K preparation. The Company has video on Y2K issues available for
viewing at certain locations. All employees are trained and informed on the
Bank's progress.
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
19
suppliers (i.e. utility systems, telephone systems, etc.), regarding their year
2000 state of readiness. The Company is unable to test the Year 2000 readiness
of its significant suppliers of utilities and is relying on utility companies'
internal testing and representations to provide the required services that drive
the Company's data systems and physical plant. Any prolonged disruption in
utility service could disrupt the ability of the Company to service its
customers on a timely basis. 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 tested. 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 Company has evaluated cash levels, analyzed expected demand for cash,
and has taken measures deemed appropriate.
The Federal Financial Institutions Examination Council (FFIEC)
had a target date of June 30, 1999 in which financial institutions testing of
mission-critical systems should be completed and implementation of
mission-critical systems should be substantially complete. Also, financial
institutions should also have substantially completed the development of these
business resumption contingency plans and designed a method of validation. The
Company has met the June 30, 1999 requirements of the FFIEC. The Company,
through its subsidiary Wayne Bank has received extensive examinations,
information and guidance from various banking regulatory agencies.
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 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
20
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. 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 utilities,
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.
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 and market value of
portfolio equity. At September 30, 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.
At September 30, 1999, the Bank had a positive 90 day gap
position of $12.3 million, or 4% of total assets. The gap ratios were within the
Company's Policy limits at September 30, 1999. A positive gap means that
interest-sensitive assets are greater than interest-sensitive liabilities at the
time interval. This would generally indicate that in an increasing rate
environment the yield on interest-earning assets would
21
increase faster than the cost of interest-bearing liabilities. Any mismatch in
repricing opportunities are managed by ALCO strategies, including investment
portfolio structure, lagging the pricing changes 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.
22
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
None
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.
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: 10/29/99 By: /s/ William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: 10/29/99 By: /s/ Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
24