SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended March 31, 1997
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
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification no.)
717 Main Street
Honesdale, Pennsylvania 18431
--------------------------------
(Address of principal executive offices)
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, 1997
- --------------------------------------- 830,475 shares
Common stock, par value $0.10 per share --------------------------------
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
Number
Part I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Materially Important Events 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheet (unaudited)*
(dollars in thousands)
March 31, December 31,
1997 1996
--------- ----------
ASSETS
Cash and due from banks $ 6,551 $ 7,072
Interest bearing deposits with banks 824 1,187
Federal funds sold - 6,850
Investment securities available for sale 50,288 48,906
Investment securities (fair value of $8,879
and $9,040) 8,806 8,805
Loans and leases (net of unearned income) 179,039 174,554
Less: Allowance for loan and lease losses 2,740 2,616
--------- ----------
Net loans and leases 176,299 171,938
Bank premises and equipment, net 7,876 7,779
Other real estate 1,870 2,283
Accrued interest receivable 1,614 1,558
Other assets 4,304 3,707
--------- ----------
TOTAL ASSETS $ 258,432 $ 260,085
========= ==========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 23,163 $ 25,256
Interest-bearing deposits 195,684 204,073
--------- ----------
Total deposits 218,847 229,329
Short-term borrowings 11,324 3,227
Other borrowed funds 2,445 2,442
Accrued interest payable 2,137 2,224
Other liabilities 2,088 1,344
--------- ----------
TOTAL LIABILITIES 236,841 238,566
--------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value,
authorized 10,000,000 shares issued 900,796
and outstanding 830,475 shares 90 90
Surplus 4,444 4,444
Retained earnings 19,244 18,861
Treasury stock, at cost (11,230 shares) (345) (345)
Unearned ESOP shares (1,950) (1,950)
Net unrealized gain on securities 108 419
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 21,591 21,519
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 258,432 $ 260,085
========= ==========
See accompanying notes to the unaudited consolidated financial statements
3
NORWOOD FINANCIAL CORP.
Consolidated Statement of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended March 31,
1997 1996
--------- ----------
INTEREST INCOME
Interest and fees on loans and leases $ 3,871 $ 3,512
Investment securities 924 806
Federal funds sold and deposits
with banks 45 24
--------- ----------
Total interest income 4,840 4,342
--------- ----------
INTEREST EXPENSE
Deposits 2,059 1,795
Short-term borrowings 51 116
Other borrowed funds 54 54
--------- ----------
Total interest expense 2,164 1,965
--------- ----------
NET INTEREST INCOME 2,676 2,377
PROVISION FOR LOAN LOSSES 250 150
--------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,426 2,227
--------- ----------
OTHER INCOME
Service charges and fees 172 127
Trust department income 47 51
Investment securities gains/(losses) - -
Other 56 42
--------- ----------
Total other income 275 220
--------- ----------
OTHER EXPENSES
Salaries and benefits 947 899
Occupancy, furniture & equipment, net 314 265
Shares tax 59 54
Other real estate owned operations 45 27
Other 603 493
--------- ----------
Total other expenses 1,968 1,738
--------- ----------
INCOME BEFORE TAX 733 709
INCOME TAXES 176 171
--------- ----------
NET INCOME $ 557 $ 538
========= ==========
EARNINGS PER SHARE $ 0.67 $ 0.62
Dividends per share $ 0.21 $ 0.21
Average shares outstanding 830,475 874,514
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
(dollars in thousands)
Net
Unearned Unrealized
Common Retained Treasury ESOP Gain on
Stock Surplus Earnings Stock Shares Securities Total
------ ------- -------- -------- -------- ---------- -------
Balance, December 31, 1996 $ 90 $ 4,444 $ 18,861 $ (345) $ (1,950) $ 419 $ 21,519
Net Income 557 557
Cash dividend declared (174) (174)
Net unrealized gain/(loss)
on securities (311) (311)
------- ------- -------- ------- -------- ------- ---------
Balance, March 31, 1997 $ 90 $ 4,444 $ 19,244 $ (345) $ (1,950) $ 108 $ 21,591
======= ======= ======== ======= ======== ======= =========
See accompanying notes to the unaudited consolidated financial statements.
5
NORWOOD FINANCIAL CORP.
Consolidated Statement of Cash flows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
1997 1996
--------- ----------
OPERATING ACTIVITIES
Net Income $ 557 $ 538
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 250 150
Depreciation and amortization 164 142
Net amortization of investment securities 49 10
Investment security gains, net - -
Loss on sale of other real estate, net 9 17
Increase in core deposit intangible, net - (1,791)
Decrease (increase) in accrued interest
receivable (56) (245)
Increase (decrease) in accrued interest
payable (87) 51
Other, net 343 (311)
--------- ----------
Net cash provided by (used for)
operating activities 1,229 (1,439)
--------- ----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales of investment
securities - 502
Proceeds from maturities of investment
securities 112 5,378
Purchases of investment securities (2,107) (15,078)
Investment securities:
Proceeds from maturities of investment
securities - 460
Purchases of investment securities - -
Net increase in loans (6,996) (761)
Purchase of premises and equipment, net (261) (712)
Proceeds from sales of other real estate 404 183
Proceeds from sales of loans 2,351 125
--------- ----------
Net cash (used for) investing
activities (6,407) (9,903)
--------- ----------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net (10,482) 18,303
Net increase in borrowings 8,102 5,864
Purchase of treasury stock - (285)
Cash dividends paid (176) -
--------- ----------
Net cash provided by (used for)
financing activities (2,556) 23,882
--------- ----------
Increase (decrease) in cash and
cash equivalent (7,734) 12,540
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 15,109 6,448
--------- ----------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 7,375 $ 18,988
========= ==========
See accompanying notes to the unaudited consolidated financial statements.
6
Notes to Unaudited Consolidated Financial Statements
- ----------------------------------------------------
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. and Norwood
Investment Corp. All significant intercompany transactions have been
eliminated in consolidation. The investments in subsidiaries on the Company's
financial statements are carried at the Company's equity in the underlying net
assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from
those estimates. The financial statements reflect, in the opinion of
management, all normal, recurring adjustments necessary to present fairly the
financial position of the Company. The operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the period ended December 31, 1997 or any other period.
For additional information and disclosure required under generally
accepted accounting principals, reference is made to the Company's 1996 Annual
Report filed on Form 10-K (File No. 0-28366).
Earnings Per Share
- ------------------
Earnings per share computations are based on the weighted average number
of shares outstanding which was 830,475 and 874,514 for the periods ending
March 31, 1997 and March 31, 1996 respectively.
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 period ended March 31, 1997 and 1996
were $2,105,000 and $1,914,000 respectively. There were no cash payments for
income taxes in 1997 compared to $41,214 in 1996. Non-cash investing activity
for 1997 and 1996 include foreclosed mortgage loans transferred to real estate
owned of $0 and $943,810, respectively.
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
Pending Accounting Pronouncement
- --------------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings based on control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
The provisions of Statement No. 125 are effective for transactions occurring
after December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and pledged
collateral, which have been delayed until after December 31, 1997 by Statement
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, an amendment of FASB Statement No. 125." The adoption of
these statements is not expected to have a material impact on financial
position or results of operations.
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share." Statement
No. 128 will become effective for the Corporation beginning in 1998. This
statement re-defines the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share. Statement No. 128 establishes new standards for computing and
presenting EPS and requires dual presentation of "basic" and "diluted" EPS on
the face of the income statement for all entities with complex capital
structures. Under Statement No. 128, basic EPS is to be computed based upon
income availability to common shareholders and the weighted average number of
common shares outstanding for the period. Diluted EPS is to reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Corporation.
Statement No. 128 also requires the restatement of all prior-period EPS data
presented. The Corporation will adopt Statement No. 128 on January 1, 1998
and based on current estimates, does not believe the effect of adoption will
have a significant impact on the Corporation's financial position or results
of operations.
Employee Benefit Plans
- ----------------------
Employee Stock Ownership Plan (ESOP)
- ------------------------------------
On August 27, 1996, the Board of Directors approved the creation of a
leveraged employee stock ownership plan ("ESOP") for the benefit of employees
who meet the eligibility requirements which include having completed one year
of service with the Company and having attained age twenty-one. The ESOP
Trust purchased shares of the Company's common stock with proceeds from a loan
from the Company. The Company makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan payments.
The loan bears interest at the prime rate adjusted annually. Interest is
payable annually and principal payable in equal annual installments over ten
years. The loan is secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid in the
year. The Company accounts for its leveraged ESOP in accordance with
Statement of Position 93-6. Accordingly, the shares pledged as collateral are
reported as unallocated ESOP shares in the consolidated balance sheet. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt.
Defined Benefit Pension Plan
- -----------------------------
On February 11, 1997, the Company decided to discontinue to provide
benefits under the defined benefit plan. The Company plans to settle the
obligations under the defined benefit plan during 1997. The effects of the
settlement cannot be determined at this time.
8
Item 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
- ------------------------------------------------------------------------------
Financial Condition
- -------------------
General
- -------
Total assets at March 31, 1997, were $258.4 million, decreasing $1.7
million from $260.1 million at December 31, 1996. The decline in assets is
principally due to seasonal downturn in retail deposits and a lower level of
public funds including school district deposits. The lower level of deposits
results in a decrease of $6.85 million in federal funds sold and an increase
of $8.1 million in short-term borrowings to fund loan growth of $4.5 million.
Investments
- -----------
Federal funds sold declined from $6,850,000 at December 31, 1996 to no
federal funds sold at March 31. The proceeds were used to fund loan growth
and offset decrease in deposits. At March 31, 1997, the fair value of the
available for sale portfolio was $50.3 million compared to $48.9 million at
year-end. The growth was principally due to an increase in US Treasury notes
with maturities of two and three years. The held-to-maturity portfolio, which
consists principally of longer term municipals, at $8.8 million showed no
change from December 31. The fair market value of securities held-to-maturity
at March 31, 1997 was $8,879,000 compared to book value of $8,806,000.
Loans and Leases
- ----------------
Total loans were $179 million at March 31, 1997, an increase of $4.5
million or 2.6% from year-end 1996. The growth was principally attributable to
indirect financing and automobile leasing. Indirect financing which includes
automobile and marine lending totaled $26.7 million at March 31, an increase
of $2 million. Auto leasing outstandings grew $6.3 million to $23.3 million.
The indirect and auto leasing volume is originated through a network of over
35 dealers geographically disbursed throughout northeastern Pennsylvania and
has an average term of 50 months. These increases were offset by lower levels
of residential mortgages amounting to $2 million and commercial mortgages of
$1.5 million. The decrease in residential mortgages is principally a result
of pay-downs in the Company's adjustable rate mortgages. The Company sells
the majority of its fixed rate residential mortgages in the secondary market.
During the first quarter, the Company sold its student loan portfolio of
$1.5 million to Sallie Mae. Going forward, the Company will originate
student loans through Sallie Mae, on a fee basis, and not hold the loans in
portfolio.
9
Set forth below is selected data relating to the composition of the loan
portfolio at the dates indicated:
Types of loans and leases
(dollars in thousands)
March 31, 1997 December 31,1996
---------------- -----------------
$ % $ %
---------------- -----------------
Commercial, financial and agricultural $ 30,333 16.7% $ 29,679 16.8%
Real Estate-construction 1,791 1.0% 1,602 0.9%
Real Estate-mortgage 87,388 48.0% 91,401 51.6%
Leases to individuals (net of unearned) 23,329 12.8% 16,981 9.6%
Instalment loans to individuals 39,076 21.5% 37,502 21.2%
-------- ------ -------- ------
Total loans and leases 181,917 100.0% 177,165 100.0%
Less: Unearned income 2,848 2,611
-------- --------
Total loans and leases,
net of unearned $179,069 $174,554
======== ========
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
(dollars in thousands) Three Months ended March 31
------------------------------
1997 1996
------- -------
Balance at beginning of period $ 2,615 $ 2,125
Provision for loan losses 250 150
Charge-offs (148) (210)
Recoveries 23 31
------- -------
Net charge-offs (125) (179)
------- -------
Balance at end of period $ 2,740 $ 2,096
======= =======
Allowance to total loans and leases 1.53% 1.38%
Net charge-offs to average loans
(annualized) .28% .47%
The allowance for loan losses totaled $2,740,000 at March 31, 1997 and
represented 1.53% of total loans, increasing from $2,615,000 and 1.50% at
year-end, and $2,096,000 and 1.38% at March 31, 1996. The provision for loan
losses for the current quarter was $250,000, compared to $150,000 for the
first quarter of 1996. 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
10
loan type and credit grading and allocated accordingly. Larger credit
exposures are individually analyzed. Management considers the allowance
adequate at March 31, 1997. While the allowance for loan losses as a
percentage of total loans is comparable to peer group, prudence dictates it
should be increased going forward given the current level of non-performing
loans. As a result, the Company may continue to incur provisions to obtain
the appropriate level.
At March 31, 1997, the recorded investment in loans which are considered
to be impaired in accordance with Statement of Financial Accounting Standards
Nos. 114 and 118 was $2,606,000. This was comprised of $375,000 with related
allowance of $23,000 and loans of $2,231,000 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 sale of operations of such collateral.
At March 31, 1997, non-performing loans totaled $3,038,000 which is 1.68%
of total loans decreasing from $3,493,000, or 1.98% of total loans at December
31, 1996. The following table sets forth information regarding non-performing
loans and other real estate owned at the date indicated:
(dollars in thousands) March 31, 1997 December 31, 1996
-------------- -----------------
Non-accrual loans:
Commercial and all other $ 1,594 $ 1,633
Real Estate 1,402 1,790
Consumer 13 28
-------- --------
Total 3,009 3,451
Loans accruing which are past due
90 days or more 29 42
-------- --------
Total non-performing loans $ 3,038 $ 3,493
Other real estate owned 1,870 2,283
-------- -------
Total non-performing assets $ 4,908 $ 5,776
======== =======
Allowance for loan losses as a
percent of non-performing loans 90.2% 74.9%
Non-performing loans to total loans 1.68% 1.98%
Non-performing assets to total assets 1.90% 2.22%
11
Other real estate owned total $1,870,000 at March 31, 1997, decreasing
principally due to sales, from $2,283,000 at December 31. In addition,
properties with a total value in excess of $700,000 were under contract at
March 31, with sales scheduled for April.
Deposits
- --------
Total deposits at March 31, 1996, were $218,847,000, a decrease of
$10,482,000 from $229,329,000 at December 31, 1996. The decrease was
principally attributable to lower level of time deposits over $100,000, which
totaled $21.5 million at March 31 compared to $28.8 million at December 31.
These deposits consisted primarily of school district deposits and other
public funds with scheduled maturities in the first quarter of 1997.
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders equity at March 31, 1997, was $21,561,000 compared to
$21,519,000 at December 31, 1996. A comparison of capital ratios is as
follows:
March 31, 1997 December 31, 1996
-------------- -----------------
Leverage 7.7% 7.7%
Tier 1 Capital 10.3% 10.3%
Total Capital 11.5% 11.5%
The minimum capital requirements imposed by the FDIC for leverage, Tier 1
and Total Capital are 4%, 4% and 8%, respectively. The Bank is also subject
to more stringent Pennsylvania Department of Banking (PDB) guidelines.
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, 1997 and December 31, 1996.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
Maintenance of liquidity is coordinated by the Asset/Liability Committee
(ALCO). Liquidity Policy is established by the Board of Directors with
certain key ratios used to measure liquidity. The Company's liquidity can be
viewed as the ability to fund customers borrowing needs and their deposit
withdrawal requests while supporting asset growth. Primary sources of
liquidity include deposit generation, borrowings available from other
financial institutions, asset maturities and cash flows from loan repayments
and investments.
The Company maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh (FHLB) and other correspondents. At March 31, 1997 the
maximum borrowing capacity with the FHLB was $48,371,000 with $4,000,000
12
repurchase agreement outstanding at March 31, 1997 compared to no outstandings
at December 31, 1996.
During the quarter ended March 31, 1997, the Company substituted
short-term borrowings, which increased $8.1 million, for public fund time
deposits which decreased $7.5 million. Sources of liquidity are available in
the investment portfolio. Scheduled maturities, anticipated repayments and
projected calls total $15.8 million over the next twelve months. Cash flow is
also provided by scheduled pay downs in the loan portfolio. The Company
believes its liquidity position is adequate at March 31, 1997.
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by 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 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 affected by interest rate movements. 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
employs net interest simulation modeling 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, 1997, the
level of net interest income at risk in a 200 basis points increase or
decrease was within policy limits.
Imbalance in repricing opportunities at a given point in time reflect
interest-sensitivity gaps - the difference between interest-sensitive assets
and interest-sensitive liabilities. These are static gap measurements that do
not take into account any future activity, and as such are principally used as
early indications of potential interest rate exposures over specific
intervals.
At March 31, 1997, the Company had a positive 30 day gap position of
$10,686,000. A positive gap means interest-sensitive assets are higher
than interest-sensitive liabilities at the time interval. This would
indicate that in a declining rate environment, the yield on earning assets
would decrease faster than the cost of interest-bearing liabilities in the 30
day time frame. This risk is managed by ALCO strategies, including investment
portfolio structure, pricing of deposit liabilities, loan pricing and
structure of fixed and variable rate products.
The Company analyzes and measures the time periods in which
interest-earning assets and interest-bearing liabilities will mature or
reprice in accordance with their contractual terms. Management believes that
the assumptions used to evaluate the vulnerability of the Company's operations
to changes in interest rates are reasonable.
13
The interest rate sensitivity of the Company's 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.
Results of Operation
- --------------------
Comparison of Operating Results for Three Months Ended March 31, 1997 and
1996
- -------------------------------------------------------------------------
General
- -------
For the first quarter of 1997, net income totaled $557,000, or $.67 per
share compared to $538,000, or $.62 per share earned during the first quarter
of 1996. Return on average assets and return on average equity for the period
were .87% and 10.23%, respectively.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (FTE) for the
first quarter of 1997 was $2,777,000, an increase of $297,000, or 12%, over
1996. The resultant FTE net interest spread and net interest margin for 1997
were 4.10% and 4.65%, respectively, compared to 4.19% and 4.79%, respectively,
in 1996. The decrease in net interest margin was principally the result of
lower earning asset yields, 8.27% in 1997 first quarter, declining 31 basis
points from 8.58% in 1996.
Interest income on an FTE basis totaled $4,941,000 for the quarter, an
increase of $496,000. The increase was due to $31.7 million growth in
average earning assets. The yield on investment securities, held-to-maturity
and available-for-sale, increased 47 basis points and 20 basis points,
respectively from 1996. This was principally due to extending the average
term of the portfolio. The yield on the loan portfolio for the first quarter
of 1997 was 8.77%, compared to 9.25%. The decline in yield was due to change
in the mix of the loan portfolio. On average, loans and leases increased $24.8
million, or 16.3%. The increase consisted principally of growth in lower
yielding indirect automobile lending $12.1 million and automobile leasing
$20.4 million, offset by lower levels of higher yielding commercial and real
estate loans. The income earned on the loan portfolio, was $3,873,000
increasing from $3,512,000 in 1996.
Total interest expense for the current period was $2,164,000 compared to
$1,965,000 in 1996, for a resulting cost of interest-bearing liabilities of
14
4.17%, decreasing from 4.39% in the first quarter of 1996. The Company funded
its growth in earning assets principally from deposit growth. Average
interest bearing deposits increased $32.5 million of which $18.1 million
represents deposits purchased from Meridian Bank in March 1996. The costs of
deposits declined 17 basis points to 4.11%, with decreases in all categories.
Non-interest Income
- -------------------
Non-interest income for three months of 1997 totaled $275,000, an
increase of $55,000 or 25% over 1996. The increase was principally due to
higher levels of service charges on deposits, of $27,000 which includes ATM
surcharge fee, an increase income on loan sales, servicing and processing of
$15,000. Commissions earned on sales of annuities and mutual funds through
Norwood Investment Corp. totaled $11,000 for the quarter. The Company
recently introduced a debit card product and changed its merchant card
processor, both of which could add to fee income going forward.
Non-interest Expense
- --------------------
Non-interest expenses totaled $1,968,000 for the quarter, an increase of
$230,000 or 13.2% over 1996. The increase was principally due to expense
associated with the Meridian offices acquired in March 1996 of $149,000 and
the auto lease program of $53,000. Total salary and benefits for the period
were $947,000 compared to $899,000 in 1996, an increase of 5.3% in part due
to the branches acquired in March 1996. Cost of other real estate owned was
$45,000 for the quarter, increasing from $27,000 in 1996. The Company
continues to incur legal costs to resolve non-performing assets which totaled
$48,000 for the quarter. The Company reduced certain expenditures in the
first quarter including marketing costs by $20,000 and consulting expenses,
incurred in 1996 for human resources and technology by $18,000. The
efficiency ratio for the quarter ended March 31, 1997 was 64.4% which was
unchanged from the prior year.
Income Tax Expense
- ------------------
Income tax expense for the three months of 1997 was $176,000 for an
effective tax rate of 24%, compared to $171,000 and 24% in 1996. The
Company's effective tax rate is less than the statutory rate of 34% due to
investments in obligations of state and political subdivisions which provide
income which is partially exempt from federal income tax.
15
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
1997 1996
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(2) (1) (2) (1)
(Tax equivalent basis, dollars in thousands)
Assets
Interest-earning assets:
Federal funds sold. . . . . . . . $ 1,984 $ 31 6.25% $ 1,564 $ 20 5.12%
Interest bearing deposits with banks 1,069 14 5.24 250 4 6.40
Investment securities . . . . . . . 8,805 189 8.59 11,878 241 8.12
Investment securities available for sale:
Taxable investments . . . . . . . . . 45,338 732 6.46 38,419 602 6.27
Tax-exempt securities . . . . . . . . 5,173 102 7.89 3,299 66 8.00
--------- ------- ------ -------- ------- ------
Total investment securities
available for sale . . . . . . . 50,511 834 6.60 41,718 668 6.40
Loans and leases (3) (4). . . . . . . 176,641 3,873 8.77 151,852 3,512 9.25
--------- ------- ------ -------- ------- ------
Total interest earning assets. . . 239,010 4,941 8.27 207,262 4,445 8.58
Non-interest earning assets:
Cash and due from banks. . . . . . . .. 5,687 5,524
Allowance for loan losses . . . . . . . (2,701) (2,175)
Other assets. . . . . . . . . . . . . . 15,652 13,725
--------- --------
Total non-interest earning assets . . . 18,638 17,074
--------- --------
Total Assets . . . . . . . . . . . . . . . $ 257,648 $224,336
========= ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits. . . . $ 45,154 291 2.58% $ 40,565 290 2.86%
Savings deposits. . . . . . . . . . . . 44,051 297 2.70 39,521 286 2.89
Time deposits. . . . . . . . . . . . . 111,157 1,471 5.29 87,767 1,219 5.56
--------- ------- ------ --------- ------- ------
Total interest bearing deposits. . 200,362 2,059 4.11 167,853 1,795 4.28
Short-term borrowings. . . . . . . . . . . 4,772 51 4.27 8,746 116 5.31
Other borrowings . . . . . . . . . . . . . 2,442 54 8.85 2,582 54 8.37
--------- ------- ------ --------- ------- ------
Total interest bearing liabilities. . . 207,576 2,164 4.17 179,181 1,965 4.39
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . 23,995 18,867
Other liabilities . . . . . . . . . . . 4,279 3,504
--------- ---------
Total non-interest bearing
liabilities . . . . . . . . . . . 28,274 22,371
--------- ---------
Shareholders' equity. . . . . . . . . 21,798 22,784
--------- ---------
Total Liabilities and
Shareholders' Equity. . . . . . . . . $ 257,648 $ 224,336
========= =========
Net interest income (tax equivalent
basis) . . . . . . . . . . . . . . . . 2,777 4.10% 2,480 4.19%
====== ======
Tax-equivalent basis adjustment. . . . . . (101) (103)
-------- --------
Net interest income. . . . . . . . . . . . 2,676 2,377
======== ========
Net interest margin (tax equivalent
basis) . . . . . . . . . . . . . . . . . 4.65% 4.79%
====== ======
[FN]
- ------------------------
(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) Loan balances include non-accrual loans and are net of unearned income.
(4) Loan yields include the effect of amortization of deferred fees, net of
costs.
16
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest
expense.
Increase/(Decrease)
Quarter ended March 31, 1997 Compared to
Quarter ended March 31, 1996
Variance due to
-------------------------------
Volume Rate Net
--------------------------------
(dollars in thousands)
Assets
Interest Earning Assets:
Federal funds sold.......................... $ 6 $ 5 $ 11
Interest bearing deposits with banks..... 15 (5) 10
Investment securities........................ (134) 82 (52)
Investment securities available for sale:
Taxable investments...................... 111 19 130
Tax-exempt securities.................... 43 (7) 36
------- ------- ------
Total investment securities........... 154 12 166
Loans 1,381 (1,020) 361
------- ------- ------
Total interest earning assets............ 1,422 (926) 496
Interest bearing liabilities:
Interest bearing demand deposits......... 123 (122) 1
Savings deposits............................. 105 (94) 11
Time deposits................................ 605 (353) 252
------- ------- ------
Total interest bearing deposits......... 833 (569) 264
Short-term borrowings ................... (46) (19) (65)
Other borrowings ........................... (12) 12 -
------- ------- ------
Total interest bearing liabilities...... 744 (545) 199
Net interest income (tax-equivalent basis) $ 679 $ (382) $ 297
======= ======= ======
- ----------------
(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.
17
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
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
22, 1997.
Proposal 1 - Election of Directors
The following incumbent Class I Directors were nominated for and duly
elected to the Board of Directors for a three year term expiring in 2000:
Charles E. Case, William W. Davis, Jr. and John E. Marshall.
The results of the voting were as follows:
Shares
----------------------
For Withheld
----------------------
Charles E. Case 711,799 5,403
William W. Davis, Jr. 715,652 1,550
John E. Marshall 711,699 5,503
Item 5.
None
Item 6.
None
18
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: By: \s\ William W. Davis, Jr.
--------------------- ----------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: By: \s\ Lewis J. Critelli
--------------------- ----------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
19