SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 1997
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
_______________
Norwood Financial Corp.
------------------------
(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)
(Zip Code)
Registrant's telephone number, including area code: (717) 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 July 31, 1997
_______________________________________ 830,475 shares
Common stock, par value $0.10 per share ________________________________
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Materially Important Events N/A
Item 6. Exhibits and Reports on Form 8-K N/A
Signatures 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, December 31,
1997 1996
----------- ------------
ASSETS
Cash and due from banks $ 8,996 $ 7,072
Interest bearing deposits with banks 1,103 1,187
Federal funds sold 2,500 6,850
Investment securities available for sale 43,849 48,906
Investment securities (fair value of $9,130
and $9,040) 8,807 8,805
Loans and leases (net of unearned income) 185,591 174,554
Less: Allowance for loan and lease losses 2,940 2,616
----------- ------------
Net loans and leases 182,651 171,938
Bank premises and equipment, net 7,895 7,779
Other real estate 1,026 2,283
Accrued interest receivable 1,361 1,558
Other assets 4,010 3,707
----------- ------------
TOTAL ASSETS $ 262,198 $ 260,085
=========== ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 26,399 $ 25,256
Interest-bearing deposits 194,055 204,073
----------- ------------
Total deposits 220,454 229,329
Short-term borrowings 12,026 3,227
Other borrowed funds 2,451 2,442
Accrued interest payable 1,823 2,224
Other liabilities 2,773 1,344
----------- ------------
TOTAL LIABILITIES 239,527 238,566
----------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized
10,000,000 shares issued 900,796 and
outstanding 889,566 shares 90 90
Surplus 4,448 4,444
Retained earnings 19,713 18,861
Treasury stock, at cost (11,230 shares) (345) (345)
Unearned ESOP shares (1,850) (1,950)
Net unrealized gain on securities 615 419
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 22,671 21,519
----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 262,198 $ 260,085
=========== ============
[FN]
See accompanying notes to the unaudited consolidated financial statements.
Page 3
NORWOOD FINANCIAL CORP.
Consolidated Statement of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------ ----------------
INTEREST INCOME
Interest and fees on loans and leases $ 4,040 $ 3,584 $ 7,911 $ 7,096
Investment securities 905 889 1,829 1,695
Federal funds sold and deposits
with banks 36 75 81 99
------- ------- ------- -------
Total interest income 4,981 4,548 9,821 8,890
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,012 1,888 4,071 3,683
Short-term borrowings 139 36 190 152
Other borrowed funds 56 55 110 109
------- ------- ------- -------
Total interest expense 2,207 1,979 4,371 3,944
------- ------- ------- -------
INTEREST INCOME 2,774 2,569 5,450 4,946
PROVISION FOR LOAN LOSSES 300 200 550 350
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,474 2,369 4,900 4,596
------- ------- ------- -------
OTHER INCOME
Service charges and fees 112 108 284 235
Trust department income 38 29 85 80
Investment securities gains/(losses) 62 - 62 -
Other 164 157 220 199
------- ------- ------- -------
Total other income 376 294 651 514
------- ------- ------- -------
OTHER EXPENSES
Salaries and benefits 905 968 1,852 1,867
Occupancy, furniture & equipment, net 308 274 622 539
Shares tax 61 55 120 109
Other real estate owned operations 123 131 168 158
Other 588 601 1,191 1,094
------- ------- ------- -------
Total other expenses 1,985 2,029 3,953 3,767
INCOME BEFORE TAX 865 634 1,598 1,343
INCOME TAXES 221 131 397 302
------- ------- ------- -------
NET INCOME $ 644 $ 503 $ 1,201 $ 1,041
======= ======= ======= =======
EARNINGS PER SHARE $ 0.78 $ 0.58 $ 1.45 $ 1.20
======= ======= ======= =======
Dividends per share $ 0.21 $ 0.21 $ 0.42 $ 0.42
======= ======= ======= =======
Average shares outstanding 830,475 871,540 830,475 873,027
[FN]
See accompanying notes to the unaudited consolidated financial statements.
Page 4
NORWOOD FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(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 1,201 1,201
Cash dividend declared (349) (349)
Net unrealized gain/(loss) on
securities 196 196
Release of earned ESOP shares 4 100 104
------ ------- -------- ------ -------- ----- --------
Balance, June 30, 1997 $ 90 $ 4,448 $ 19,713 $ (345) $ (1,850) $ 615 $ 22,671
====== ======= ======== ====== ======== ===== ========
[FN]
See accompanying notes to the unaudited consolidated financial statements.
Page 5
NORWOOD FINANCIAL CORP.
Consolidated Statement of Cash Flows (Unaudited)
(dollars in thousands)
Six Months Ended
June 30,
1997 1996
-------- ---------
OPERATING ACTIVITIES
Net Income $ 1,201 $ 1,041
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 550 350
Depreciation and amortization 477 296
Net amortization of investment securities 5 3
Investment security gains, net (62) -
Loss on sale of other real estate, net 58 64
Proceeds from sales of loans 3,007 85
Increase in core deposit intangible, net - (1,744)
Decrease (increase) in accrued interest receivable 197 (41)
Increase (decrease) in accrued interest payable (401) (119)
Increase (decrease) in accrued taxes 532 (277)
Other, net 660 93
-------- ---------
Net cash provided by (used for)
operating activities 6,224 (249)
-------- ---------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales of investment securities 5,980 502
Proceeds from maturities of investment securities 1,523 11,234
Purchases of investment securities (2,156) (21,623)
Investment securities:
Proceeds from maturities of investment securities - 3,140
Purchases of investment securities - -
Net increase in loans (14,579) (6,918)
Purchase of premises and equipment, net (450) (882)
Proceeds from sales of other real estate 1,377 395
-------- ---------
Net cash (used for) investing activities (8,305) (14,152)
-------- ---------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net (8,875) 18,545
Net increase in borrowings 8,798 2,429
Purchase of treasury stock - (320)
Issuance of common stock - 12
Cash dividends paid (352) (359)
-------- ---------
Net cash provided by (used for)
financing activities (429) 20,307
-------- ---------
Increase (decrease) in cash and cash equivalent (2,510) 5,906
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,109 6,447
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,599 $ 12,353
======== =========
[FN]
See accompanying notes to the unaudited consolidated financial statements.
Page 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
and six month period ended June 30, 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 871,540 for the three month
periods ending June 30, 1997 and June 30, 1996 respectively. For the six
month period June 30, 1997 and 1996 average shares outstanding were 830,475
and 873,027, 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 six month period ended June 30, 1997
and 1996 were $4,472,584 and $4,063,481 respectively. There were no cash
payments for income taxes in 1997 compared to $569,544 in 1996. Non-cash
investing activity for 1997 and 1996 include foreclosed mortgage loans
transferred to real estate owned of $209,995 and $1,146,810, 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.
Page 7
Pending Accounting Pronouncements
- ---------------------------------
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.
In July 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income."
Statement No. 130 establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
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 on August 1, 1997
received final IRS approval to terminate the plan and will settle
obligations under the defined benefit plan during the third quarter of
1997. The effects of the settlement cannot be determined at this time.
Page 8
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------
Financial Condition
- -------------------
General
- -------
Total assets at June 30, 1997, were $262.2 million, increasing $2.1
million from $260.1 million at December 31, 1996. The increase was
principally due to $11.0 million of loan growth which was funded by cash flow
from the investment portfolio, lower level of Federal Funds sold and increase
in stockholders' equity. A decrease in time deposits over $100,000, of $13.1
million, primarily school district deposits and other public funds, was offset
by $6 million increased borrowings from the Federal Home Loan Bank, and growth
in core deposits.
Investments
- -----------
The fair value of investment securities available for sale was $43.8
million at June 30, 1997, decreasing from $48.9 million at December 31, 1996.
The decrease was principally due to sales of $5.8 million of securities. The
Company took advantage of bond market conditions in June to sell certain
longer-term securities. The proceeds were used to fund loan growth and
invested in shorter-term instruments. The held-to-maturity portfolio which
consists of longer-term municipals, at $8.8 million showed no change from
December 31. The fair market value of securities held to maturity at June 30,
1997 is $9,130,000 compared to book value of $8,807,000.
Loans and Leases
- ----------------
Total loans and leases were $185.6 million at June 30, 1997, an increase
of $11 million or 6.3% from year-end 1996. The growth was principally
attributable to indirect financing and automobile leasing. Indirect financing
which includes new and used automobile and marine lending increased $3.9
million to total $28.7 million at June 30, 1997. Auto leasing portfolio
totaled $28.4 million at June 30, 1997, increasing $11.4 million from year-end
1996. The indirect and auto leasing volume is originated through a network of
over 40 dealers geographically disbursed throughout Northeastern Pennsylvania
and has an average term of less than 50 months. Commercial loans increased
$1.5 million from year-end. Residential mortgages decreased $2.2 million
principally as a result of pay downs in adjustable rate mortgages. The
Company sells the majority of its fixed rate residential mortgages in the
secondary market with sales totaling $1.5 million during 1997. The Company
sold its student loan portfolio of $1.5 million to Sallie Mae. The Company
will originate student loans through Sallie Mae, on a fee basis, and not hold
the loans in portfolio.
Page 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)
June 30, 1997 December 31, 1996
------------- -----------------
$ % $ %
-------- ---- -------- ----
Commercial, financial and agricultural $ 30,839 16.4% $ 29,679 16.8%
Real estate-construction 2,186 1.2 1,602 0.9
Real estate-mortgage 88,231 46.9 91,401 51.5
Leases to individuals (net of unearned) 28,373 15.1 16,981 9.6
Installment loans to individuals 38,392 20.4 37,502 21.2
-------- ---- -------- ----
Total loans and leases 188,021 100.0% 177,165 100.0%
Less: Unearned income 2,430 2,611
-------- --------
Total loans and leases, net of unearned $185,591 $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 At or for the
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 1997 1996 1997 1996
------- ------- ------- -------
Balance at beginning of period $ 2,740 $ 2,097 $ 2,616 $ 2,125
Provision for loan losses 300 200 550 350
Charge-offs (150) (208) (299) (418)
Recoveries 50 44 73 76
------- ------- ------- -------
Net charge-offs (100) (164) (226) (342)
------- ------- ------- -------
Balance at end of period $ 2,940 $ 2,133 $ 2,940 $ 2,133
======= ======= ======= =======
Allowance to total loans and leases 1.58% 1.36% 1.58% 1.36%
Net charge-offs to average loans
(annualized) .22% .43% .25% .45%
The allowance for loan losses totaled $2,940,000 at June 30, 1997 and
represented 1.58% of total loans, increasing from $2,615,000 and 1.50% at
year-end, and $2,133,000 and 1.36% at June 30, 1996. The provision for loan
Page 10
losses for the current year was $550,000, compared to $350,000 for 1996. The
Bank's loan review function assesses 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. Management considers the allowance adequate at June 30,
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 June 30, 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 $2,592,877. This was comprised of $414,738 with related
allowance of $25,257 and loans of $2,178,139 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 June 30, 1997, non-performing loans totaled $2,927,000 which is 1.56%
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) June 30, 1997 December 31, 1996
-------------- -----------------
Non-accrual loans:
Commercial and all other $ 1,423 $ 1,633
Real estate 1,450 1,790
Consumer 12 28
------ ------
Total 2,885 3,451
Loans accruing which are past due
90 days or more 42 42
------ ------
Total non-performing loans 2,927 3,493
Other real estate owned 1,026 2,283
------ ------
Total non-performing assets $3,953 $5,776
====== ======
Allowance for loan losses as a
percent of non-performing loans 100.4% 74.9%
Non-performing loans to total loans 1.58% 1.98%
Non-performing assets to total assets 1.51% 2.22%
Page 11
Other real estate owned total $1,026,000 at June 30, 1997, decreasing
principally due to sales, from $2,283,000 at December 31. The largest non-
performing loan relationship is $1,050,000 and consists of the real estate and
inventory of a marina. The Company is in the process of an orderly
liquidation of the inventory and is aggressively marketing the real estate.
Deposits
- --------
Total deposits at June 30, 1997, were $220.5 million, a decrease of $8.9
million from December 31, 1996. The decrease was principally due to lower
level of time deposits greater than $100,000 consisting primarily of school
district deposits and other public funds. Non-interest bearing demand
deposits totaled $26.4 million at June 30, 1997 representing 12% of total
deposits compared to $25.2 million and 11% at year-end. A new tiered rate
money market account, introduced in June, totaled $2.5 million at June 30,
1997 with over 50% new funds.
Short-term Borrowings
- ---------------------
Short-term borrowings at June 30, 1997 totaled $12,026,000, increasing
from $3,227,000 at December 31, 1996. The increase is principally due to $6
million borrowing from the Federal Home Loan Bank with original term of three
months maturing on July 23, 1997. Corporate cash management accounts and
repurchase agreement were $5,025,000 at June 30, 1997 compared to $2,604,000
at December 31, 1996.
Stockholders' Equity and Capital Ratios
- ---------------------------------------
Total stockholders' equity at June 30, 1997, was $22,671,000 compared to
$21,519,000 at December 31, 1996. A comparison of capital ratios is as
follows:
June 30, 1997 December 31, 1996
------------- -----------------
Leverage 7.9% 7.7%
Tier 1 Capital 10.4% 10.3%
Total Capital 11.6% 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 June 30, 1997 and December 31, 1996.
Page 12
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 June 30, 1997 the
maximum borrowing capacity with the FHLB was $48,371,000 with $6,000,000
repurchase agreement outstanding at June 30, 1997 compared to no outstandings
at December 31, 1996.
During the six months ended June 30, 1997, the Company substituted
short-term borrowings, which increased $8.8 million, for public fund time
deposits which decreased $12.4 million. Core deposits including savings and
transactions accounts increased $3.4 million during the period. Sources of
liquidity are also available in the investment portfolio. The Company did
sell $5.8 million of securities during the second quarter, with part of the
proceeds used to fund loan growth. Scheduled maturities, anticipated
repayments and projected calls total $16 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 June 30, 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 June 30, 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
Page 13
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 June 30, 1997, the Company had a positive 30 day positive gap position
of $14,036,000. 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. 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 Six Months Ended June 30, 1997 and 1996
- ---------------------------------------------------------------------------
General
- -------
For the six months of 1997 net income totaled $1,201,000 or $1.45
earnings per share compared to $1,041,000 or $1.20 earnings per share for the
prior year. Return on average assets and return on average equity for the
period were .93% and 10.93% respectively, improving from .90% and 9.14%
respectively in 1996.
Net Interest Income
- -------------------
Net interest income, on a fully taxable equivalent basis (FTE) for the
six months of 1997 was $5,647,000, an increase of $477,000, or 9.2%, over
1996. The resultant FTE net interest spread and net interest margin for 1997
were 4.12% and 4.69%, respectively, compared to 4.30% and 4.87%, respectively,
in 1996. The decrease in net interest margin was principally the result of
lower earning asset yields, 8.32% in 1997 declining 26 basis points from 8.58%
in 1996.
Page 14
Interest income on an FTE basis totaled $10,018,000 for the period, an
increase of $903,000. The increase was due to $28.4 million growth in
average earning assets. The yield on investment securities; held-to-maturity
and available-for-sale, increased 40 basis points and 6 basis points,
respectively from 1996. The yield on the loan portfolio for the period of
1997 was 8.81%, compared to 9.26%. The decline in yield was due to change in
the mix of the loan portfolio. On average, loans and leases increased $26.4
million, or 17.2%. The increase consisted principally of growth in lower
yielding indirect automobile lending $11.7 million and automobile leasing
$22.4 million, offset by lower levels of higher yielding commercial and real
estate loans. The income earned on the loan portfolio, was $7,915,000
increasing from $7,100,000 in 1996.
Total interest expense for the current period was $4,371,000 compared to
$3,944,000 in 1996, for a resulting cost of interest-bearing liabilities of
4.20%, decreasing from 4.28% in the first six months of 1996. On average the
Company funded its growth in earning assets principally from deposit growth.
Average interest bearing deposits increased $22.6 million of which $10.1
million represents deposits purchased from Meridian Bank in March 1996. The
costs of deposits declined 8 basis points to 4.11%, with decreases in all
categories. The mix of deposits become more expensive with time deposits
representing 55% increasing from 50% of interest-bearing deposits.
Non-interest Income
- -------------------
Non-interest income for six months of 1997 totaled $651,000. This
includes $62,000 in investment securities gains principally related to sale of
an equity holding in another financial institution. Excluding this gain,
non-interest income is $589,000 compared to $514,000 in 1996, an increase of
$75,000, or 14.6%. Service charges and fees increased $45,000 to $284,000
principally due to $33,000 of ATM surcharge fee income. Commissions on sales
of annuities and mutual funds through Norwood Investment Corp. were $33,000
for the six months. Other increases in fee income include debit card
introduced in April 1997 and improvements in merchant card processing.
Non-interest Expense
- --------------------
Non-interest expense totaled $3,953,000 for six months 1997 compared to
$3,767,000 in 1996, an increase of $186,000 or 4.9%. The increase was
principally due to full six month effect of three branches acquired from
Meridian Bank in March 1996 of $151,000 and expenses of $73,000 related to
increased auto leasing volume. Total salary and benefits were $1,852,000
compared to $1,867,000, with full-time equivalents of 117 at June 30, 1997,
decreasing from 124 at June 30, 1996. The Company incurred FDIC assessment
costs of $13,746 compared to $1,000 in 1996, with increase due to the
assessment related to Financing Corp. (FICO) bond obligation as required by
the Deposit Insurance Funds Act of 1996 (DIFA). The company continues to have
expenses related to other real estate owned operations (OREO) which includes
loss on sale, write-downs to realizable value and legal fees related to
resolving non-performing assets. For the six months of 1997, OREO costs were
$168,000 compared to $158,000 the prior year, with additional legal fees of
$89,000, increasing from $74,000 in 1996. The Company reduced certain
Page 15
expenditures during the six months including marketing costs by $45,000;
supply expenses by $20,000 as a result of outsourcing the purchasing; and
consulting/training fees by $53,000 with costs related to technology, sales
training and human resources incurred in 1996. The efficiency ratio for six
months improved to 62.7% from 66.3% in 1996.
Income Tax Expense
- ------------------
Income taxes for the period total $397,000 for an effective tax rate of
24.8% compared to $302,000 and 22.5% in 1996. The increase in the effective
rate is principally due to a lower level of tax exempt securities and higher
amount of pre-tax income in 1997.
Comparison of Operating Results for Three Months Ended June 30, 1997 and
June 30, 1996
- ------------------------------------------------------------------------
General
- -------
For the three months ended June 30, 1997, net income was $644,000 and
increase of $141,000 or 28% from $503,000 earned for the second quarter of
1996. Earnings per share for 1997 period were $.78 compared to $.58 in 1996.
Resultant return on assets and return on equity for second quarter of 1997
were .99% and 11.75% respectively, improving from .84% and 8.84% respectively,
in 1996.
Net Interest Income
- -------------------
Interest income on an FTE basis totaled $5,077,000, an increase of
$408,000 or 8.7% from 1996 period. The increase was principally due to higher
level of earning assets in 1997. The yield on loans was 8.85% decreasing from
9.27% in 1996, primarily due to change in loan mix to lower yielding indirect
lending and auto leasing. The total yield on earning assets was 8.35% in
1997, a decrease of 21 basis points from 1996.
Total interest expense for 1997 second quarter was $2,207,000 compared to
$1,979,000 in 1996, an increase of 11.5%. The total cost of funds in 1997 was
4.23% compared to 4.17% in 1996. The increase was principally due to more
expensive deposit mix with higher level of certificates of deposit.
With a decrease in earning asset yield and increase in cost of funds, the
net interest spread for three months 1997 decreased to 4.14% from 4.38% in
1996, and net interest margin 4.73% down from 4.95% in 1996. However, with
growth in earning assets, net interest income on an FTE basis increased
$180,000 or 6.7%, to $2,870,000.
Non-Interest Income
- -------------------
Non-interest income totaled $376,000 for the second quarter of 1997 which
Page 16
included $62,000 gain on sales of securities. Excluding the gain on sale
investment securities non-interest income was $314,000, an increase of $18,000
over second quarter of 1996. The increase was principally due to ATM
surcharge income, trust fees and fees associated debit card and merchant card
processing.
Non-Interest Expense
- --------------------
Non-interest expense of $1,985,000 for the 1997 period, decreased $44,000
or 2.2% from 1996. Salary and benefit costs decreased 6.5% due to lower
staffing levels. Costs associated with OREO totaled $123,000 for the period,
down from $131,000 in 1996. Efficiency ratio for the quarter was 62.3%
improving from 68.3% in 1996.
Income Taxes
- ------------
Income taxes totaled $221,000 for the quarter for an effective tax rate
of 25.6% compared to $131,000 and 20.7% in 1996. The increase in effective
rate is principally due to lower level of tax-exempt income and higher per-tax
income.
Page 17
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Six Months Ended June 30,
---------------------------------------------------------------
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 $ 2,043 $ 57 5.58% $ 3,380 $ 88 5.21%
Interest bearing deposits with banks 878 24 5.47 442 11 4.98
Investment securities 8,806 375 8.52 11,767 478 8.12
Investment securities available for sale:
Taxable investments 44,457 1,452 6.53 39,322 1,267 6.44
Tax-exempt securities 4,917 195 7.93 4,167 170 8.16
--------- -------- ---- --------- ------- ----
Total investment securities
available for sale 49,374 1,647 6.67 43,489 1,437 6.61
Loans and leases (3) (4) 179,747 7,915 8.81 153,396 7,100 9.26
--------- -------- ---- --------- ------- ----
Total interest earning assets 240,848 10,018 8.32 212,474 9,114 8.58
Non-interest earning assets:
Cash and due from banks 6,017 6,092
Allowance for loan losses (2,771) (2,166)
Other assets 15,191 14,828
--------- ---------
Total non-interest earning assets 18,437 18,754
--------- ---------
Total assets $ 259,285 $ 231,228
========= =========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 45,279 $ 585 2.58% $ 43,056 $ 610 2.83%
Savings deposits 44,362 601 2.71 42,069 593 2.82
Time deposits 108,381 2,885 5.32 90,829 2,480 5.46
--------- -------- ---- --------- ------- ----
Total interest bearing deposits 198,022 4,071 4.11 175,954 3,683 4.19
Short-term borrowings 7,822 190 4.86 5,927 152 5.13
Other borrowings 2,444 110 9.00 2,582 109 8.44
--------- -------- ---- --------- ------- ----
Total interest bearing liabilities 208,288 4,371 4.20 184,463 3,944 4.28
Non-interest bearing liabilities:
Demand deposits 24,733 20,631
Other liabilities 4,402 3,368
--------- ---------
Total non-interest bearing
liabilities 29,135 23,999
--------- ---------
Shareholders' equity 21,862 22,766
--------- ---------
Total Liabilities and
Shareholders' Equity $ 259,285 $ 231,228
========= =========
Net interest income (tax equivalent basis) 5,647 4.12% 5,170 4.30%
==== ====
Tax-equivalent basis adjustment (197) (224)
-------- -------
Net interest income $ 5,450 $ 4,946
======== =======
Net interest margin (tax equivalent basis) 4.69% 4.87%
==== ====
[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.
Page 18
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest
expense.
Increase/(Decrease)
--------------------------------
Six months ended June 30, 1997
Compared to
Six months ended June 30, 1996
--------------------------------
Variance due to
Volume Rate Net
------- ------ ------
(dollars in thousands)
Assets
Interest Earning Assets:
Federal funds sold $ (48) $ 17 $ (31)
Interest bearing deposits with banks 12 1 13
Investment securities (164) 61 (103)
Investment securities available for sale:
Taxable investments 167 18 185
Tax-exempt securities 38 (13) 25
------- ------ ------
Total investment securities 206 4 210
Loans 1,712 (897) 815
------- ------ ------
Total interest earning assets 1,718 (814) 904
------- ------ ------
Interest bearing liabilities:
Interest bearing demand deposits 70 (95) (25)
Savings deposits 59 (51) 8
Time deposits 579 (174) 405
------- ------ ------
Total interest bearing deposits 707 (319) 388
Long-term borrowings (12) 13 1
Other borrowings 60 (22) 38
------- ------ ------
Total interest bearing liabilities 629 (202) 427
------- ------ ------
Net interest income
(tax-equivalent basis) $ 1,089 $ (612) $ 477
======= ====== ======
[FN]
- ------------
(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.
Page 19
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
Page 20
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: August 5, 1997 By: \s\ William W. Davis, Jr.
--------------------- --------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 1997 By: \s\ Lewis J. Critelli
--------------------- --------------------------------------
Lewis J. Critelli
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 21