-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tf0vC7CplqOAc3a0gymCdQaObo3cOHbVlZtmq9zbMTZvZAJup/ejo+uPIg/CzzUy Af8STlaKBj6+8zpRidFUFQ== 0000946275-96-000201.txt : 19960814 0000946275-96-000201.hdr.sgml : 19960814 ACCESSION NUMBER: 0000946275-96-000201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD FINANCIAL CORP CENTRAL INDEX KEY: 0001013272 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 282828306 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28364 FILM NUMBER: 96610448 BUSINESS ADDRESS: STREET 1: 717 MAIN ST STREET 2: PO BOX 269 CITY: HONESDALE STATE: PA ZIP: 18431 BUSINESS PHONE: 7172531455 10-Q 1 FORM 10-Q 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 quarterly period ended June 30, 1996 ------------- 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 (I.R.S. employer identification no.) of incorporation or organization) 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. Indicate by checkmark 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding as of Class August 12, 1996 - --------------------------------------- ------------------- common stock, par value $0.10 per share 871,540 shares NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 INDEX Page Number ------ PART I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP. Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Materially Important Events 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES (i) PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- NORWOOD FINANCIAL CORP. Consolidated Balance Sheets (unaudited)* (dollars in thousands)
June 30, December 31, 1996 1995 ---- ---- ASSETS Cash and due from banks $ 7,354 $ 5,343 Interest bearing deposits with banks 349 255 Federal funds sold 4,650 850 Investment securities available for sale 45,220 36,671 Investment securities 9,074 12,211 Loans (net of unearned Income) 157,318 152,095 Less: Allowance for loan losses 2,133 2,125 --------- --------- Net loans 155,185 149,970 Bank premises and equipment,net 7,518 7,017 Other real estate owned 2,632 1,944 Accrued interest receivable 1,545 1,504 Goodwill Other assets 4,406 1,497 --------- --------- TOTAL ASSETS $ 237,933 $ 217,262 ========= ========= LIABILITIES Deposits: Noninterest-bearing demand $ 23,666 $ 19,656 Interest-bearing deposits 182,179 167,643 --------- --------- Total Deposits 205,845 187,299 Federal funds purchased and securities sold under agreements to repurchase 3,460 1,727 Other borrowed funds 1,000 304 Long-term debt 2,582 2,582 Accrued interest payable 1,713 1,831 Accrued expenses and other liabilities 899 737 --------- --------- TOTAL LIABILITIES 215,499 194,480 STOCKHOLDERS' EQUITY Common Stock, $0.10 par value, authorized 10,000,000 shares, issued 871,406 and 880,542 90 90 shares Surplus 4,391 4,379 Retained earnings 18,562 17,704 Treasury stock, at cost (29,390 and 19,754 shares) (881) (562) Net unrealized gain on securities 272 1,171 --------- --------- TOTAL STOCKHOLDERS' EQUITY 22,434 22,782 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 237,933 $ 217,262 ========= =========
- --------------- * The consolidated balance sheet for December 31, 1995 has been taken from the audited financial statements for the fiscal year ended December 31, 1995. See accompanying notes to the unaudited consolidated financial statement -1- 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, ---------------------------- ----------------------- 1996 1995 1996 1995 --------------- ------------ ------------- --------- INTEREST INCOME Interest and fees on loans $ 3,526 $ 3,282 $ 7,008 $ 6,375 Interest on investment securities 889 446 1,695 936 Interest on federal funds sold and deposits with banks 75 86 99 92 --------- --------- --------- --------- Total Interest income 4,490 3,814 8,802 7,403 INTEREST EXPENSE Interest on deposits 1,889 1,588 3,684 2,986 Interest on federal funds purchased and repurchase agreements 30 33 141 93 Interest on other borrowed funds 5 4 10 11 Interest on long-term debt 55 53 109 106 --------- --------- --------- --------- Total Interest expense 1,979 1,678 3,944 3,196 --------- --------- --------- --------- NET INTEREST INCOME 2,511 2,136 4,858 4,207 PROVISION FOR LOAN LOSSES 200 150 350 299 --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,311 1,986 4,508 3,908 OTHER INCOME Service charges on deposits 135 100 235 193 Trust department income 59 34 110 70 Investment securities gains/(losses) 0 (52) 0 (8) Other operating income 130 107 227 179 --------- --------- --------- --------- Total other income 324 189 572 434 OTHER EXPENSES Salaries and employee benefits 968 780 1,867 1,615 Occupancy, furniture and equipment 274 217 539 441 Federal deposit insurance premiums (7) 95 1 190 Other real estate owned operations 136 65 163 118 Other operating expenses 631 429 1,168 898 --------- --------- --------- --------- Total other expenses 2,002 1,586 3,738 3,262 INCOME BEFORE TAX 633 589 1,342 1,080 INCOME TAXES 130 163 301 292 --------- --------- --------- --------- NET INCOME $ 503 $ 426 $ 1,041 $ 788 ========= ========= ========= ========= EARNINGS PER SHARE $ 0.58 $ 0.48 $ 1.20 $ 0.88 ========= ========= ========= ========= Dividends per Share $ 0.21 $ 0.19 $ 0.42 $ 0.38 ========= ========= ========= ========= Average Shares outstanding 871,540 891,646 873,027 895,180
See accompanying notes to the unaudited consolidated financial statements -2- NORWOOD FINANCIAL CORP. Consolidated Statement of changes in Stockholders' Equity (dollars in thousands)
Net Unrealized Common Retained Treasury Gain on Stock Surplus Earnings Stock Securities Total ----- ------- -------- ----- ---------- ----- Balance, December 31, 1994 $ 90 $ 4,379 $16,594 $ $ 579 $21,642 Net Income 788 788 Cash Dividend Declared ($0.19 per Share) (170) (170) Net Unrealized gain/(loss) on Securities 335 335 Acquisition of Treasury Stock (218) (218) ------ ------ ------ ------ ------ ------ Balance, June 30, 1995 $ 90 $ 4,379 $17,212 $ (218) $ 914 $22,377 ====== ====== ====== ====== ====== ======= Balance, December 31, 1995 $ 90 $ 4,379 $17,704 $ (561) $ 1,170 $22,782 Net Income 1,041 1,041 Common stock issued upon exercise of 12 12 options Cash Dividend Declared (183) (183) Net Unrealized gain/(loss) on Securities (898) (898) Acquisition of Treasury Stock (320) (320) ------ ------ ------ ------ ------ ------ Balance, June 30, 1996 $ 90 $ 4,391 $18,562 $ (881) $ 272 $22,434 ====== ====== ====== ====== ====== =======
See accompanying notes to the unaudited consolidated financial statements -3- NORWOOD FINANCIAL CORP. Consolidated Statement of Cash Flow (unaudited) (dollars in thousands)
Six Months Ended June 30, ------------------------- 1996 1995 ----------- ------------ OPERATING ACTIVITIES Net income $ 1,041 $ 788 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 350 299 Depreciation and amortization 296 263 Net amortization of investment securities 3 128 Investment security (gains) losses, net 0 8 Loss on sale of other real estate, net 64 46 Increase in core deposit intangible, net (1,744) 0 Decrease (increase) in accrued interest receivable (41) 310 Increase (decrease) in accrued interest payable (119) 162 Other, net (360) 285 -------- -------- Net cash provided by (used for) operating activities (510) 2,289 -------- -------- INVESTING ACTIVITIES Investment securities available for sale: Proceeds from sales of investment securities 502 49 Proceeds from maturities of investment securities 11,234 2,500 Purchases of investment securities (21,623) 0 Investment securities: Proceeds from maturities of investment securities 3,140 10,965 Purchases of investment securities 0 (7) Net increase in loans (6,918) (6,669) Purchase of premises and equipment, net (882) (443) Proceeds from sales of other real estate 395 432 Proceeds from sales of loans 85 132 -------- -------- Net cash provided by (used for) investing activities (14,067) 6,959 -------- -------- FINANCING ACTIVITIES Net increase in deposits 18,545 7,501 Net increase in short - term borrowings 2,429 761 Repayments of other borrowings 0 0 Acquisition of treasury stock (320) (218) Proceeds from issuance of common stock 12 0 Cash dividends paid (183) (169) -------- -------- Net cash provided by (used for) financing activities 20,483 7,875 -------- -------- Increase (decrease) in cash and cash equivalents 5,906 17,123 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,447 6,919 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,353 $ 24,042 ======== ========
See accompanying notes to consolidated financial statements. -4- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation --------------------- The consolidated financial statements have been prepared on an accrual basis. For additional information and disclosures required under generally accepted accounting principles, reference is made to the Company's 1995 audited financial statements included in the Company's initial registration statement on Form 10 filed with the Securities and Exchange Commission on April 29, 1996 (File No. 0-28366). The accompanying financial statements reflect in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position of Norwood Financial Corp. and the results of operations and changes in cash flows. The financial statements presented, in all material respects, comply with the current reporting requirements of supervisory authorities. The operating results for the six-month period ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996 or any other period. All significant intercompany accounts and transactions have been eliminated. Note 2 - Loans ----- Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Under this Standard, the Bank estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Prior to 1995, the credit losses related to these loans were estimated based on undiscounted cash flows or the fair value of the underlying collateral. Statement 118 amends Statement 114 to permit the creditor to use existing methods for recognizing interest income on impaired loans eliminating the income recognition provision of Statement 114. The allowance method is used in providing for loan losses. Accordingly all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The allowance is maintained at a level believed by management to be sufficient to absorb estimated potential credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of expected future cash flows on impaired loans, which may be susceptible to significant change. The allowance for loan losses on impaired loans pursuant to Statement 114 is one component of the methodology for determining the allowance for loan losses on commercial loans, commercial real estate loans, consumer loans and residential real estate mortgages, and general amounts for historical loss experience, uncertainties in estimating losses, and inherent risks in the various credit portfolios. Note 3 - Cash Flow Information --------------------- For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. -5- Cash payments for interest through June, 28, 1996 were $4,063,481 and for income taxes, $569,544. Noncash investing activity through June 28, 1996 includes foreclosed mortgage loans transferred to real estate owned of $1,146,810. Note 4 - Earnings Per Share ------------------ Earnings per share for the three month and six month periods ended June 30, 1996 and June 30, 1995 are calculated by dividing the net earnings for the periods by the average shares outstanding. The average shares outstanding for the three months ended June 30, 1996 and 1995 were 871,540 and 891,646, respectively. For the six months ended June 30, 1996 and 1995 average shares outstanding were 873,027 and 895,180 respectively. Note 5 - Branch Acquisition ------------------ On March 23, 1996, the Bank completed an assumption of liabilities and purchase of selected assets of three branches of Meridian Bank, Reading Berks Counties, Pennsylvania. The branches are located in; Lakewood, Wayne County; Shohola, Pike County; and Thompson, Susquehanna County. Pursuant to the transaction, the Bank assumed $20,014,000 of deposits, acquired real estate and equipment of $646,000 and loans of $30,000 which consisted only of overdraft lines of credit and those secured by deposits. Management initially reinvested a substantial portion of the $17.3 million of cash received as a result of the branch purchases in investment and mortgage-backed securities with short to medium terms. The Bank assumed deposits with an average cost of 3.68%. Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- FINANCIAL CONDITION General. Total assets at June 30, 1996 were $237.9 million compared to $217.3 at December 31, 1995, an increase of $20.6 million, or 9.5%. On March 23, 1996 the Bank completed an assumption of liabilities and purchase of selected assets of three branches of Meridian Bank, Reading, Berks County, Pennsylvania. The branches are located in: Lakewood, Wayne County; Shohola, Pike County; and Thompson, Susquehanna County. Total deposits associated with the transaction were $20,014,000, real estate and equipment of $646,000 and loans of $30,000 consisted only of overdraft lines and those loans secured by deposits. Investment Portfolio. Effective January 1, 1994, the Bank adopted statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In adopting Statement No. 115 the Bank has classified investment securities in two categories: held to maturity ("HTM") and available for sale ("AFS"). At June 30, 1996 the fair value of the AFS portfolio was $45.2 million compared to $36.7 million at December 31, 1995. The increase was due to purchases of obligations of U.S. Government agencies and obligations of state and political subdivisions. This represents, in part, the investment of proceeds of deposits acquired from Meridian Bank. HTM Securities totaled $9.1 million at June 30, 1996 down from $12.2 million at December 31, 1995. The HTM portfolio consists principally of longer term obligations of state and political subdivisions. Loans. Total loans and leases at June 30, 1996 were $157.3 compared to $152.1 million at December 31, 1995, an increase of $5.2 million or 3.4%. The increase from year-end is principally due to higher -6- levels of indirect automobile financing of $7.8 million, home equity loans of $2.7 million and introduction of automobile leasing totaling $3.7 million. These increases were partially offset by lower levels of residential real estate $3.9 million and commercial mortgages, $3.8. Non-performing Assets and Allowance for Loan Losses. Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Under this standard, the Bank estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Total impaired loans at June 30, 1996 were $3,411,767 comprised of $182,728 with related allowance of $12,014 and $3,229,039 without related allowance for loan losses. For the six months ended June 30, 1996, average impaired loans totaled $3,190,143. The Bank's loan review functions assess the adequacy of the allowance for loan losses. 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. Management considers the allowance at June 30, 1996 and December 31, 1995 adequate for its loan mix and classifications based on its internal analysis. There can be no assurance that the allowance for loan losses will be adequate to cover losses which may in fact be realized in the future or that additional provisions to the allowance for loan losses will not be required. The allowances for loan losses at June 30, 1996 was $2,133,000 or 1.36% of total loans, compared to $2,125,000, or 1.40% of total loans at December 31, 1995. The allowance for loan losses provides coverage for 52% of non-performing loans compared to 54.8% at year-end 1995. 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 June 30, six months ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------------ ------------- ------------ ----------- (Dollars in thousands) Balance at beginning of period $ 2,097 $ 1,951 $ 2,125 $ 1,893 Provision for loan losses 200 150 350 299 Charge-offs (208) (131) (418) (253) Recoveries 44 62 76 93 ------- ------- ------- ------- Net charge-offs (164) (69) (342) (160) Balance at end of Period $ 2,133 $ 2,032 $ 2,133 $ 2,032 ======= ======= ======= ======= Net charge-offs to average loans (annualized) 0.45% 0.22% ======= =======
-7- Non-performing loans at June 30, 1996 were $4,101,000 or 2.61% of total loans. Compared to $3,880,000 or 2.55% of total loans at December 31, 1996. The following table sets forth information regarding non-performing loans and other real estate owned at the dates indicated:
At At June 30, 1996 December 31, 1995 ------------- ----------------- (Dollars in thousands) Non-performing loans: Commercial and other $1,580 $1,627 Real estate related 2,469 2,205 Consumer 52 48 ------ ------ Total non-performing loans 4,101 3,880 Other real estate owned 2,632 1,944 ------ ------ Total non-performing assets $6,733 $5,824 ====== ====== Total non-performing loans to total loans 2.61% 2.55% ====== ====== Total non-performing assets to total assets 2.83% 2.68% ====== ======
The increase in non-performing real-estate related loans of $264,000 is principally due to the delinquency status of a single large residential mortgage. Deposits. Total deposits at June 30, 1996 were $205.8 million, an increase of $18.5, or 9.9%, from $187.3 million at December 31, 1995. The June 30 balance includes $21 million of deposits acquired in a branch purchase from Meridian Bank. Demand deposits totaled $23.7 million at June 30, 1996 representing 11.5% of total deposits, an increase of 10.5% from December 31, 1995. At June 30, 1996 commercial CDs over $100,000 were $13.9 million, a decrease $4.4 million from $18.3 million from December 31, 1995. This decrease is principally due to lower level of municipality and school district funds. Stockholders' Equity. Total stockholders' equity was $22,434,000 at June 30, 1996, compared to $22,782,000 at December 31, 1995. Higher levels of treasury stock due to stock repurchases and unrealized loss on securities related to SFAS No. 115 resulted in the net decrease in total stockholders' equity. At June 30, 1996, 29,390 shares were held in treasury at a cost of $881,000. These shares may be held for use in employee benefit plans currently under evaluation. RESULTS OF OPERATION Comparison of Operating Results for Six Months Ended June 30, 1996 and 1995 - --------------------------------------------------------------------------- General. For the six months of 1996, net income was $1,041,000 compared to $788,000 for the 1995 period, an increase of $253,000 or 32.1%. This represents earnings per share of $1.20 in 1996 compared to $0.88 in 1995. -8- Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
Six Months Ended June 30, ------------------------------------------------------------------- 1996 1995 ------------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ------- ASSETS Interest Earning Assets: Federal funds sold $ 3,380 $ 92 5.44% $ 3,091 $ 93 6.02% Interest bearing deposits with banks 250 7 5.60 0 Investment securities available for sale 43,360 1,436 6.62 16,997 456 5.37 Investment securities: Taxable investments 191 4 4.19 9,938 292 5.88 Tax-exempt securities 11,704 471 8.05 8,514 287 6.74 ------- ----- ------- ----- Total investment securities 11,895 475 7.99 18,452 579 6.28 Loans 153,396 7,018 9.15 143,410 6,379 8.90 ------- ----- ------- ----- Total interest earning assets 212,281 9,028 8.51 181,950 7,507 8.25 ---- ---- Non-interest earning assets: Cash and due from banks 6,285 5,246 Allowance for loan losses (2,166) (1,986) Other assets 14,828 11,497 Total non-interest earning assets 18,947 14,757 TOTAL ASSETS $ 231,228 $ 196,707 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Interest bearing demand deposits $ 43,056 610 2.83 $ 37,636 512 2.72 Savings deposits 42,069 593 2.82 37,904 563 2.97 Time deposits 90,828 2,481 5.46 72,739 1,911 5.25 ------- ----- ------- ----- Total interest bearing deposits 175,953 3,684 4.19 148,279 2,986 4.03 Other borrowed funds 5,927 181 6.11 3,720 104 5.59 Long-term debt 2,582 109 8.44 2,262 106 9.37 ------- ----- ------- ----- Total interest bearing liabilities 184,462 3,974 4.31 154,261 3,196 4.14 ---- ---- Non-interest bearing liabilities Demand deposits 20,713 18,761 Other liabilities 3,286 2,557 Total non-interest bearing liabilities 23,999 21,318 ------- -------- Shareholders' equity 22,767 21,128 ------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $231,228 $196,707 ======= ======= Net interest income(tax-equivalent basis) 5,054 4.20% 4,311 4.11% ==== ==== Tax-equivalent basis adjustment (103) (49) ----- ----- Net Interest Income $4,951 $4,262 ===== ===== Net Interest margin(tax-equivalent basis) 4.76% 4.74% ==== ====
- ---------------- 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. -9- 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 30,1996 Compared to six months ended June 30,1995 -------------------------------- Variance due to -------------------------------- Volume Rate Net -------- -------- --------- (Dollars in thousands) ASSETS Interest Earning Assets: Federal funds sold $ 17 $ (18) $ (1) Interest bearing deposits with banks 4 3 7 Investment securities available for sale 851 129 980 Investment securities: Taxable investments (223) (65) (288) Tax-exempt securities 121 63 184 ------- ------- ------- Total investment securities (101) (3) (104) Loans 453 186 639 ------- ------- ------- Total interest earning assets 1,224 297 1,521 Interest bearing liabilities: Interest bearing demand deposits 76 22 98 Savings deposits 99 (69) 30 Time deposits 492 78 570 ------- ------- ------- Total interest bearing deposits 667 31 698 Other borrowed funds 67 10 77 Long-term debt 26 (23) 3 Total interest bearing liabilities 646 132 778 ------- ------- ------- Net interest income(tax-equivalent basis) $ 578 $ 165 $ 743 ======= ======= =======
- ---------------- (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. -10- Interest Income. Interest income on a fully taxable equivalent ("FTE") basis totaled $9,028,000 for six months of 1996, an increase of $1,521,000, or 20.3% over the same period in 1995. The FTE yield on earning assets was 8.51% in 1996, an increase from 8.25% in 1995. This increase was principally related to growth in average earnings assets of $30.3 million or 16.7%, which represented an increase in income of $1,224,000. Loans averaged $153.4 million in 1996, representing 72.3% of earnings assets and yielding 9.15%. For six months of 1995, loans represented 78.8% of earning assets with a yield of 8.90%. Income on loans for 1996 was $7,018,000 compared to $6,379,000 for 1995. The yields on the investment portfolio, both the AFS and HTM, increased from 1995 principally due to lengthening of maturities. The total portfolio yield for six months of 1996 was 6.92% compared to 5.84% in 1995. Interest Expense. Interest expense was $3,944,000 for six months 1996 compared to $3,196,000 in 1995, an increase of $748,000 or 23.4%. The rates paid on interest-bearing liabilities for six months 1996 was 4.31% compared to 4.14% in 1995. The cost of interest bearing deposits increased to 4.19% from 4.03%, reflecting higher costs on CD's which increased 21 basis points and represented 51.6% of interest-bearing deposits compared to 49.1% in 1995. Net interest Income. Net interest income on an FTE basis increased $743,000, or 17.2%, to $5,054,000 for six months of 1996. The increase was principally due to increase in volume which accounted for $578,000 while rate changes accounted for $165,000 of the increase. Net interest spread and net interest margin were 4.20% and 4.76%, respectively for 1996, compared to 4.11% and 4.74%, respectively in 1995. Provision for Loan Losses. Provision for loan losses was $350,000 for six months of 1996 increased from $299,000 in 1995 reflecting a higher level of net charge-offs in 1996. See also "Financial Condition -- Non-performing Assets and Allowance for Loan Losses." Non-interest Income. Non-interest income for the six months of 1996 was $572,000, an increase of $138,000 or 31.8% over 1995. Service charges on deposits increased 22% reflecting additional volume and increase in certain fees in the second quarter of 1996. Trust department income for 1996 totaled $110,000 compared to $70,000 in 1995 as a result of higher fees related to mutual fund sales and increased volume. The six months of 1995 included a $8,000 net loss on the sale of investment securities, with no such activity in 1996. Non-interest Expenses. Non-interest expenses totaled $3,738,000 for six months 1996, compared to $3,262,000 in 1995, an increase of $476,000 or 14.6%. Expenses related to three new branches acquired from Meridian in March accounted for $210,000 of the increase. FDIC insurance premiums decreased $189,000 for the six month period due to the rate reduction as a result of the Bank Insurance Fund reaching its required level of capitalization, thereby reducing deposit insurance premiums. Expenses relating to other real estate increased $45,000 to $163,000 due to higher levels of write-downs and increased volume of properties. Legal fees increased $33,000 from 1995 with additional expenses related to costs incurred during loan work-out situations and the additional costs related to formation of holding company and initial registration to become a public company. Consulting costs of $53,000 for six months 1996 increased $37,000 from 1995 due to services related to technology planning and human resources/benefits administration. Income Tax Expenses. Income tax expense for six months of 1996 was $301,000 for an effective tax rate of 22.4% compared to an effective rate of 27% in 1995. The change in rate is due to higher levels of obligations of state and political subdivision in 1996 which provide income which is partially exempt from federal income tax. -11- Comparison of Operating Results for Three Months Ended June 30, 1996 and 1995 - ----------------------------------------------------------------------------- General. For the three months ended June 30, 1996, net income was $503,000 compared to $426,000 for the 1995 period, an increase of $77,000 or 18.1%. This represents earnings per share of $0.58 in 1996 compared to $0.48 in 1995. The resultant return on average assets and return on average equity for the 1996 period was 0.84% and 8.84%, respectively, compared to 0.85% and 7.71% respectively in 1995. Interest Income. Interest income on a fully taxable equivalent ("FTE") basis totaled $4,613,000 for the quarter, an increase of $744,000 or 19.2% over 1995. The increase was principally due to a higher level of earning assets, $217.3 million compared to $183.9 million in 1995. Interest Expense. Total interest expense was $1,979,000 for the 1996 period compared to $1,678,000 in 1995. The increase was attributable to a higher level of interest bearing deposits due primarily to the branch acquisition and increased costs on certificates of deposit. Net Interest Income. Net interest income on an FTE basis was $2,604,000 compared to $2,191,000 in the 1995 period. Net interest spread and net interest margin were 4.27% and 4.79% respectively in 1996, compared to 4.20% and 4.84% respectively in 1995. Provision for Loan Losses. Provision for loan losses for the second quarter of 1996 were $200,000 increasing from $150,000 in 1995. The increase is due to higher level of charge-offs in 1996 and increased loan volume. Non-interest Income. Non-interest income for the three months ended June 30, 1996 was $324,000 an increase of $135,000 or 71.4% over the same period in 1995. The 1995 period included losses on investment securities of $52,000, with no activity in the 1996 quarter. Service charges on deposits increased $35,000 or 35% due to volume increases and a increase in certain fees in the second quarter of 1996. Non-interest Expenses. Non-interest expenses totaled $2,002,000 for the three months ended June 30, 1996 compared to $1,586,000 in the same period of 1995, an increase of $416,000, or 26.2%. Expenses related to new branch locations accounted for $210,000 of the increase. Other real estate owned operations expenses increased $71,000 to $136,000 for the current period. These increases were partially offset by lower FDIC insurance assessment of $102,000 in 1996 compared to 1995. Income Tax Expense. Income tax expense for the second quarter of 1996 was $130,000 compared to $163,000 for the second quarter of 1995. The tax expense decreases even as pre-tax income increased due to a higher level of obligations of state and political subdivision, in 1996 which provide income which is partially exempt from federal income taxes. Capital. A comparison of capital ratios is as follows:
At At June 30, 1996 December 31, 1995 ----------------------------- ------------------------ Leverage Capital 9.15% 10.05% Tier 1 Capital 12.33% 13.93% Total Capital 13.58% 15.18%
-12- The minimum capital requirements imposed by the FDIC for leverage capital, tier 1 capital and total capital are 3.0%, 4.0% and 8.0% 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 Bank was in compliance in both FDIC and PDB capital requirements at June 30, 1996 and December 31, 1995. Liquidity and Interest Rate Sensitivity. Maintenance of liquidity for the Bank is coordinated by Asset Liability Committee ("ALCO"). Liquidity Policy is set by the Board of Directors with certain key ratios used to measure the Bank's liquidity. Bank liquidity can be viewed as the ability to fund customers borrowing needs and their deposit withdrawal request while supporting the Bank's asset growth. The Bank's primary sources of liquidity include deposit generation, asset maturities and repayments. The Bank also maintains established lines of credit with the Federal Home Loan Bank (FHLB) of Pittsburgh and other correspondent banks which support liquidity needs. At June 30, 1996 the Flex Line Limit with the FHLB was $5,350,000 and maximum borrowing capacity of $54,135,000. Total deposits have increased $18.5 million from December 31, 1995 to June 30, 1996, principally as a result of acquiring three offices from Meridian Bank with total deposits of $21.1 million. The Bank had $4.7 million invested in overnight Federal Funds at June 30, 1996 compared to $850,000 at December 31, 1995. Additional sources of liquidity are available in the investment available for sale and the investment portfolio. Scheduled maturities and anticipated repayments of the total investment portfolio, including those available for sale, is approximately $6.3 million for the next twelve months. Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Bank's 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 both traditional static gap analysis and computer simulation modeling to measure the effect of changes in interest rates on net interest income. Net interest income, which is the primary source of the Bank's earnings, is affected by interest rate movements. To manage the impact of rate changes the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at similar 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. At June 30, 1996, the Bank had a positive 90 day gap of $22,143,000 and at one year a negative gap of $4,990,000. A positive gap at 90 days means the Company's interest sensitive assets are higher than its interest-sensitive liabilities. This would indicate that in a declining rate environment, the yield on earnings assets would decrease faster than the cost of interest-bearing liabilities. This risk is managed by ALCO strategies including investment portfolio structure, pricing of deposits, loan pricing and structure of fixed and variable rate products. Certain shortcomings are inherent in the method of analysis presented in the preceding paragraph. For example, although certain assets and liabilities may have similar maturities or periods following of repricing, they may react in different degrees to changes in market interest rates. Also, 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. Additionally, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis over the life of the asset. Further, in the event of change in interest rates, prepayment levels -13- and decay rates on core deposits may deviate significantly from those assumed in calculating the Bank's gap. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Neither the Company nor the Bank was engaged in any legal proceeding of a material nature at June 30, 1996 that would have a material adverse effect on the Company's or the Bank's financial condition, liquidity or results of operation. From time to time, the Company is a party to legal proceedings in the ordinary course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of loans, and other issues related to the operations of the Company and the Bank. 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 23, 1996. Proposal 1 - Election of Directors. The following incumbent Class III Directors were nominated for election to the Board of Directors for a three year term: Daniel J. O'Neill, Dr. Kenneth A. Phillips and Gary P. Rickard. The results of the voting were as follows: Shares For Against --- ------- O'Neill 569,661 7,172 Phillips 570,877 6,172 Rickard 569,285 7,764 Item 5. Other Materially Important Events - ------------------------------------------ Not applicable. -14- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits None. (b) Reports on Form 8-K None. -15- NORWOOD FINANCIAL CORP. SIGNATURES Pursuant to the requirements of the Securities 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 13, 1996 By: /s/ Russell L. Ridd Russell L. Ridd President (Principal Executive Officer) Date: August 13, 1996 By: /s/ Lewis J. Critelli Lewis J. Critelli Vice President and Chief Financial Officer (Principal Financial Officer) EX-27 2 FDS FOR 10-Q
9 1,000 6-MOS DEC-31-1996 JUN-30-1996 7,354 349 4,650 0 45,220 54,294 54,161 157,318 2,133 237,933 205,845 4,460 2,612 2,582 0 0 90 22,344 237,933 7,008 1,695 99 8,802 3,683 3,944 4,858 350 0 3,738 1,342 1,342 0 0 1,041 1.20 1.20 4.76 4,101 1,573 0 0 2,125 418 76 2,133 2,133 0 119
-----END PRIVACY-ENHANCED MESSAGE-----