10-Q 1 0001.txt 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 quarter period ended September 30, 2000 ------------------ OR [s] 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 identification no.) incorporation or organization) 717 Main Street, Honesdale, Pennsylvania 18431 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (570) 253-1455 -------------- N/A -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicated by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of October 31, 2000 ---------------------------------------- 1,743,935 common stock, par value $0.10 per share --------- 1 NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 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 Item 3 Qualitative and Quantitative Disclosures about market risk 19 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 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ---------------------------- NORWOOD FINANCIAL CORP. Consolidated Balance Sheets (unaudited) (dollars in thousands)
September 30, December 31, 2000 1999 --------- --------- ASSETS Cash and due from banks $ 9,925 $ 8,430 Interest bearing deposits with banks 83 398 Federal funds sold 2,350 1,970 Securities available for sale 78,917 78,875 Securities held-to-maturity (fair value 2000: $7,642 1999; $7,411) 7,482 7,477 Loans receivable (net of unearned income) 214,760 205,160 Less: Allowance for loan losses 3,334 3,344 --------- --------- Net loans receivable 211,426 201,816 Bank premises and equipment, net 6,288 6,739 Other real estate 27 110 Accrued interest receivable 1,962 1,646 Other assets 7,106 7,366 --------- --------- TOTAL ASSETS $ 325,566 $ 314,827 ========= ========= LIABILITIES Deposits: Non-interest bearing demand $ 35,192 $ 26,848 Interest-bearing deposits 213,197 216,659 --------- --------- Total deposits 248,389 243,507 Short-term borrowings 9,202 8,600 Other borrowings 33,000 30,000 Accrued interest payable 2,461 2,385 Other liabilities 3,296 3,681 --------- --------- TOTAL LIABILITIES 296,348 288,173 STOCKHOLDERS' EQUITY Common Stock, $.10 par value, authorized 10,000,000 shares issued 1,803,824 shares 180 180 Surplus 4,626 4,603 Retained earnings 27,767 25,763 Treasury stock, at cost (59,889 shares) (1,214) (1,214) Unearned ESOP shares (1,230) (1,359) Accumulated other comprehensive income (loss) (911) (1,319) --------- --------- TOTAL STOCKHOLDERS' EQUITY 29,218 26,654 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 325,566 $ 314,827 ========= =========
See accompanying notes to the unaudited consolidated financial statements 3 NORWOOD FINANCIAL CORP. Consolidated Statements of Income (unaudited) (dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- INTEREST INCOME Loans receivable including fees $ 4,644 $ 4,143 $13,451 $12,029 Securities 1,447 1,309 4,301 3,521 Federal funds sold and deposits with banks 3 15 14 62 ------- ------- -------- ------ Total interest income 6,094 5,467 17,766 15,612 INTEREST EXPENSE Deposits 2,079 1,877 6,188 5,772 Short-term borrowings 66 82 232 221 Other borrowed funds 612 322 1,590 594 ------- ------- ------- ------- Total interest expense 2,757 2,281 8,010 6,587 ------- ------- ------- ------- NET INTEREST INCOME 3,337 3,186 9,756 9,025 PROVISION FOR LOAN LOSSES 120 110 335 340 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,217 3,076 9,421 8,685 OTHER INCOME Service charges and fees 384 336 1,102 899 Income from fiduciary activities 73 72 227 210 Net realized gains on sales of securities 1 1 2 59 Other 232 138 547 279 ------- ------- ------- ------- Total other income 690 547 1,878 1,447 OTHER EXPENSES Salaries and employee benefits 1,091 1,041 3,246 3,033 Occupancy, furniture & equipment, net 288 325 927 887 Data processing related 111 111 320 313 Taxes, other than income 69 63 203 189 Professional fees 53 57 209 140 Other 842 680 2,438 1,841 ------- ------- ------- ------- Total other expenses 2,454 2,277 7,343 6,403 INCOME BEFORE INCOME TAXES 1,453 1,346 3,956 3,729 INCOME TAX EXPENSE 414 426 1,105 1,147 ------- ------- ------- ------- NET INCOME $ 1,039 $ 920 $ 2,851 $ 2,582 ======= ======= ======= ======= BASIC EARNINGS PER SHARE $ 0.62 $ 0.55 $ 1.71 $ 1.53 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 0.61 $ 0.55 $ 1.70 $ 1.53 ======= ======= ======= =======
See accompanying notes to the unaudited consolidated financial statements. 4 NORWOOD FINANCIAL CORP. Consolidated Statement of Changes in Stockholders' Equity (unaudited) Nine months ended September 30, 1999 and 2000 (dollars in thousands)
Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income(loss) Total ----- ------- -------- ----- ------ ------------ ----- Balance, December 31, 1998 $180 $4,542 $23,240 ($343) ($1,546) $1,655 $27,728 Comprehensive income: Net Income 2,582 2,582 Net change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects (2,355) (2,355) ------- Total comprehensive income 227 ------- Cash dividends declared, $.42 per share (702) (702) Stock Options exercised (6) 49 43 Purchase of Treasury Stock (718) (718) Release of earned ESOP shares 58 122 180 ---- ------ ------- ------- ------- ------ ------- Balance, September 30, 1999 $180 $4,594 $25,120 ($1,012) ($1,424) (700) $26,758 ==== ====== ======= ======== ======== ====== =======
Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income(loss) Total ----- ------- -------- ----- ------ ------------ ----- Balance, December 31, 1999 $180 $4,603 $25,763 ($1,214) ($1,359) ($1,319) $26,654 Comprehensive income: Net Income 2,851 2,851 Net change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects 408 408 ------- Total comprehensive income 3,259 ------- Cash dividends declared, $.51 per share (847) (847) Release of earned ESOP shares 23 129 152 ---- ------ ------- ------- ------- ----- ------- Balance, September 30, 2000 $180 $4,626 $27,767 ($1,214) ($1,230) ($911) $29,218 ==== ====== ======= ======= ======= ====== =======
See accompanying notes to the unaudited financial statements 5 NORWOOD FINANCIAL COPR. Consolidated Statement of changes in Stockholders' Equity (unaudited) Three Months Ended September 1999 and 2000 (dollars in thousands)
Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income(loss) Total ----- ------- -------- ----- ------ ------------ ----- Balance June 30, 1999 $180 $4,580 $24,431 ($805) ($1,474) ($295) $26,617 Comprehensive Income: Net Income 920 920 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects (405) (405) ------- Total comprehensive income 515 ------- Cash dividends declared $.14 per share (231) (231) Stock options exercised (6) 49 43 Purchase of treasury stock (256) (256) Release of earned ESOP shares 20 50 70 ---- ------ ------- ------- ------- ----- ------- Balance, September 30, 1999 $180 $4,594 $25,120 ($1,012) ($1,424) ($700) $26,758 ==== ====== ======= ======= ======= ===== =======
Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income(loss) Total ----- ------- -------- ----- ------ ------------ ----- Balance, June 30, 2000 $180 $4,617 $27,292 ($1,214) ($1,280) ($1,688) $27,907 Comprehensive income: Net Income 1,039 1,039 Change in unrealized gains (losses) on securities available for sale, net of reclassification and adjustment and tax effects 777 777 ------- Total comprehensive income 1,816 ------- Cash dividends declared $.34 per share (564) (564) Release of earned ESOP shares 9 50 59 ---- ------ ------- ------- ------- ----- ------- Balance, September 30, 2000 $180 $4,626 $27,767 ($1,214) ($1,230) ($911) $29,218 ==== ====== ======= ======= ======= ===== =======
See accompanying notes to the unaudited financial statements. 6 NORWOOD FINANCIAL CORP. Consolidated Statements of Cashflows (Unaudited) (dollars in thousands)
Nine Months Ended September 30, ------------------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 2,851 $ 2,582 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 335 340 Depreciation 471 501 Amortization of intangible assets 133 141 Deferred income taxes (1,084) (1,367) Net realized gain on sales of securities (2) (59) Gain(loss) on sale of other real estate, net (106) (9) Gain on sale of premises & equipment 26 - Net gain on sale of mortgage loans/servicing rights (108) (6) Mortgage loans originated for sale (769) (690) Proceeds from sale of mortgage loans/servicing rights 877 695 Decrease (increase) in accrued interest receivable (316) (161) Increase (decrease) in accrued interest payable 76 (543) (Increase) in cash surrender value of life insurance (124) - Other, net 1,779 2,541 -------- -------- Net cash provided by operating activities 4,039 3,965 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 8,891 7,207 Proceeds from maturities and principal reductions on mortgage-backed securities 4,119 11,925 Purchases (12,439) (38,031) Net decrease (increase) in loans (10,816) (14,387) Purchase of bank premises and equipment, net (289) (262) Proceeds from sales of other real estate 439 197 -------- -------- Net cash used in investing activities (10,095) (33,351) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 4,882 6,246 Net increase (decrease) in short term borrowings (1,398) 14,921 Proceeds from other borrowings 5,000 10,000 Acquisition of treasury stock - (674) Release of ESOP shares (20) 122 Cash dividends paid (848) (702) -------- -------- Net cash used in financing activities 7,616 29,913 -------- -------- (Decrease) Increase in cash and cash equivalents 1,560 527 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,798 12,598 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,358 $ 13,125 ======== --------
See accompanying notes to consolidated financial statement 7 Notes to Unaudited Consolidated Financial Statements ---------------------------------------------------- 1. Basis of Presentation --------------------- The consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All significant intercompany transactions have been eliminated in consolidation. 2. Estimate -------- The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position of the Company. The operating results for the three month and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000 or any other interim period. These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company's Annual Report on Form 10-K for the year-ended December 31, 1999. 3. Earnings Per Share ------------------ Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. 4. Cash Flow Information --------------------- For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the period September 30, 2000 and 1999 were $7,934,000 and $6,330,000 respectively. Cash payments for income taxes in 2000 were $1,798,000 compared to $738,000 in 1999. Non-cash investing activity for 2000 and 1999 included foreclosed mortgage loans transferred to real estate owned and repossession of other assets of $824,000 and $973,000, respectively. 5. Reclassification of Comparative Amounts --------------------------------------- Certain comparative amounts for the prior period have been reclassified to conform to the current period's presentation. Such reclassifications did not affect net income. 8 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements -------------------------- The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes, "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, Year 2000 issues and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Changes in Financial Condition ------------------------------ General ------- Total assets at September 30, 2000 were $325.6 million, compared to $314.8 million at year-end 1999. Securities ---------- The fair value of securities available for sale at September 30, 2000 was $78.9 million, compared to $78.9 million at year-end 1999. Total purchases for the period were $9.2 million with maturities sales and cashflows of $4.8 million. The cashflow as reinvested in short-term securities and tax-exempt municipal issues. Loans ----- Total loans receivable, which include automobile leases, were $214.8 million at September 30, 2000 compared to $205.2 million at December 31, 1999, an increase of $9.6 million. The increase was net of $1.5 million of a commercial loan participation sold and $636,000 of residential mortgages sold in the secondary market. Indirect lending, principally in used automobiles, increased $10.0 million to total $55.1 million at September 30, 2000. The Company no longer originates automobile leases, and as a result, the portfolio declined $8.2 million from December 31, 1999 to $15.8 million at September 30, 2000, which includes residual value of $12.2 million, at September 30, 2000 declining from $17.8 million at year-end. The Company liquidates its returned off-lease vehicles through various used car dealers and automobile auction centers. At September 30, 2000 the Company had an inventory of vehicles to liquidate of $892,000. Total losses incurred on sales of off-lease vehicles included in other expenses was $556,000 for the nine months ended September 30, 2000. The Company's reserve for future residual value losses as classified in other liabilities was $509,000 at September 30, 2000 and compared to $311,000 at December 31, 1999. 9 Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated: Types of loans (dollars in thousands)
September 30 , 2000 December 31, 1999 ------------------------ ------------------------ $ % $ % --------- ----- -------- ----- Real Estate-Residential $ 62,198 28.9 $ 56,984 27.7 Commercial 54,370 25.3 49,796 24.2 Construction 1,706 .8 3,339 1.6 Commercial, financial and agricultural 15,383 7.2 17,440 8.5 Consumer loans to individuals 65,629 30.4 54,026 26.3 Lease financing, net of unearned income 15,814 7.4 23,974 11.7 -------- ----- -------- ----- Total loans 215,100 100.0% 205,559 100.0% Less: Unearned income and deferred fees 340 399 Allowance for loan losses 3,334 3,344 -------- -------- Total loans, net $211,426 $201,816 ======== ========
Allowance for Loan Losses and Non-performing Assets --------------------------------------------------- Following is a summary of changes in the allowance for loan losses for the periods indicated:
At or for the Three At or for Nine Months (dollars in thousands) Months Ended September 30 Ended September 30 ------------------------- ----------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Balance, beginning $ 3,381 $ 3,326 $ 3,344 $ 3,333 Provision for loan losses 120 110 335 340 Charge-offs (200) (115) (537) (466) Recoveries 33 22 192 136 ------- ------- ------- ------- Net charge-offs (167) (93) (345) (330) ------- ------- ------- ------- Balance, ending $ 3,334 $ 3,343 $ 3,334 $ 3,343 ======= ======= ======= ======= Allowance to total loans 1.55% 1.67% 1.55% 1.67% Net charge-offs to average loans (annualized) .31% .19% 0.22% 0.23%
The allowance for loan losses totaled $3,334,000 at September 30, 2000 and represented 1.55% of total loans, compared to $3,344,000 at year-end, and $3,343,000 at September 30, 1999. Management'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 10 percentages are identified by loan type and credit grading and allocated accordingly. Larger credit exposures are individually analyzed. Management considers the allowance adequate at September 30, 2000 based on the loan mix and level of classifications. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. At September 30, 2000, non-performing loans totaled $574,000, which is .27% of total loans decreasing from $657,000, or .32% of total loans at December 31, 1999. Non-performing loans consist principally of residential real estate with the largest loan at $292,000. The following table sets forth information regarding non-performing loans and other real estate owned at the date indicated:
(dollars in thousands) September 30, 2000 December 31, 1999 ------------------ ----------------- Loans accounted for on a non-accrual basis: Commercial and all other $ 64 $ 64 Real Estate 492 513 Installment - 19 ---- ---- Total 556 596 Accruing loans which are contractually past due 90 days or more 18 61 ---- ---- Total non-performing loans $574 $657 Other real estate owned 27 110 ---- ---- Total non-performing assets $601 $767 ==== ==== Allowance for loan losses as a percent of non-performing loans 581.8% 508.9% Non-performing loans to total loans .27% .32% Non-performing assets to total assets .18% .24%
Deposits -------- Total deposits at September 30, 2000 were $248.4 million compared to $243.5 million at December 31, 1999. Non interest bearing checking grew by $8.3 million from year-end with the increase principally in seasonal transactions for summer camps, property owners associations, local municipalities and school districts. The growth was partially offset by scheduled maturities of school district time deposits which declined $12.4 million. In addition, the Company had $8.2 million of commercial cash management accounts included in short-term borrowings, which represents excess funds invested in overnight securities. The Company considers these balances as a source of core funding. 11 Other Borrowings ---------------- Other borrowings consisted of the following: Notes with the Federal Home Loan Bank (FHLB) September 30, 2000 ------------------ Fixed note due October 2000 6.65% $ 5,000 Fixed note due February 2001 6.46% 6,000 Convertible note due April 2005 6.13% 5,000 Fixed note due January 2001 6.68% 2,000 Convertible note due December 2006 6.19% 5,000 Convertible note due April 2009 4.83% 5,000 Convertible note due April 2009 5.07% 5,000 ------- $33,000 ======= The Bank has a maximum borrowing capacity with the FHLB of $76.5 million. Stockholders' Equity and Capital Ratios --------------------------------------- At September 30,2000, total stockholders' equity totaled $29.2 million, an increase of $2.6 million from year-end 1999. The net increase in stockholders' equity was primarily due to $2,851,000 in net income, that was partially offset by $847,000 of dividend payments and $408,000 of other comprehensive income due to a decline in market value of the available for sale securities (primarily the mortgage-backed securities portfolio). The increase in market value of the investment securities available for sale will not affect the Company's net income unless the securities are sold. The Company currently plans to hold these securities until maturity or until the market values of these securities increase. Accordingly, the Company does not expect, though there is no assurance, that the investment in these securities will affect net income in future periods. A comparison of the Company's capital ratios is as follows: September 30, 2000 December 31, 1999 ------------------ ----------------- Tier 1 Capital (To average assets) 9.06% 9.15% Tier 1 Capital (To risk-weighted assets) 12.53% 11.98% Total Capital (To risk-weighted assets) 14.01% 13.50% The minimum capital requirements imposed by the FDIC for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank's capital ratios do not differ significantly from the Company's ratios. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% total capital. The Company and the Bank were in compliance in FRB, FDIC and PDB capital requirements at September 30, 2000. 12 Results of Operation NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
Nine Months Ended September 30, --------------------------------------------------------------------------- 2000 2000 ------------------------------------- --------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- (2) (1) (3) (2) (1) (3) Assets Interest-earning assets: Federal funds sold $205 $9 5.85% $1,506 $47 4.16% Interest bearing deposits with banks 243 5 2.74 911 15 2.20 Securities held-to-maturity 7,479 486 8.66 7,647 491 8.56 Securities available for sale: Taxable 76,972 3,836 6.64 67,164 3,107 6.17 Tax-exempt 3,965 219 7.36 2,731 137 6.69 -------- ------- ------- ------- Total securities available for sale 80,937 4,055 6.68 69,895 3,244 6.19 Loans receivable (4) (5) 209,923 13,476 8.56 193,868 12,062 8.30 -------- ------- -------- ------- Total interest earning assets 298,787 18,031 8.05% 273,827 15,859 7.72% Non-interest earning assets: Cash and due from banks . . . . . . . .. . . . 7,003 7,056 Allowance for loan losses . . . . . . . . . . . (3,376) (3,353) Other assets. . . . . . . . . . . . . . . . . . 15,412 12,553 -------- -------- Total non-interest earning assets 19,039 16,256 -------- -------- Total Assets $317,826 $290,083 ======== ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Interest bearing demand deposits. . . . . . . . $60,786 1,124 2.47% $57,509 1,037 2.40% Savings . . . . .. . . . . . . . . . . . . . . 42,801 703 2.19 42,680 697 2.18 Time . . . . . . . . . . . . . . . . . . . . . 109,054 4,361 5.33 104,680 4,038 5.14 -------- ------- -------- ------- Total interest bearing deposits 212,641 6,188 3.88 204,869 5,772 3.76 Short-term borrowings 7,471 232 4.14 8,950 221 3.29 Other borrowings 35,151 1,590 6.03 15,016 594 5.27 -------- ------- -------- ------- Total interest bearing liabilities 255,263 8,010 4.18% 228,835 6,587 3.84% Non-interest bearing liabilities: Demand deposits 29,384 27,787 Other liabilities 5,697 5,922 -------- -------- Total non-interest bearing liabilities 35,081 33,709 Shareholders' equity 27,482 27,539 ------ -------- Total Liabilities and Shareholders' Equity $317,826 $290,083 ======== ======== Net interest income (tax equivalent basis) 10,021 3.86% 9,272 3.88% ====== ====== Tax-equivalent basis adjustment (265) (247) ------- ------- Net interest income $ 9,756 $9,025 ======= ======= Net interest margin (tax equivalent basis) 4.47% 4.51% ====== ======
(1) Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. (2) Average balances have been calculated based on daily balances. (3) Annualized (4) Loan balances include non-accrual loans and are net of unearned income. (5) Loan yields include the effect of amortization of deferred fees, net of costs. 13 Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease) Nine months ended September 30, 2000 compared to Nine months ended September 30, 1999 Variance due to Volume Rate Net ------------------------------- (dollars in thousands) Assets Interest earning assets: Federal funds sold ...................... $ (60) $ 22 $ (38) Interest bearing deposits with banks .... (15) 5 (10) Securities held to maturity ............. (13) 8 (5) Securities available for sale: Taxable .............................. 477 252 729 Tax-exempt securities ................ 67 15 82 ------- ------- ------- Total securities .................. 544 267 811 Loans receivable ........................ 1,022 392 1,414 ------- ------- ------- Total interest earning assets ......... 1,478 694 2,172 Interest bearing liabilities: Interest-bearing demand deposits ....... 60 27 87 Savings ................................ 2 4 6 Time ................................... 172 151 323 ------- ------- ------- Total interest bearing deposits .... 234 182 416 Short-term borrowings ................... (55) 66 11 Other borrowings ......................... 900 96 996 ------- ------- ------- Total interest bearing liabilities ...... 1,079 344 1,423 Net interest income (tax-equivalent basis) $ 399 $ 350 $ 749 ======= ======= =======
(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. 14 Comparison of Operating Results for Nine Months Ended September 30, 2000 and ---------- ------------ ----------------------------- --------- ------------ September 30, 1999 ------------------ General ------- For the nine months ended September 30, 2000, net income totaled $2,851,000 or $1.71 basic earnings per share (eps) and diluted eps of $1.70, compared to $2,582,000 or $1.53 eps (basic and diluted) earned for the similar period in 2000. The resulting return on average equity and average assets were 13.83% and 1.20% respectively, compared to 12.50% and 1.19% for nine months of 1999. Net Interest Income ------------------- Net interest income on a fully taxable equivalent basis (fte) for the nine months ending September 30, 2000 was $10,021,000 compared to $9,272,000 in 1999, an increase of $749,000 or 8.1%. The resultant fte net interest spread and net interest margin for 2000 was 3.86% and 4.47% respectively, compared to 3.88% and 4.51% in 1999. Interest income (fte) for the nine months ended September 30, 2000 totaled $18,031,000 increasing $2,172,000 or 13.7% from $15,859,000 in 1999. The increase was due to $25,0 million growth in average earning assets and the yield on earning assets improving 33 basis points to 8.05% in 2000 compared to 7.72% in 1999. Securities available for sale averaged $80.9 million for nine months 2000 compared to $68.9 million in 1999 with the increase principally due to higher levels of mortgage backed securities. The yield also increased to 6.63% from 6.19% in 1999 principally due to the generally higher interest rate environment, which began in the third quarter of 1999. Average loans for the nine month period in 2000 were $209.9 million, with interest income of $13,476,000 and yield of 8.56% compared to $193.9 million, $12,062,000 and 8.30%, respectively, in 1999. The increase in loan income was partially due to the higher prime rate of interest of 9.50% at September 30, 2000 compared to 8.50% in 1999. Total interest expense for the nine months ended September 30, 2000 was $8,010,000 increasing $1,423,000 from $6,587,000 in 1999. The resulting of cost of funds for 2000 was 4.18% increasing 34 basis points from 3.84% in 1999. The increase was principally due to higher level of other borrowings consisting of FHLB advances, $35.1 million at 6.03% in 2000 compared to $15.0 million at 5.27% in 1999. The proceeds of the borrowings were used in part to fund purchases of securities available for sale. In addition, the cost of time deposits increased to 5.33% from 5.14% in 1999. reflecting the higher interest rate environment in 2000. The cost of transaction and savings products has not increased to same degree as time deposits and borrowings whose rates are more market driven. Detailed changes regarding net interest income are contained in tables at pages 13 and 14. Other Income ------------ Other income, excluding net realized gains on sales of securities totaled $1,876,000 for the nine months end September 30, 2000, an increase of $488,000 or 35.2% over $1,388,000 in the same period in 1999. A loan promotion generated $49,000 in revenue in 2000. The Bank through its subsidiary, Norwood Investment Corp. had revenue of $155,000 on commissions from sales of annuities, mutual funds and discount brokerage compared to $114,000 in 1999. Earnings on the increase in cash surrender of value of $3.2 million of Bank owned life insurance, purchased in the fourth quarter of 1999, was $131,000, the proceeds of which are used to fund employee benefit plans. During 15 the third quarter, the Company sold its portfolio of mortgage servicing rights for a net gain of $105,000. For the nine month period, fee income represents 18.7% of total revenue. Other Expense ------------- Other expenses totaled $7,343,000 for the nine months ended September 30, 2000 compared to $6,403,000 in 1999, an increase of $940,000. The increase was due in part to losses, additions to the reserve for future losses and costs of disposing of vehicles from the auto leasing portfolio of $797,000 in 2000 increasing from $307,000 in 1999. The Stroud Mall Branch, opened in June 1999, had costs of $241,000 which includes salaries, benefits and occupancy costs compared to $74,000 in the prior year. The Company also incurred additional costs of $52,000 related to improvements in local and wide area network communications. Other expense was favorably impacted by a gain on sale of property originally purchased for expansion but no longer needed, of $113,000. The cost of opening new branch office in Lords Valley in August 2000 was $36,000, which includes salaries, occupancy costs and other expense. Income Tax Expense ------------------ Income tax expense totaled $1,105,000 for an effective tax rate of 27.9% compared to $1,147,000 and 30.1% for the 1999 period. The decrease in the effective rate is due to higher levels of interest income on municipal securities and increase in the cash surrender value of bank owned life insurance not subject to Federal income tax. 16 Results of Operation NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
Three Months Ended September 30 ----------------------------------------------------------------------------- 2000 1999 ---------------------------------- ----------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ---------- ------- -------- -------- (2) (1) (3) (2) (1) (3) Assets Interest-earning assets: Federal funds sold $51 $1 7.84% $1,039 $10 3.85% Interest bearing deposits with banks 107 2 7.48 598 5 3.34 Securities held-to-maturity 7,481 162 8.66 7,649 164 8.58 Securities available for sale: Taxable 76,857 1,279 6.66 73,069 1,169 6.40 Tax-exempt 4,907 92 7.50 3,154 50 6.34 -------- ------- -------- ------- Total securities available for sale 81,764 1,371 6.71 76,223 1,219 6.40 Loans receivable (4) (5) 213,271 4,647 8.72 198,267 4,161 8.39 -------- ----- 8.17% -------- ----- Total interest earning assets 302,674 6,183 283,776 5,559 7.84% Non-interest earning assets: Cash and due from banks . . . . . . . . . . . . 7,334 7,790 Allowance for loan losses . . . . . . . . . . . (3,366) (3,371) Other assets. . . . . . . . . . . . . . . . . . 15,174 11,887 -------- -------- Total non-interest earning assets 19,142 16,306 -------- -------- Total Assets $321,816 $300,082 ======== ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Interest bearing demand deposits. . . . . . . . $63,621 402 2.53% $61,050 374 2.45% Savings . . . . .. . . . . . . . . . . . . . . 43,170 238 2.21 43,861 242 2.21 Time . . . . . . . . . . . . . . . . . . . . . 104,752 1,439 5.49 99,341 1,262 5.08 -------- ------- -------- ------- Total interest bearing deposits 211,543 2,079 3.93 204,252 1,878 3.68 Short-term borrowings 7,447 66 3.55 7,301 59 3.23 Other borrowings 37,753 612 6.48 25,207 344 5.46 -------- --- ------ - --- Total interest bearing liabilities 256,743 2,757 4.30% 236,760 2,281 3.85% Non-interest bearing liabilities: Demand deposits 31,101 30,376 Other liabilities 5,545 5,407 -------- -------- Total non-interest bearing liabilities 36,646 35,783 Shareholders' equity 28,427 27,539 -------- -------- Total Liabilities and Shareholders' Equity $321,816 $300,082 ======== ======== Net interest income (tax equivalent basis) 3,426 3.88% 3,278 3.98% ===== ===== Tax-equivalent basis adjustment (89) (92) ------- ------ Net interest income $ 3,337 $3,186 ======= ====== Net interest margin (tax equivalent basis) 4.53% 4.62% ===== =====
(1) Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. (2) Average balances have been calculated based on daily balances. (3) Annualized (4) Loan balances include non-accrual loans and are net of unearned income. (5) Loan yields include the effect of amortization of deferred fees, net of costs. 17 Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease) Three months ended September 30, 2000 compared to Three months ended September 30, 1999 Variance due to Volume Rate Net -------------------------- (dollars in thousands) Assets Interest earning assets: Federal funds sold ...................... $ (44) $ 35 $ (9) Interest bearing deposits with banks .... (21) 18 (3) Securities held to maturity ............. (9) 7 (2) Securities available for sale: Taxable .............................. 62 48 110 Tax-exempt securities ................ 32 10 42 ----- ----- ----- Total securities .................. 94 58 152 Loans receivable ........................ 323 163 486 ----- ----- ----- Total interest earning assets ......... 343 281 624 Interest bearing liabilities: Interest-bearing demand deposits ....... 16 12 28 Savings ................................ (4) (0) (4) Time ................................... 71 106 177 ----- ----- ----- Total interest bearing deposits .... 83 118 201 Short-term borrowings ................... 1 6 7 Other borrowings ......................... 195 73 268 ----- ----- ----- Total interest bearing liabilities ...... 279 197 476 Net interest income (tax-equivalent basis) $ 64 $ 84 $ 148 ===== ===== =====
(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. 18 Comparison of operating results for the three months ended September 30, 2000 -------------------------------------------------------------------------------- and September 30, 1999 ---------------------- General ------- For the three months ended September 30, 2000 net income was $1,039,000 or $.62 per share basic and $.61 per share diluted compared to $920,000 or $.55 per share (basic and diluted) earned in the third quarter of 1999. The resultant return on average equity (ROE) was 14.62% with a return on average assets (ROA) of 1.29% compared to an ROE of 13.70% and ROA of 1.23% for the second quarter of 1999. Net Interest Income ------------------- Net interest income (fte) for the third quarter of 2000 was $3,426,000 with a net interest spread of 3.88% and net interest margin of 4.53% compared to $3,278,000, 3.98% and 4.62%, respectively in 1999. The increase in net interest income was principally due to $18.9 million growth in earning assets and an increase in yield. The yield on earning assets for the three months ended September 30, 2000 was 8.17%, improving from 7.84% in the 1999 period. This was partially offset by rising cost of interest-bearing liabilities, 4.30% in 2000 from 3.85% in 1999. Total interest income for the three months ending September 30, 2000 was $6,183,000, an increase of $624,000 from $5,559,000 in 1999. Interest expense for the period in 2000 was $2,757,000, increasing from $2,281,000 in 1999. Detailed changes regarding net interest income are contained in the tables on pages 17 and 18. Other Income ------------ Other income, excluding net realized gains on sales of securities transactions totaled $689,000 for the third quarter of 2000, compared to $546,000 for the same period in 1999. The increase was due to higher levels of deposit service charge income, $48,000 as a result of a new office in Stroudsburg and the implementation of account analysis income. During the third quarter the Company sold its portfolio of mortgage servicing rights for a net gain of $105,000. Other Expenses -------------- Other expenses totaled $2,454,000 for the third quarter of 2000, compared to $2,227,000 for the same period in 1999. The increase was due in part to additional losses and costs of disposing of vehicles from the auto-leasing portfolio of $274,000 included in other expense, compared to $127,000 in 1999. The Company opened a new office in September 2000 with expenses of $36,000. Income Tax Expense ------------------ Income tax expense totaled $414,000 for an effective tax rate of 28.5% in 2000 decreasing from $426,000 and an effective tax rate of 31.6% in 1999. The decrease in the effective rate is due to higher levels of income on municipal securities and increase in the cash surrender value on bank owned life insurance not subject to Federal income tax. Item 3 Quantitative and Qualitative Disclosures about Market Risk ------------------------------------------------------------------ Market Risk ----------- There were no significant changes for the three months or nine months ended September 30, 2000 from the information presented in the Form 10-k for the year-ended December 31, 1999. 19 Part II. Other Information Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and use of proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Materially Important Events None 20 Item 6. Exhibits and Reports on Form 8-K
(a) 3(i) Articles of Incorporation of Norwood Financial Corp* 3(ii) Bylaws of Norwood Financial Corp.* 4.0 Specimen Stock Certificate of Norwood Financial Corp.* 10.1 Amended Employment Agreement with William W. Davis, Jr.*** 10.2 Amended Employment Agreement with Lewis J. Critelli *** 10.3 Form of Change-In-Control Severance Agreement with nine key employees of the Bank* 10.4 Consulting Agreement with Russell L. Ridd** 10.5 Wayne Bank Stock Option Plan* 10.6 Salary Continuation Agreement between the Bank and William W. Davis, Jr.*** 10.7 Salary Continuation Agreement between the Bank and Lewis J. Critelli*** 10.8 Salary Continuation Agreement between the Bank and Edward C. Kasper*** 10.9 1999 Directors Stock Compensation Plan*** 27 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-k None
--------------------------- * Incorporated herein by reference into the identically numbered exhibits of the Registrant's Form 10 Registration Statement initially filed with the Commission on April 29, 1996. ** Incorporated herein by reference into the indentically numbered exhibits of the Registrant's Form 10-K filed with the Commission on March 31, 1997. *** Incorporated herein by reference into the indentically numbered exhibits of the Registrant's Form 10-K filed with the Commission on March 23, 2000. 21 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: November 7, 2000 By:/s/William W. Davis, Jr. --------------------------------------- William W. Davis, Jr. President and Chief Executive Officer (Principal Executive Officer) Date: November 7, 2000 By:/s/Lewis J. Critelli --------------------------------------- Lewis J. Critelli Executive Vice President and Chief Financial Officer (Principal Financial Officer) 22