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 March 31, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-28366
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Norwood Financial Corp.
------------------------------------------------------
(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
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N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
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 May 9, 2004
- --------------------------------------- -----------------------------
common stock, par value $0.10 per share 2,643,630
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
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 10
Item 3. Qualitative and Quantitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 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)
March 31, December 31,
2004 2003
--------- ---------
ASSETS
Cash and due from banks $ 8,272 $ 9,110
Interest bearing deposits with banks 186 64
Federal funds sold 6,375 -
--------- ---------
Cash and cash equivalents 14,833 9,174
Securities available for sale 116,431 124,823
Securities held to maturity, fair value 2004
$6,014, 2003: $5,975 5,750 5,748
Loans receivable (net of unearned income) 233,587 233,733
Less: Allowance for loan losses 3,302 3,267
--------- ---------
Net loans receivable 230,285 230,466
Investment in FHLB Stock 1,834 2,002
Bank premises and equipment, net 5,556 5,596
Foreclosed real estate 22 -
Accrued interest receivable 1,724 1,783
Other Assets 7,459 7,891
--------- ---------
TOTAL ASSETS $ 383,894 $ 387,483
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 40,645 $ 39,517
Interest bearing 264,795 267,152
--------- ---------
Total deposits 305,440 306,669
Short-term borrowings 9,076 12,859
Long-term debt 23,000 23,000
Accrued interest payable 1,216 1,309
Other liabilities 1,116 815
--------- ---------
TOTAL LIABILITIES 339,848 344,652
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized 10,000,000 shares 270 270
Issued 2004: 2,705,715, 2003: 2,705,715 shares
Surplus 5,001 4,933
Retained earnings 37,790 37,042
Treasury stock at cost: 2004: 19,247 shares, 2003: 23,318 xx (310) (295)
Unearned ESOP shares (500) (550)
Accumulated other comprehensive income 1,795 1,431
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 44,046 42,831
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 383,894 $ 387,483
========= =========
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
March 31
------------------
2004 2003
------ ------
INTEREST INCOME
Loans receivable, including fees $3,552 $3,636
Securities 1,130 1,256
Other 7 33
------ ------
Total interest income 4,689 4,925
INTEREST EXPENSE
Deposits 908 1,305
Short-term borrowings 25 25
Long-term debt 323 317
------ ------
Total interest expense 1,256 1,647
------ ------
NET INTEREST INCOME 3,433 3,278
PROVISION FOR LOAN LOSSES 125 165
------ ------
NET INTEREST INCOME AFTER 3,308 3,113
PROVSION FOR LOAN LOSSES
OTHER INCOME
Service charges and fees 441 442
Income from fiduciary activities 86 50
Net realized gains on sales of securities 178 143
Gain on sale of loans 57 140
Other 177 113
------ ------
Total other income 939 888
OTHER EXPENSES
Salaries and employee benefits 1,302 1,230
Occupancy, furniture & equipment, net 352 356
Data processing related 146 144
Losses on lease residuals 90 -
Taxes, other than income 91 82
Professional fees 85 49
Other 529 605
------ ------
Total other expenses 2,595 2,466
------ ------
INCOME BEFORE INCOME TAXES 1,652 1,535
INCOME TAX EXPENSE 452 425
------ ------
NET INCOME $1,200 $1,110
====== ======
BASIC EARNINGS PER SHARE $ 0.46 $ 0.43
====== ======
DILUTED EARNINGS PER SHARE $ 0.45 $ 0.42
====== ======
Cash dividends per share $ 0.17 $ 0.16
====== ======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated statement of changes in stockholders' equity (unaudited)
(dollars in thousands) Accumulated
Number of Unearned Other
shares Common Retained Treasury ESOP Comprehensive
issued Stock Surplus Earnings Stock Shares Income Total
------ ------ ------- -------- ----- ------ ------ -----
Balance December 31, 2002 1,803,824 $180 $4,762 $34,082 ($640) ($750) $2,491 $40,125
Comprehensive Income:
Net Income 1,110 1,110
Change in unrealized gains
(losses) on securities
available for sale, net of
reclassification adjustment
and tax effects (324) (324)
-------
Total comprehensive income 786
-------
Cash dividends declared,
$.16 per share (413) (413)
Three-for-two stock split
in the form of a
50% stock dividend 901,891 90 (91) (1)
Stock options exercised 20 20
Tax benefit of stock
options exercised 4 4
Aquisition of treasury stock (46) (46)
Release of earned ESOP shares 39 49 88
--------- ---- ------ ------- ----- ----- ------ -------
Balance, March 31, 2003 2,705,715 $270 $4,714 $34,779 ($666) ($701) $2,167 $40,563
========= ==== ====== ======= ===== ===== ====== =======
Accumulated
Number of Unearned Other
shares Common Retained Treasury ESOP Comprehensive
Issued Stock Surplus Earnings Stock Shares Income Total
------ ----- ------- -------- ----- ------ ------ -----
Balance December 31, 2003 2,705,715 $270 $4,933 $37,042 ($295) ($550) $1,431 $42,831
Comprehensive Income:
Net Income 1,200 1,200
Change in unrealized gains
(losses) on securities
Available for sale, net of
reclassification adjustment
and tax effects 364 364
-------
Total comprehensive income 1,564
-------
Cash dividends declared
$.17 per share (452) (452)
Stock options exercised (14) 78 64
Tax benefit of stock
options exercised 1 1
Acquisition of treasury stock (93) (93)
Release of earned ESOP shares 81 50 131
--------- ---- ------ ------- ----- ----- ------ -------
Balance, March 31, 2004 2,705,715 $270 $5,001 $37,790 ($310) ($500) $1,795 $44,046
========= ==== ====== ======= ===== ===== ====== =======
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,200 $ 1,110
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 125 165
Depreciation 136 159
Amortization of intangible assets 13 44
Deferred income taxes (101) (387)
Net amortization of securities premiums and discounts 110 104
Net realized gain on sales of securities (178) (143)
Earnings on life insurance policy (79) (29)
Net gain on sale of mortgage loans (57) (140)
Mortgage loans originated for sale (3,557) (3,729)
Proceeds from sale of mortgage loans 3,614 3,869
Tax benefit of stock options exercised 1 4
Release of ESOP shares 131 89
Decrease in accrued interest receivable and other assets 675 686
Increase in accrued interest payable and other liabilities 118 276
-------- --------
Net cash provided by operating activities 2,145 2,084
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 6,532 6,122
Proceeds from maturities and principal reductions on mortgage-backed securities 16,545 23,542
Purchases (14,062) (25,759)
(Increase) decrease in investment in FHLB stock 168 (195)
Net increase in loans (84) (2,679)
Purchase of bank premises and equipment, net (96) (32)
Proceeds from sale of foreclosed real estate - 10
Net cash provided by investing activities 9,003 1,009
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits (1,229) 4,062
Net increase in short term borrowings (3,783) (1,065)
Stock options exercised 64 19
Acquisition of treasury stock - (46)
Repurchase of ESOP shares (93) (1)
Cash dividends paid and cash paid in lieu of fractional shares (448) (413)
-------- --------
Net cash provided by (used in) financing activities (5,489) 2,556
-------- --------
Increase in cash and cash equivalents 5,659 5,649
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,174 16,244
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,833 $ 21,893
======== ========
See accompanying notes to the unaudited consolidated financial statements
6
Notes to Unaudited Consolidated Financial Statements
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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. Estimates
---------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. The financial statements reflect, in the opinion of management, all
normal, recurring adjustments necessary to present fairly the financial position
of the Company. The operating results for the three month period ended March 31,
2004 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2004 or any other future 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, 2003.
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.
The following table sets forth the computations of basic and diluted
earnings per share:
(in thousands)
Three Months Ended
------------------
March 31,
---------
2004 2003
----- -----
Basic EPS weighted average shares outstanding 2,636 2,589
Dilutive effect of stock options 55 37
----- -----
Diluted EPS weighted average shares outstanding 2,691 2,626
===== =====
4. Stock Option Plans
------------------
The Company accounts for stock option plans under the recognition and
measurement principles of APB opinion No. 25, "Accounting For Stock Issued to
Employees", and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise
7
price equal to the market value of the underlying common stock on the date of
the grant. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123 "Accounting for Stock-Based Compensation", to stock based
employee compensation.
Three Months ended March 31
---------------------------
(in thousands, except for per share data)
2004 2003
--------- ---------
Net income as reported $ 1,200 $ 1,110
Total stock-based employee compensation determined
under fair value based method for all awards, net
of taxes (36) (15)
--------- ---------
Earnings per share (basic) $ 1,164 $ 1,095
========= =========
Earnings per share (basic)
As Reported $ .46 $ .43
Pro forma .44 .42
Earnings per share (assuming dilution)
As Reported .45 .42
Pro forma .43 .42
During the first three months ended March 31, 2004, there were 5,615 stock
options exercised at an average exercise price of $11.27.
5. 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 ended March 31, 2004 and 2003
were $1,350,000 and $1,704,000 respectively. Cash payments for income taxes in
2004 were $2,350 compared to $1,400 in 2003. Non-cash investing activity for
2004 and 2003 included foreclosed mortgage loans and repossession of other
assets of $140,000 and $124,000, respectively.
6. Comprehensive Income
--------------------
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities such as unrealized gains and losses on available for
sale securities, are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are components of
comprehensive income. The components of other comprehensive income and related
tax effects are as follows.
8
(in thousands) Three Months Ended March 31
---------------------------
2004 2003
------ ------
Unrealized holding gains/(losses)
On available for sale securities $ 728 $(346)
Reclassification adjustment for gains
Realized in income (178) (143)
----- -----
Net unrealized gain/(losses) 550 (489)
Income tax (benefit) 186 (165)
----- -----
Other comprehensive income $ 364 $(324)
===== =====
7. Off Balance Sheet Financial Instruments and Guarantees
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Bank's financial instrument commitments is as follows:
March 31 Dec. 31
2004 2003
------- -------
Commitments to grant loans $11,511 $12,197
Unfunded commitments under lines of credit 27,575 26,269
Standby letters of credit 2,213 2,128
------- -------
$41,299 $40,594
======= =======
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the customer and generally consists of real
estate.
9
The Bank does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are
involved in extending loan facilities to customers. The Bank, generally, holds
collateral and/or personal guarantees supporting these commitments. Management
believes that the proceeds obtained through a liquidation of collateral and the
enforcement of guarantees would be sufficient to cover the potential amount of
future payment required under the corresponding guarantees. The current amount
of the liability as of March 31, 2004 for guarantees under standby letters of
credit issued is not material.
Item 2. Management's 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, and
general economic conditions.
Critical Accounting Policies
- ----------------------------
Note 2 to the Company's consolidated financial statements (incorporated
by reference in Item 8 of the 10-K) lists significant accounting policies used
in the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company and its results of operations.
The most significant estimates in the preparation of the Company's
financial statements are for the allowance for loans losses and accounting for
stock options. Please refer to the discussion of the allowance for loan losses
calculation under "Allowance for Loan Losses and Non-performing Assets" and in
the "Changes in Financial Condition" section below. The Company accounts for
their stock option plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees, " and related
Interpretations. No stock-based employee compensation is reflected in net
income, as all options granted had an exercise price equal to the market value
of the underlying common stock on the grant date. The Company currently has no
intentions of adopting the expense recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
Changes in Financial Condition
- ------------------------------
General
- -------
Total assets as of March 31, 2004 were $383.9 million compared to
$387.5 million as of December 31, 2003. The decline was principally due to a
decline in securities available for sale and was partially offset by an increase
in cash and cash equivalents.
10
Securities
- ----------
The fair value of securities available for sale as of March 31, 2004
was $116.4 million declining from $124.8 million as of December 31, 2003. The
decrease was principally due to a decline of $8.4 million in callable bonds of
U.S. Government agencies and the sale of $2.4 million of mortgage-backed
securities. The Company is reducing its exposure to callable bonds and to
mortgage backed securities issued by the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corp. (Freddie Mac). Cash flow from
the portfolio was reinvested in short-term corporate bonds and invested in
federal funds sold. As a result, federal funds sold totaled $6.4 million as of
March 31, 2004, compared to $-0- at year-end.
Loans Receivable
- ----------------
Total loans receivable were $233.6 million as of March 31, 2004
compared to $233.7 million as of December 31, 2003. An increase in commercial
loans of $3.9 million was offset by a continued decline in indirect lending of
$2.8 million.
The Company's indirect lending portfolio (included in consumer loans to
individuals) declined $2.8 million to $25.5 million as of March 31, 2004. As the
Company is focusing its efforts on increasing direct and real estate lending
through its branch system, it anticipates a further decrease in indirect
financing throughout 2004.
The Company sold $3.6 million of 30 year fixed rate residential
mortgages at a gain of $57,000 (included in other income) for the three months
ended March 31, 2004. As a result, total residential real estate loans increased
only slightly, to total $77.6 million as compared to $77.5 million as of
December 31, 2003.
The Company's automobile leasing portfolio totaled $201,000 as of March
31, 2004 compared to $316,000 at year-end. The Company expects all the remaining
leases to mature in 2004, and to have the majority of vehicles liquidated by
year-end 2004. The Company maintains a reserve for residual losses (included in
other liabilities) which totaled $92,000 as of March 31, 2004 compared to
$66,000 as of December 31, 2003.
Set forth below is selected data relating to the composition of the loan
portfolio at the dates indicated:
Types of loans
(dollars in thousands) March 31, 2004 December 31, 2003
------------------ -------------------
$ % $ %
------- ----- ------- -----
Real Estate-Residential $ 77,585 33.2% $ 77,459 33.1%
Commercial 97,747 41.7 96,276 41.1
Construction 3,340 1.4 5,904 2.5
Commercial, financial and agricultural 20,963 9.0 17,022 7.3
Consumer loans to individuals 34,188 14.6 37,219 15.9
Lease financing, net of unearned income 201 0.1 316 0.1
--------- ----- --------- -----
Total loans 234,024 100.0% 234,196 100.0%
===== =====
Unearned income and deferred fees (437) (463)
--------- ---------
233,587 233,733
Allowance for loan losses (3,267) (3,302)
--------- ---------
Net loans receivable $ 230,285 $ 230,466
========= =========
11
Allowance for Loan Losses and Non-performing Assets
- ---------------------------------------------------
Following is a summary of changes in the allowance for loan losses for
the periods indicated:
Three
(dollars in thousands) Months Ended March 31
------------------------
2004 2003
------- -------
Balance, beginning $ 3,267 $ 3,146
Provision for loan losses 125 165
Charge-offs (98) (133)
Recoveries 8 34
------- -------
Net charge-offs (90) (99)
------- -------
Balance, ending $ 3,302 $ 3,212
======= =======
Allowance to total loans 1.41% 1.46%
Net charge-offs to average loans
(annualized) .16% .18%
The allowance for loan losses totaled $3,302,000 as of March 31, 2004
and represented 1.41% of total loans, compared to $3,267,000 at year end, and
$3,212,000 as of March 31, 2003. Net charge-offs for the three month period
ended March 31, 2004, totaled $90,000 and consisted principally of losses on the
sale of repossessed automobiles. The Company's loan review process assesses the
adequacy of the allowance for loan losses on a quarterly basis. The process
includes an analysis of the risks inherent in the loan portfolio. It includes an
analysis of impaired loans and a historical review of credit losses by loan
type. Other factors considered include: concentration of credit in specific
industries; economic and industry conditions; trends in delinquencies, large
dollar exposures and loan growth. Management considers the allowance adequate at
March 31, 2004 based on the Company's criteria. 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.
12
As of March 31, 2004, non-performing loans totaled $74,000, which is
..03% of total loans compared to $143,000, or .06% of total loans at December 31,
2003. The following table sets forth information regarding non-performing loans
and foreclosed real estate at the date indicated:
(dollars in thousands) March 31, December 31,
--------- ------------
2004 2003
---- ----
Loans accounted for on a non accrual basis:
Commercial and all other $ - $ -
Real Estate 61 125
Consumer - 1
----- -----
Total 61 125
Accruing loans which are contractually
Past due 90 days or more 13 18
----- -----
Total non-performing loans 74 143
Foreclosed real estate 22 -
----- -----
Total non-performing assets $ 96 $ 143
===== =====
Allowance for loans losses
Coverage of non-performing loans 44.6x 22.8x
Non-performing loans to total loans .03% .06%
Non-performing assets to total assets .03% .04%
Deposits
- --------
Total deposits as of March 31, 2004 were $305.4 million declining
slightly from $306.7 million as of December 31, 2003.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) March 31, December 31,
--------- ------------
2004 2003
---- ----
Non-interest bearing demand $40,645 $39,517
Interest bearing demand 40,539 40,926
Money Market 46,900 46,481
Savings 56,809 55,895
Time deposits <$100,000 93,033 94,478
Time deposits >$100,000 27,514 29,372
-------- --------
Total $305,440 $306,669
======== ========
The decline in deposits is principally due to scheduled maturities of school
district time deposits.
13
Short-term Borrowings
- ---------------------
Short-term borrowings as of March 31, 2004 were $9.1 million compared
to $12.9 million as of December 31, 2003. The decrease was principally due to a
lower level of cash management account balances
Off Balance Sheet Arrangements
- ------------------------------
The Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Company's financial
instrument commitments is as follows:
March 31, December 31,
2004 2003
---- ----
(In thousands)
Commitments to grant loans $11,511 $12,197
Unfunded commitments under lines of credit 27,575 26,269
Standby letters of credit 2,213 2,128
------- -------
$41,299 $40,594
======= =======
14
Stockholders' Equity and Capital Ratios
- ---------------------------------------
At March 31, 2004, total stockholders' equity totaled $44.0 million,
a net increase of $1,215,000 from December 31, 2003. The net increase in
stockholders' equity was primarily due to $1,200,000 in net income, that was
partially offset by $452,000 of dividends declared. In addition, accumulated
other comprehensive income increased $364,000 due to an increase in fair value
of securities in the available for sale portfolio. This increase in fair value
is the result of a change in interest rates, which may impact the value of the
securities. Because of interest rate volatility, the Company's accumulated other
comprehensive income could materially fluctuate for each interim and year-end
period.
A comparison of the Company's regulatory capital ratios is as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Tier 1 Capital
(To average assets) 11.02% 10.52%
Tier 1 Capital
(To risk-weighted assets) 15.93% 15.58%
Total Capital
(To risk-weighted assets) 17.45% 17.09%
The minimum capital requirements imposed by the FDIC on the Bank 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 as of March 31, 2004 and
December 31, 2003.
Liquidity
- ---------
As of March 31, 2004, the Company had cash and cash equivalent of
$14.8 million in the form of cash, due from banks, federal funs sold and
short-term deposits with other institutions. In addition, the Company had total
securities available for sale of $116.4 million which could be used for
liquidity needs. This totals $131.2 million and represents 34.2% of total assets
compared to $134.0 million and 34.6% of total assets as of December 31, 2003.
The Company also monitors other liquidity measures, all of which were within the
Company's policy guidelines as of March 31, 2004 and December 31, 2003. Based
upon these measures, the Company believes its liquidity is adequate.
The Company maintains established lines of credit with the Federal
Home Loan Bank of Pittsburgh (FHLB), the Atlantic Central Bankers Bank (ACBB)
and other correspondent banks, which are available to support liquidity needs.
The approximate borrowing capacity from the FHLB was $123.3 million, of which
$23 million of long-term borrowings was outstanding as of March 31, 2004 and
December 31, 2003
15
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
---------------------------------------------------------------------------
2004 2003
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 2,709 $ 6 0.89% $ 11,102 $ 33 1.19%
Interest bearing deposits with banks 105 1 0.86 293 1 1.37
Securities held-to-maturity 5,748 126 8.77 6,205 136 8.77
Securities available for sale:
Taxable 104,029 864 3.32 97,746 982 4.02
Tax-exempt 18,558 277 5.97 14,642 276 7.54
-------- ------ -------- ------
Total securities available for sale (1) 122,587 1,141 3.72 112,388 1,258 4.48
Loans receivable (4) (5) 231,865 3,571 6.16 218,466 3,650 6.68
-------- ------ -------- ------
Total interest earning assets 363,014 4,845 5.34 348,454 5,078 5.83
Non-interest earning assets:
Cash and due from banks 8,254 7,925
Allowance for loan losses (3,303) (3,206)
Other assets 14,836 13,115
-------- --------
Total non-interest earning assets 19,787 17,834
-------- --------
Total Assets $382,801 $366,288
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $86,440 131 0.61 $76,129 141 0.74
Savings 56,370 65 0.46 52,535 134 1.02
Time 121,309 712 2.35 130,175 1,030 3.16
-------- ------ -------- ------
Total interest bearing deposits 264,119 908 1.38 258,839 1,305 2.02
Short-term borrowings 10,882 25 0.92 7,790 25 1.28
Long-term debt 23,000 323 5.62 23,000 317 5.51
-------- ------ -------- ------
Total interest bearing liabilities 298,001 1,256 1.69 289,629 1,647 2.27
Non-interest bearing liabilities:
Demand deposits 39,076 32,858
Other liabilities 2,183 3,331
-------- --------
Total non-interest bearing liabilities 41,259 36,189
Stockholders' equity 43,541 40,470
-------- --------
Total Liabilities and Stockholders' Equity $382,801 $366,288
======== ========
Net interest income (tax equivalent basis) 3,589 3.65% 3,431 3.55%
==== ====
Tax-equivalent basis adjustment (156) (153)
------ ------
Net interest income $3,433 $3,278
====== ======
Net interest margin (tax equivalent basis) 3.95% 3.94%
==== ====
(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.
16
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
---------------------------------------------
Three months ended March 31, 2004 Compared to
---------------------------------------------
Three months ended March 31, 2003
---------------------------------------------
Variance due to
---------------------------------------------
Volume Rate Net
---------------------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold .......................... $ (20) $ (7) $ (27)
Interest bearing deposits with banks ........ - - -
Securities held to maturity ................. (10) - (10)
Securities available for sale:
Taxable ................................... 336 (454) (118)
Tax-exempt securities ..................... 259 (258) 1
------- ------- -------
Total securities ........................ 595 (712) (117)
Loans receivable ............................ 969 (1,048) (79)
------- ------- -------
Total interest earning assets ............... 1,534 (1,767) (233)
Interest bearing liabilities:
Interest-bearing demand and money market... 83 (93) (10)
Savings ................................... 61 (130) (69)
Time ...................................... (66) (252) (318)
------- ------- -------
Total interest bearing deposits ........ 78 (475) (397)
Short-term borrowings ....................... 28 (28) -
Other borrowings ............................ - 6 6
Total interest bearing liabilities .......... 106 (497) (391)
------- ------- -------
Net interest income (tax-equivalent basis)... $ 1,428 $(1,270) $ 158
======= ======= =======
(1) Changes in net interest income that could not be specifically identified as
either a rate or volume change were allocated proportionately to changes in
volume and changes in rate.
17
Comparison of Operating Results for The Three Months Ended March 31, 2004 to
- --------------------------------------------------------------------------------
March 31, 2003
- --------------
General
- -------
For the three months ended March 31, 2004, net income totaled
$1,200,000, an increase of $90,000, or 8.1%, over $1,110,000 earned in the
similar period of 2003. Earnings per share for the current period were $.46
basic and $.45 on a diluted basis, compared to $.43 basic and $.42 on a diluted
basis for the three months ended March 31,2003. The resulting return on average
assets and return on average equity for the three months ended March 31, 2004,
were 1.26% and 11.08%, respectively compared to 1.23% and 11.12%, respectively
for the similar period in 2003.
The following table sets forth changes in net income:
Dollars in thousands Three months ended
-------------------------------
March 31,2004 to March 31, 2003
-------------------------------
Net income three months ended March 31, 2003 $1,110
Net interest income 155
Provision for loan losses 40
Net realized gains on sales of securities 35
Gains on sale of loans (83)
All other income 99
Salaries and employee benefits (72)
Losses on lease (90)
residuals
All other expenses 33
Income tax effect (27)
------
Net income three months ended March 31, 2004 $1,200
======
Net Interest Income
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the
three months ended March 31, 2004, totaled $3,589,000, an increase of $158,000
or 4.6%, over the similar period in 2003. The fte net interest spread and net
interest margin were 3.65% and 3.95% increasing from 3.55% and 3.94% for the
three months ended March 31, 2003.
Interest income (fte) totaled $4,845,000 at a yield of 5.34% compared
to $5,078,000 and a yield of 5.83% in 2003. The decrease in yield was due in
part, to lower short-term interest rates in 2004, with the prime rate at 4.00%
and the Federal Funds rate at 1.00% as of March 31, 2004, declining from 4.25%
and 1.25%, respectively, as of March 31, 2003. The decrease in rates, was
partially offset by an increase in volume. Average loans increased $13.4
million, and represented 63.9% of total average earning assets for the three
months ended March 31, 2004 compared to 62.7% for the similar period in the
prior year.
Interest expense for the three months ended March 31, 2004 totaled
$1,256,000 at a cost of 1.69% compared to $1,647,000 and 2.27% in the prior
period. The cost of each type of deposit decreased in the lower interest rate
environment in 2004. The cost of deposits was also favorably impacted by a
change in the mix, with a higher percentage of lower costing transaction and
savings accounts in 2004. For the three months ended, March 31, 2004, the
average transaction and savings accounts to total average deposits was 60.0%
compared to 55.4% for the similar period in 2003.
18
Other Income
- ------------
Other income totaled $939,000 for the three months ended March 31,
2004, compared to $888,000 during the similar period in 2003. Net realized gains
on sales of securities were $178,000 in 2004 compared to $143,000 in 2003, with
the increase principally due to the sale of mortgage-backed securities in 2004.
The Company also sold $3.6 million of 30 year fixed rate mortgages, for interest
rate risk management, for a gain of $57,000, compared to $140,000 gains on sales
of $3.9 million mortgages in 2003.
Income from fiduciary activities increased $36,000 to $86,000
principally due to an estate fee received in the current period. Earnings on the
cash surrender value of bank-owned life insurance (BOLI, included in other) was
$79,000 for the three months ended March 31, 2004, increasing from $29,000 in
the similar period in 2003. The increase was due to the purchase of an
additional $2.5 million of BOLI, during the third quarter of 2003, the proceeds
of which are used to fund employee benefit plans.
Other Expense
- -------------
Other expense for the three months ended March 31, 2004 totaled
$2,595,000, an increase of $129,000, or 5.2%, when compared to $2,466,000 for
the similar period in 2003. Salary and benefits increased $72,000 to $1,302,000,
principally due to increases in expense related to the employee stock ownership
plan (ESOP) of $29,000 and health care insurance, $13,000. The loss on lease
residuals was $90,000 for the current period, with no expense incurred for the
similar period in 2003. With 21 vehicles remaining in the portfolio, the company
expects this expense to decrease throughout the year.
The Company has a new branch facility under construction in the
Marshalls Creek area of Monroe County. The staff was hired in April. The Company
anticipates an increase in salary and occupancy expense as well as certain
one-time marketing costs which may be incurred in the second and third quarter.
Income Tax Expense
- ------------------
Income tax expense totaled $452,000 for an effective tax rate of
27.4% for the period ending March 31, 2004 compared to $425,000 and 27.7% for
the similar period in 2003. The effective tax rate is lower than the statutory
rate due to tax-exempt interest income on certain investments and loans.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Market Risk
- -----------
There were no significant changes as of March 31, 2004 from the
information presented in the Form 10-K for the year-ended December 31, 2003.
Item 4: Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over
financial reporting that occurred during the Company's last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
19
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Issuer Purchases of
--------------------
Equity Securities
--------------------
Maximum number
Total number of of shares (or approximate
shares purchased dollar value) that may yet
Total number Average price as part of publicly be purchased
of shares paid per announced plans under the plans
purchased share or programs or programs
------------ ------------- -------------------- ---------------------------
January 1-January 31, 2004 - - - -
February 1-February 29, 2004 - - - -
March 1 - March 31, 2004 3,544 (1) $26.24 - -
----- ------ ------ ------
3,544 $26.24 - -
===== ====== ====== ======
(1) Purchases related to the Company's Employee Stock Ownership Plan (ESOP)
related to forfeitures of shares by participants and purchase of shares
from participants.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
20
Item 5. Other Information
None
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 seven 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***
10.10 Salary Continuation Agreement between the Bank and Joseph A. Kneller****
10.11 Salary Continuation Agreement between the Bank and John H. Sanders****
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32.1 Section 1350 Certification
(b) Reports on Form 8-K
On January 27, 2004, the Registrant filed a report on Form 8-K
reporting under Item 12 the announcement of earnings for the year ended
December 31, 2003. No financial statements were filed with this report.
- -------------------
* 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 identically numbered exhibits of
the Registrant's Form 10-K filed with the Commission on March 31, 1997.
*** Incorporated herein by reference into the identically numbered exhibits of
the Registrant's Form 10-K filed with the Commission on March 20, 2000.
**** Incorporated herein by reference to the identically numbered exhibit to the
Registrant's Form 10-K filed with the Commission on March 22, 2004.
21
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: May 13, 2004 By: /s/William W. Davis, Jr.
----------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2004 By: /s/Lewis J. Critelli
----------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22