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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 September 30, 2004
------------------
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
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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
--------------
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 November 10, 2004
- --------------------------------------- --------------------------------
common stock, par value $0.10 per share 2,693,118
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds and Issuer Purchases of Equity Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits 24
Signatures 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
September 30, December 31,
2004 2003
---- ----
Unaudited
ASSETS
Cash and due from banks $ 10,290 $ 9,110
Interest bearing deposits with banks 101 64
Federal funds sold 610 --
--------- ---------
Cash and cash equivalents 11,001 9,174
Securities available for sale 111,100 124,823
Securities held to maturity, fair value 2004
$5,912, 2003: $5,975
5,720 5,748
Loans receivable (net of unearned income) 256,919 233,733
Less: Allowance for loan losses 3,418 3,267
--------- ---------
Net loans receivable 253,501 230,466
Investment in FHLB Stock 2,183 2,002
Bank premises and equipment, net 5,602 5,596
Accrued interest receivable 1,667 1,783
Other assets 7,797 7,891
--------- ---------
TOTAL ASSETS $ 398,571 $ 387,483
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 51,752 $ 39,517
Interest bearing 266,193 267,152
Total deposits 317,945 306,669
Short-term borrowings 11,194 12,859
Long-term debt 23,000 23,000
Accrued interest payable 1,136 1,309
Other liabilities 508 815
--------- ---------
TOTAL LIABILITIES 353,783 344,652
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized
10,000,000 shares issued 2,705,715 shares 270 270
Surplus 5,180 4,933
Retained earnings 39,338 37,042
Treasury stock at cost: 2004: 12,597 shares, 2003:
21,318 (204) (295)
Unearned ESOP shares (400) (550)
Accumulated other comprehensive income 604 1,431
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 44,788 42,831
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 398,571 $ 387,483
========= =========
See accompanying notes to the 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
--------------------- ----------------------
2004 2003 2004 2003
------ ------ -------- -------
INTEREST INCOME
Loans receivable, including fees $3,770 $3,590 $10,886 $10,853
Securities 1,004 1,148 3,155 3,561
Other 8 22 25 87
------ ------ ------- -------
Total interest income 4,782 4,760 14,066 14,501
INTEREST EXPENSE
Deposits 858 1,114 2,628 3,641
Short-term borrowings 46 23 103 73
Long-term debt 320 324 964 962
------ ------ ------- -------
Total interest expense 1,224 1,461 3,695 4,676
------ ------ ------- -------
NET INTEREST INCOME 3,558 3,299 10,371 9,825
PROVISION FOR LOAN LOSSES 100 165 390 495
------ ------ ------- -------
NET INTEREST INCOME AFTER
PROVSION FOR LOAN LOSSES 3,458 3,134 9,981 9,330
------ ------ ------- -------
OTHER INCOME
Service charges and fees 575 489 1,489 1,391
Income from fiduciary activities 83 85 238 189
Net realized gains on sales of securities 51 156 313 542
Gain on sale of loans 1 19 63 192
Other 161 136 469 381
------ ------ ------- -------
Total other income 871 885 2,572 2,695
------ ------ ------- -------
OTHER EXPENSES
Salaries and employee benefits 1,276 1,232 3,840 3,681
Occupancy, furniture & equipment, net 335 346 1,025 1,061
Data processing related 149 137 451 415
Losses on lease residuals -- -- 90 25
Taxes, other than income 2 (3) 185 167
Professional fees 77 67 233 195
Other 670 638 1,724 1,814
------ ------ ------- -------
Total other expenses 2,509 2,417 7,548 7,358
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 1,820 1,602 5,005 4,667
INCOME TAX EXPENSE 500 408 1,358 1,241
------ ------ ------- -------
NET INCOME $1,320 $1,194 $ 3,647 $ 3,426
====== ====== ======= =======
BASIC EARNINGS PER SHARE $ 0.50 $ 0.46 $ 1.38 $ 1.32
====== ====== ======= =======
DILUTED EARNINGS PER SHARE $ 0.49 $ 0.45 $ 1.35 $ 1.30
====== ====== ======= =======
Cash dividends per share $ 0.17 $0.16 $ 0.51 $ 0.48
====== ===== ======= =======
See accompanying notes to the consolidated financial statements.
4
NORWOOD FINANCIAL CORP
Consolidated statements of changes in stockholders' equity (unaudited)
(dollars in thousands, except per share
data) Number of
shares Common Retained Treasury
issued Stock Surplus Earnings Stock
--------- ----- ------- -------- --------
Balance December 31, 2002 1,803,824 $180 $4,762 $34,082 ($640)
Comprehensive Income:
Net Income 3,426
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects
Total comprehensive income
Cash dividends declared, $.48 per share (1,248)
Three-for-two stock split in the form of
a 50% stock dividend 901,891 90 (91)
Stock options exercised (24) 358
Tax benefit of stock options exercised 20
Acquisition of treasury stock (46)
Release of earned ESOP shares 168
--------- ---- ------ ------- -----
Balance, September 30, 2003 2,705,715 $270 $4,835 $36,260 ($328)
========= ==== ====== ======= =====
Number of
shares Common Retained Treasury
Issued Stock Surplus Earnings Stock
--------- ----- ------- -------- --------
Balance December 31, 2003 2,705,715 $270 $4,933 $37,042 ($295)
Comprehensive Income:
Net Income 3,647
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects
Total comprehensive income
Cash dividends declared $.51 per share (1,351)
Stock options exercised (20) 186
Tax benefit of stock options exercised 14
Acquisition of treasury stock (95)
Release of earned ESOP shares 253
--------- ---- ------ ------- -----
Balance, September 30, 2004 2,705,715 $270 $5,180 $39,338 ($204)
========= ==== ====== ======= =====
(dollars in thousands, except per share Accumulated
data) Unearned Other
ESOP Comprehensive
Shares Income(Loss) Total
------ ------------- --------
Balance December 31, 2002 ($750) $2,491 $40,125
Comprehensive Income:
Net Income 3,426
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects (1,092) (1,092)
-------
Total comprehensive income 2,334
-------
Cash dividends declared, $.48 per share (1,248)
Three-for-two stock split in the form of
a 50% stock dividend (1)
Stock options exercised 334
Tax benefit of stock options exercised 20
Acquisition of treasury stock (46)
Release of earned ESOP shares 149 317
----- ------ -------
Balance, September 30, 2003 ($601) $1,399 $41,835
==== ====== =======
Accumulated
Unearned Other
ESOP Comprehensive
Shares Income (Loss) Total
------ ------------- --------
Balance December 31, 2003 ($550) $1,431 $42,831
Comprehensive Income:
Net Income 3,647
Change in unrealized gains (losses) on
securities available for sale, net of
reclassification adjustment and tax
effects (827) (827)
-----
Total comprehensive income 2,820
-----
Cash dividends declared $.51 per share (1,351)
Stock options exercised 166
Tax benefit of stock options exercised 14
Acquisition of treasury stock (95)
Release of earned ESOP shares 150 403
----- ---- -------
Balance, September 30, 2004 ($400) $604 $44,788
==== ==== =======
See accompanying notes to the Consolidated Financial Statements
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Nine Months Ended
-----------------
September 30,
-------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,647 $ 3,426
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 390 495
Depreciation 407 464
Amortization of intangible assets 39 70
Deferred income taxes (221) (583)
Net amortization of securities premiums and discounts 404 414
Net realized gain on sales of securities (313) (542)
Earnings on life insurance policy (236) (168)
Net gain (loss) on sale of bank premises and equipment and foreclosed real estate (12) (9)
Net gain on sale of mortgage loans (63) (192)
Mortgage loans originated for sale (3,966) (7,060)
Proceeds from sale of mortgage loans 4,029 7,252
Release of ESOP shares 403 317
Tax benefit of stock options exercised 14 20
Decrease in accrued interest receivable and other assets 644 971
Increase in accrued interest payable and other liabilities 162 156
------- -------
Net cash provided by operating activities 5,328 5,049
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 11,537 16,636
Proceeds from maturities and principal reductions on mortgage-backed securities 31,501 60,077
Purchases (30,666) (90,850)
Securities held to maturity proceeds 35 35
Increase in investment in FHLB stock (181) (298)
Net increase in loans (23,684) (11,775)
Purchase of life insurance policy -- (2,550)
Purchase of bank premises and equipment, net of sales (423) (107)
Proceeds from sale of bank equipment and foreclosed real estate 44 44
------- -------
-- --
Net cash used in investing activities (11,837) (28,788)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,276 23,608
Net (decrease) increase in short term borrowings (1,665) 909
Stock options exercised 166 334
Acquisition of treasury stock (95) (46)
Cash dividends paid and cash paid in lieu of fractional shares (1,346) (1,244)
------- -------
Net cash provided by financing activities 8,336 23,561
------- -------
Increase in cash and cash equivalents 1,827 (178)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,174 16,244
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,001 $16,066
======= =======
See accompanying notes to the unaudited consolidated financial statements
6
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. 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 and nine month periods ended
September 30, 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 Nine Months Ended
September 30, September 30,
------------- --------------
2004 2003 2004 2003
---- ------ ---- ----
Basic EPS weighted average shares outstanding 2,650 2,614 2,644 2,599
Dilutive effect of stock options 53 57 55 47
------ ----- ----- -----
Diluted EPS weighted average shares outstanding 2,703 2,671 2,699 2,646
===== ===== ===== =====
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 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
7
recognition provisions of FASB Statement No. 123 "Accounting for Stock-Based
Compensation", to stock based employee compensation.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
In thousands, except for per share data) 2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $1,320 $1,194 $3,647 $3,426
Total stock based employee compensation determined
under fair value based method for all awards, net of taxes (36) (10) (108) (40)
------ ------ ------ ------
Pro forma net income $1,284 $1,184 $3,539 $3,386
====== ====== ====== ======
Earnings per share (basic)
As Reported $ .50 $ .46 $ 1.38 $ 1.32
Pro forma .49 .45 1.34 1.30
.49 .45
Earnings per share (assuming dilution)
As Reported .49 .45 1.35 1.30
Pro forma .48 .44 1.31 1.28
During the nine months ended September 30, 2004, there were 12,360 stock options
exercised at an average exercise price of $13.38.
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 periods ended September 30, 2004 and
2003 were $3,868,000 and $4,882,000 respectively. Cash payments for income taxes
in 2004 were $1,381,000 compared to $1,351,000 in 2003. Non-cash investing
activity for 2004 and 2003 included foreclosed mortgage loans and repossession
of other assets of $259,000 and $492,000, 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 Nine Months
- ------------- ------------ ----------
Ended September 30 Ended September 30
------------------ -------------------
2004 2003 2004 2003
------- ------ ------- ------
Unrealized holding gains/(losses)
on available for sale securities $ 1,514 $(1,428) $ (940) $(1,105)
Reclassification adjustment for gains
realized in income (51) (156) (313) (542)
---------- ------- ------- -------
Net unrealized gains/(losses) 1,463 (1,584) (1,253) (1,647)
Income tax (benefit) 497 (538) (426) (555)
-------- ------- ------- -------
Other comprehensive income (loss) $ 966 $(1,046) $ (827) $(1,092)
======== ======= ======= =======
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:
(in thousands) September 30
---------------------
2004 2003
---- ----
Commitments to grant loans $14,815 $12,161
Unfunded commitments under lines of credit 30,538 26,019
Standby letters of credit 1,358 1,104
------- -------
$46,711 $39,284
======= =======
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.
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
9
required under the corresponding guarantees. The current amount of the liability
as of September 30, 2004 for guarantees under standby letters of credit issued
is not material.
8. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
During March 2004, the Financial Accounting Standards Board (FASB) issued
an exposure draft of a new standard entitled "Share Based Payment," which would
amend FASB Statement No. 123 and FASB Statement No. 95, "Statement of Cash
Flows." The new accounting standard, as proposed, would require the expensing of
stock options issued by the Company in the financial statements using a
fair-value-based method and would be effective for periods beginning after June
15, 2005. See Note 4 "Stock Option Plans" for pro forma disclosures regarding
the effect on net income and income per share if we had applied the fair value
recognition provisions of the SFAS No. 123. Depending on the method adopted by
the Company to calculate stock-based compensation expense upon the adoption of
Share Based Payment, the pro forma disclosure in Note 4 may not be indicative of
the stock-based compensation expense to be recognized in periods beginning after
June 15, 2005.
In March 2004, the SEC released Staff Accounting Bulletin (SAB) No. 105,
"Application of Accounting Principles to Loan Commitments." SAB 105 provides
guidance about the measurements of loan commitments recognized at fair value
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SAB 105 also requires companies to disclose their accounting policy
for those loan commitments including methods and assumptions used to estimate
fair value and associated hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of SAB 105 did not have a material effect on our consolidated
financial statements.
In March 2004, The FASB's Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No., 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" (EITF 03-1). EITF 03-1
provides guidance regarding the meaning of other-than-temporary impairment and
its application to investments classified as either available-for-sale or
held-to-maturity under FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and to equity securities accounted
for under the cost method. Included in EITF 03-1 is guidance on how to account
for impairments that are solely due to interest rate changes, including changes
resulting from increases in sector credit spreads. This guidance was to become
effective for reporting periods beginning after June 15, 2004. However, on
September 30, 2004, the FASB issued a Staff Position that delays the effective
date for the recognition and measurement guidance of EITF 03-1 until additional
clarifying guidance is issued. This additional guidance is expected to be issued
during and be effective for the fourth quarter of 2004. We are not able to
assess the impact of the adoption of EITF 03-1 until final guidance is issued.
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.
10
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 its
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 September 30, 2004 were $398.6 million compared to
$387.5 million as of December 31, 2003. The increase was principally due to loan
growth of $23.2 million funded in part by $11.3 million of deposit growth and
cash flow from the securities available for sale portfolio.
SECURITIES
- ----------
The fair value of securities available for sale as of September 30, 2004
was $111.1 million declining from $124.8 million as of December 31, 2003. The
decrease was principally due to a decline of $4.2 million in callable bonds of
U.S. Government agencies and the sale of $11.5 million of securities. The
proceeds were used to fund loan growth. 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). Total mortgage-backed securities decreased $9.3 million from December 31,
2003 to September 30, 2004, principally due to the sale of $7.4 million of
securities.
LOANS RECEIVABLE
- ----------------
Total loans receivable were $256.9 million as of September 30, 2004, an
increase of $23.2 million or 9.9% compared to $233.7 million as of December 31,
2003. Increases in Commercial Real Estate, $13.9 million, and home equity
lending, $11.2 million, were partially offset by a continued decline in indirect
lending of $6 million.
Commercial real estate activity remains strong, with the portfolio
increasing $13.9 million, or 14.5%. The growth was principally in the Monroe
County Market Area.
The Company's indirect lending portfolio (included in consumer loans to
individuals) declined $6 million to $22.4 million as of September 30, 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 and into 2005.
The Company sold $4.0 million of 30 year fixed rate residential mortgages
at a gain of $63,000 (included in other income) for the nine months ended
September 30, 2004. The Company holds in its portfolio its 15 year originations.
During 2004, the Company has emphasized home equity lending through its branch
system. As a result, home equity loans and lines increased $11.2 million, to
$35.0 million.
11
During the third quarter, the Company liquidated its final leased vehicles.
The losses on the sales were covered by the reserve for residual losses. The
Company anticipates no further leasing activity. 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, 2004 December 31, 2003
- ---------------------- ------------------- -----------------
$ % $ %
--- --- --- ---
Real Estate-Residential 89,328 34.7 77,459 33.1
Commercial 110,207 42.8 96,276 41.1
Construction 3,873 1.5 5,904 2.5
Commercial, financial and agricultural 23,074 9.0 17,022 7.3
Consumer loans to individuals 30,821 12.0 37,219 15.9
Lease financing, net of unearned income -- -- 316 0.1
-------- ----- -------- -----
Total loans 257,303 100.0% 234,196 100.0%
-------- ===== -------- =====
Unearned income and deferred fees (384) (463)
-------- --------
256,919 233,733
Allowance for loan losses (3,418) (3,267)
-------- --------
Net loans receivable $253,501 $230,466
======== ========
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 Months Nine Months
------------ -----------
Ended September 30 Ended September 30
------------------- ------------------
(dollars in thousands) 2004 2003 2004 2003
---------------------- ---- ---- ---- ----
Balance, beginning $ 3,362 $ 3,294 $ 3,267 $ 3,146
Provision for loan losses 100 165 390 495
Charge-offs (116) (197) (325) (448)
Recoveries 72 10 86 79
------- ------- ------- -------
Net charge-offs (44) (187) (239) (369)
------- ------- ------- -------
Balance, ending $ 3,418 $ 3,272 $ 3,418 $ 3,272
======= ======= ======= =======
Allowance to total loans 1.33% 1.43% 1.33% 1.43%
Net charge-offs to average loans
(annualized) .07% .33% .13% .22%
12
The allowance for loan losses totaled $3,418,000 as of September 30, 2004
and represented 1.33% of total loans, compared to $3,267,000 at year end. Net
charge-offs for the nine month period ended September 30, 2004, totaled $239,000
and consisted principally of losses on the sale of repossessed automobiles.
During the third quarter of 2004, the Company sold a block of old charged-off
loans to a third party for a one-time recovery of $39,000.
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 September 30, 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.
As of September 30, 2004, non-performing loans totaled $68,000, 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) September 30, 2004 December 31, 2003
------------------ -----------------
Loans accounted for on a non accrual basis:
Commercial and all other $ -- $ --
Real Estate 46 125
Consumer -- --
---- ----
Total 46 125
Accruing loans which are contractually
Past due 90 days or more 22 18
---- ----
Total non-performing loans 68 143
Foreclosed real estate -- --
---- ----
Total non-performing assets $ 68 $143
==== ====
Allowance for loans losses
coverage of non-performing loans 50.3x 22.8x
Non-performing loans to total loans .03% .06%
Non-performing assets to total assets .02% .04%
DEPOSITS
- -------
Total deposits as of September 30, 2004 were $317.9 million increasing from
$306.7 million as of December 31, 2003. The $12.2 million, or 31%, increase in
non-interest bearing demand deposits is due in part to new commercial accounts
and the seasonality of certain corporate and municipal accounts. Time deposits
greater than $100,000 decreased principally due to scheduled maturities of
school district funds. The Company expects to competitively bid for school
district funds during the fourth quarter.
13
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) September 30, 2004 December 31, 2003
------------------ -----------------
Non-interest bearing demand $51,752 $39,517
Interest bearing demand 44,828 40,926
Money Market 48,722 46,481
Savings 58,905 55,895
Time deposits <$100,000 89,753 94,478
Time deposits >$100,000 23,985 29,372
-------- --------
Total $317,945 $306,669
======== ========
SHORT-TERM BORROWINGS
- ---------------------
Short-term borrowings as of September 30, 2004 were $11.2 million compared
to $12.9 million as of December 31, 2003. The balance consists principally of
cash management account balances.
OFF BALANCE SHEET ARRANGEMENTS
- ------------------------------
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 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:
September 30, December 31,
2004 2003
---- ----
(In thousands)
Commitments to grant loans $14,815 $12,197
Unfunded commitments under lines of credit 30,538 26,269
Standby letters of credit 1,358 2,128
------- -------
$46,711 $40,594
======= =======
STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
- ---------------------------------------
As of September 30, 2004, total stockholders' equity totaled $44.8
million, a net increase of $1,957,000 from December 31, 2003. The net change in
stockholders' equity was primarily due to $3,647,000 in net income which was
partially offset by $1,351,000 of dividends declared. In addition, accumulated
other comprehensive income decreased $827,000 due to a decrease in fair value of
securities in the available for sale portfolio. This decrease in fair value is
the result of a change in interest rates, which may impact the fair value of the
securities.
14
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:
September 30, 2004 December 31, 2003
------------------ -----------------
Tier 1 Capital
(To average assets) 11.03% 10.52%
(To risk-weighted assets) 15.59% 15.58%
Total Capital
(To risk-weighted assets) 17.02% 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 September 30, 2004
and December 31, 2003.
LIQUIDITY
- ---------
As of September 30, 2004, the Company had cash and cash equivalents of
$11.0 million in the form of cash, due from banks, federal funds sold and
short-term deposits with other institutions. In addition, the Company had total
securities available for sale of $111.1 million which could be used for
liquidity needs. This totals $122.1 million and represents 30.6% 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 September 30, 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 $127.4 million, of which $23
million of long-term borrowings was outstanding as of September 30, 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 September 30,
------------------------------------------------------------------------
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 $ 2,526 $8 1.27% $ 7,901 $ 21 1.06%
Interest bearing deposits with banks 87 - - 138 1 2.90
Securities held-to-maturity 5,718 126 8.81 6,180 162 10.49
Securities available for sale:
Taxable 98,389 791 3.22 106,714 944 3.54
Tax-exempt 18,398 205 4.46 18,491 197 4.26
-------- ------ -------- ------
Total securities available for sale (1) 116,787 996 3.41 125,205 1,141 3.65
Loans receivable (4) (5) 253,123 3,807 6.01 226,742 3,611 6.37
-------- ------ -------- ------
Total interest earning assets 378,241 4,937 5.22 366,166 4,936 5.39
Non-interest earning assets:
Cash and due from banks 8,273 10,168
Allowance for loan losses (3,403) (3,336)
Other assets 14,963 14,552
-------- --------
Total non-interest earning assets 19,833 21,384
-------- --------
Total Assets $398,074 $387,550
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $ 91,246 137 0.60% $ 83,915 121 0.58%
Savings 59,502 70 0.47 56,400 94 0.67
Time 114,368 651 2.28 127,317 899 2.82
-------- ------ 2.28 -------- ------
Total interest bearing deposits 265,116 858 1.29 267,632 1,114 1.66
Short-term borrowings 14,155 46 1.30 9,140 23 1.01
Long-term debt 23,000 320 5.57 23,000 324 5.63
-------- ------ -------- ------
Total interest bearing liabilities 302,271 1,224 1.62 299,772 1,461 1.95
Non-interest bearing liabilities:
Demand deposits 50,851 43,691
Other liabilities 1,240 2,557
-------- --------
Total non-interest bearing liabilities 52,091 46,248
Stockholders' equity 43,712 41,530
-------- --------
Total Liabilities and Stockholders' Equity $398,074 $387,550
======== ========
Net interest income (tax equivalent basis) 3,713 3.60% 3,475 3.44%
==== ====
Tax-equivalent basis adjustment (155) (176)
------ ------
Net interest income $3,558 $3,299
====== ======
Net interest margin (tax equivalent basis) 3.93% 3.80%
==== ====
(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 September 30, 2004 Compared to
Three months ended September 30, 2003
Variance due to
Volume Rate Net
-------------------------------
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (47) $ 34 $ (13)
Interest bearing deposits with banks -- (1) (1)
Securities held to maturity (11) (25) (36)
Securities available for sale:
Taxable (71) (82) (153)
Tax-exempt securities (6) 14 8
------- ------- -------
Total securities (77) (68) (145)
Loans receivable 1,223 (1,027) 196
------- ------- -------
Total interest earning assets 1,088 (1,087) 1
Interest bearing liabilities:
Interest-bearing demand and money market 11 5 16
Savings 31 (55) (24)
Time (85) (163) (248)
------- ------- -------
Total interest bearing deposits (43) (213) (256)
Short-term borrowings 15 8 23
Other borrowings -- (4) (4)
Total interest bearing liabilities (28) (209) (237)
------- ------- -------
Net interest income (tax-equivalent basis) $ 1,116 $ (878) $ 238
======= ======= =======
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.
COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003.
GENERAL
For the three months ended September 30, 2004, net income totaled
$1,320,000 which represents an increase of $126,000, or 10.6%, over $1,194,000
earned in the similar period of 2003. Earnings per share for the current period
were $.50 basic and $.49 on a diluted basis, compared to $.46 basic and $.45 on
a diluted basis for the three months ended September 30, 2003. The resulting
annualized return on average assets and return on average equity for the three
months ended September 30, 2004, were 1.32% and 12.01%, respectively compared to
1.22% and 11.41%, respectively for the similar period in 2003.
17
The following table sets forth the effect on net income:
Three months ended
------------------
September 30, 2004 to September 30, 2003
----------------------------------------
(dollars in thousands)
Net income for the three months ended September 30, 2003 $1,194
------
Net interest income
259
Provision for loan losses
65
Net realized gains on sales of securities
(105)
Gains on sale of loans
(18)
All other income 109
Salaries and employee benefits
(44)
All other expenses
(48)
Income tax effect
(92)
------
Net income for the nine months ended September 30, 2004 $1,320
======
NET INTEREST INCOME
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the three
months ended September 30, 2004 totaled $3,713,000, an increase of $238,000 or
6.8% over the similar period in 2003. The fte net interest spread and net
interest margin were 3.60% and 3.93%, respectively, increasing from 3.44% and
3.80%, respectively in 2003.
Interest income(fte) totaled $4,937,000 at a yield of 5.22% compared to
$4,936,000 and a yield of 5.39% in 2003. The drop in yield is principally due to
lower reinvestment rates on cash flow from securities and loans.The decrease in
yield was partially offset by an increase in volume and change in mix. Average
loans, which have a higher yield than securities, increased $26.4 million and
represented 66.9% of total average earning assets for the 2004 period compared
to 61.9% for the 2003 period. Short term interest rates also increased 75 basis
during the current quarter, which has increased the yield on floating rate loans
tied to prime rate.
Interest expense for the three months ended September 30, 2004 totaled
$1,224,000 at an average cost of 1.62% compared to $1,461,000 and 1.95% in 2003.
This is due primarily to the decrease of 54 basis points in the cost of time
deposits.
OTHER INCOME
- ------------
Other income totaled $871,000 for the three months ended September 30, 2004
compared to $885,000 during the similar period in 2003. Net realized gains on
the sales of securities were $51,000 in 2004, declining from $156,000 in the
similar period of 2003. The decrease was principally due to gains on corporate
bonds sold in 2003. Service charges and fees increased $86,000, to $575,000 in
2004. The increase was principally due to higher fees related to customer checks
with non-sufficient funds as a result of the Bank's new Overdraft Manager
Service. The level of fixed rate residential mortgages sold into the secondary
market was lower in 2004, resulting in a gain of $1,000, decreasing from $19,000
in 2003. Commissions on sales of non-deposit investment products (included in
Other) were $46,000 in 2004 compared to $29,000 in 2003.
OTHER EXPENSES
- --------------
Other expenses for the three months ended September 30, 2004, totaled
$2,509,000, an increase of $92,000, or 3.8%, over the similar period in 2003.
Salaries and employee benefits increased $44,000, or 3.6%, principally due
to increases in expense related to the Company's Employee Stock Ownership Plan
(ESOP) of $20,000 and to an increase in health insurance costs.
18
The Bank made a $100,000 charitable contribution (included in Other) in the
third quarter of 2004. The contribution qualifies for the PA Education
Improvement Tax Credit. As a result, a $90,000 tax credit was recorded against
the PA Shares Tax Liability (Included in Taxes, Other than income). The Company
made a similar contribution in 2003. The Company incurred $19,000 of expenses
related to advertising and direct mail in opening the Marshalls Creek Office in
the third quarter of 2004.
INCOME TAX EXPENSE
- ------------------
Income tax expense totaled $500,000 for an effective tax rate of 27.5% for
the three months ended September 30, 2004, compared to $408,000 and 25.4% for
the similar period in 2003. The effective rate is lower than the statutory rate
due to tax-exempt interest income on certain investments and loans. The rate is
higher in 2004 due to higher level of pre-tax income.
19
RESULTS OF OPERATIONS
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands) Nine Months Ended September 30,
------------------------------------------------------------------------
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 $ 3,147 $ 24 1.02% $ 9,811 $ 86 1.17%
Interest bearing deposits with banks 110 1 1.21 149 1 0.89
Securities held-to-maturity 5,735 379 8.81 6,194 434 9.34
Securities available for sale:
Taxable 101,177 2,387 3.15 101,789 2,795 3.66
Tax-exempt 18,174 786 5.77 16,651 770 6.17
-------- ------- -------- -------
Total securities available for sale (1) 119,351 3,173 3.54 118,440 3,565 4.01
Loans receivable (4) (5) 242,151 10,976 6.04 223,079 10,906 6.52
-------- ------- -------- -------
Total interest earning assets 370,494 14,553 5.24 357,673 14,992 5.59
Non-interest earning assets:
Cash and due from banks 8,515 9,034
Allowance for loan losses (3,346) (3,268)
Other assets 14,893 13,591
-------- -------
Total non-interest earning assets 20,062 19,357
-------- --------
Total Assets $390,556 $377,030
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $88,405 395 0.60% $ 80,194 398 0.66%
Savings 57,742 202 0.47 54,494 358 0.88
Time 117,920 2,031 2.30 128,879 2,885 2.98
-------- ------- -------- -------
Total interest bearing deposits 264,067 2,628 1.33 263,567 3,641 1.84
Short-term borrowings 12,677 103 1.08 8,543 73 1.14
Long-term debt 23,000 964 5.59 23,000 962 5.58
-------- ------- -------- -------
Total interest bearing liabilities 299,744 3,695 1.64 295,110 4,676 2.11
Non-interest bearing liabilities:
Demand deposits 45,594 37,936
Other liabilities 1,656 2,909
-------- --------
Total non-interest bearing liabilities 47,250 40,845
Stockholders' equity 43,562 41,075
-------- --------
Total Liabilities and Stockholders' Equity $390,556 $377,030
======== ========
Net interest income (tax equivalent basis) 10,858 3.59% 10,316 3.48%
==== ====
Tax-equivalent basis adjustment (487) (491)
------- -------
Net interest income $10,371 $ 9,825
======= =======
Net interest margin (tax equivalent basis) 3.91% 3.85%
==== ====
(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
(6) Loan balances include non-accrual loans and are net of unearned income.
(7) Loan yields include the effect of amortization of deferred fees, net of costs.
20
Rate/Volume analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and expense.
Increase/(Decrease)
Nine months ended September 30, 2004 Compared to
Nine months ended September 30, 2003
Variance due to
Volume Rate Net
------ ---- ---
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold $ (54) $ (8) $ (62)
Interest bearing deposits with banks -- -- --
Securities held to maturity (31) (24) (55)
Securities available for sale:
Taxable (17) (391) (408)
Tax-exempt securities 87 (71) 16
------- ------- -------
Total securities available for sale 70 (462) (392)
Loans receivable 1,183 (1,113) 70
------- ------- -------
Total interest earning assets 1,168 (1,607) (439)
Interest bearing liabilities:
Interest-bearing demand and money market 52 (55) (3)
Savings 33 (189) (156)
Time (231) (623) (854)
------- ------- -------
Total interest bearing deposits (146) (867) (1,013)
Short-term borrowings 36 (6) 30
Other borrowings -- 2 2
------- ------- -------
Total interest bearing liabilities (110) (871) (981)
------- ------- -------
Net interest income (tax-equivalent basis) $ 1,278 $ (736) $ 542
======= ======= =======
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.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO
SEPTEMBER 30, 2003
GENERAL
For the nine months ended September 30, 2004, net income totaled
$3,647,000, which represents an increase of $221,000, or 6.5% when compared to
$3,426,000 earned in the similar period of 2003. Basic and diluted earnings per
share were $1.38 and $1.35, respectively, in 2004 compared to $1.32 and
$1.30,respectively, in 2003. The resulting annualized return on average assets
for the nine months ended September 30, 2004 was 1.24%, with a return on average
equity of 11.18%.
21
The following table sets forth changes in net income:
(in thousands) Nine months ended
-----------------
September 30, 2004 to September 30, 2003
---------------------------------------
Net income nine months ended September 30, 2003 $3,426
------
Net interest income 546
Provision for loan losses 105
Net realized gains on sales of securities (229)
Gains on sale of loans (129)
All other income 235
Salaries and employee benefits (159)
Losses on lease residuals (65)
All other expenses 34
Income tax effect (117)
------
Net income for the nine months ended September 30, 2004 $3,647
======
NET INTEREST INCOME
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the nine
months ended September 30, 2004 totaled $10,858,000, an increase of $542,000, or
5.3%, over the similar period in 2003. The (fte) net interest spread and net
interest margin were 3.59% and 3.91%, respectively, increasing from 3.48% and
3.85%, respectively, for the similar period in 2003.
Interest income (fte) for the 2004 period totaled $14,553,000 with a yield
of 5.24% compared to $14,992,000 and a yield of 5.59% in 2003. The decrease in
yield is due in part to the cumulative impact of lower rate assets that have
been put on the balance sheet in the last two years. This has been partially
offset by the recent increase in short term rates with the Federal Funds rate
increasing from 1.00% to 1.75% and the prime rate increasing from 4.00% to 4.75%
during the third quarter. The decrease in earning asset yield was also partially
offset by an increase in loan volume and a change in asset mix. Average loans
increased $19.1 million and represented 65.4% of total average earning assets
for the nine months ended September 30, 2004 compared to 62.4% for the similar
period in 2003.
Interest expense for the 2004 period totaled $3,695,000 at an average cost
of 1.64% compared to $4,676,000 at 2.11% for the similar period in the prior
year. The average cost of each type of deposit decreased in 2004. With the
recent increases in short-term interest rates, the Company expects a slight
increase in deposit rates during the fourth quarter. The cost of deposits was
also favorably impacted by a change in deposit mix, with a higher percentage of
lower costing transaction and savings accounts in 2004. For the nine months
ended September 30, 2004, the average transaction (including non-interest
bearing demand deposits) and savings accounts to total average deposits was
61.9% compared to 57.3% for the similar period in 2003.
OTHER INCOME
- ------------
Other income totaled $2,572,000 for the nine months ended September 30,
2004 compared to $2,695,000 for the similar period in 2003. Net realized gains
on sales of securities were $313,000 in 2004, declining from
22
$542,000 in 2003. The decrease was principally due to the higher level of gains
on corporate bonds sold in 2003. Gains on sales of loans were $63,000 on the
sale of $4.0 million of loans in 2004, decreasing from $192,000 on the sale of
$7.2 million in 2003. Income from fiduciary activities increased $49,000 to
$238,000, due in part to higher level of estate fees collected in 2004. Fees on
non-sufficient funds items (included in service charges and fees) increased
$141,000 to $572,000 principally due to the Overdraft Manager Service introduced
in the third quarter of 2004. Earnings on the cash surrender of BOLI (included
in Other) was $257,000 for the nine months ended September 30, 2004, increasing
from $185,000 in the similar period of 2003. The increase was due to the
purchase of an additional $2.5 million of BOLI (included in Other Assets) during
the third quarter of 2003, the earnings of which were used to offset expenses
related to employee benefit plans.
OTHER EXPENSES
--------------
Other expense totaled $7,548,000 for the nine months ended September 30,
2004, an increase of $190,000, or 2.6%, over the $7,358,000 for the similar
period of 2003.
Salaries and employee benefits increased $159,000, to $3,840,000
principally due to increases in ESOP costs, $68,000, and health insurance
premiums of $35,000. The expense associated with losses on lease residuals was
$90,000 in the current period compared to $25,000 in the similar period in 2003.
The Company liquidated its final vehicles in the third quarter, with no
additional losses.
In July, the Company opened a new branch in the Marshalls Creek area of
Monroe County. Expenses related to the new branch total $110,000, which includes
some one-time marketing costs.
INCOME TAX EXPENSE
------------------
Income tax expense totaled $1,358,000 for an effective tax rate of 27.1%
for the nine months ended September 30, 2004 compared to $1,241,000 and 26.6%
for the similar period in 2004. The effective 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 September 30, 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.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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 INFORMATION
None
ITEM 6. THE FOLLOWING EXHIBITS ARE EITHER FILED OR INCORPORATED BY REFERENCE
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*
24
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 Section 1350 Certification
- ---------------------------
* 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
Registrants Form 10-K filed with the Commission on March 22, 2004.
25
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: November 10, 2004 By: /s/ William W. Davis, Jr.
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William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2004 By: /s/ Lewis J. Critelli
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Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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