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, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28366
-------
Norwood Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
- --------------------------------------------------------------------------------
(State or otherjurisdiction 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 of May 12, 2005
- --------------------------------------- --------------------------------
common stock, par value $0.10 per share 2,699,736
1
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
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 18
Item 4. Controls and Procedures 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets
(dollars in thousands)
March 31, December 31,
2005 2004
--------- -----------
(unaudited) (audited)
ASSETS
Cash and due from banks $ 7,186 $ 7,488
Interest bearing deposits with banks 29 118
Federal funds sold -- 13,060
--------- ---------
Cash and cash equivalents 7,215 20,666
Securities available for sale 119,490 116,933
Securities held to maturity, fair value 2005
$5,229, 2004: $5,878 5,103 5,724
Loans receivable (net of unearned income) 266,032 254,757
Less: Allowance for loan losses 3,523 3,448
--------- ---------
Net loans receivable 262,509 251,309
Investment in FHLB Stock 2,477 2,225
Bank premises and equipment, net 5,475 5,489
Accrued interest receivable 1,800 1,641
Other Assets 9,119 7,639
--------- ---------
TOTAL ASSETS $ 413,188 $ 411,626
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 46,774 $ 44,450
Interest bearing 270,174 274,195
--------- ---------
Total deposits 316,948 318,645
Short-term borrowings 24,956 22,982
Long-term debt 23,000 23,000
Accrued interest payable 1,188 1,200
Other liabilities 1,501 114
--------- ---------
TOTAL LIABILITIES 367,593 365,941
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized 10,000,000 shares 270 270
issued 2,705,715 shares
Surplus 5,421 5,336
Retained earnings 40,984 40,222
Treasury stock at cost: 2005: 7,872 shares, 2004: 8,913 (157) (149)
Unearned ESOP shares (299) (327)
Accumulated other comprehensive income (624) 333
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 45,595 45,685
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 413,188 $ 411,626
========= =========
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
---------------------
2005 2004
---- ----
INTEREST INCOME
Loans receivable, including fees $3,920 $3,552
Securities 1,041 1,130
Other 12 7
------ ------
Total interest income 4,973 4,689
INTEREST EXPENSE
Deposits 987 908
Short-term borrowings 99 25
Long-term debt 317 323
------ ------
Total interest expense 1,403 1,256
------ ------
NET INTEREST INCOME 3,570 3,433
PROVISION FOR LOAN LOSSES 100 125
------ ------
NET INTEREST INCOME AFTER 3,470 3,308
PROVSION FOR LOAN LOSSES
OTHER INCOME
Service charges and fees 579 441
Income from fiduciary activities 84 86
Net realized gains on sales of securities 77 178
Gain on sale of loans 40 57
Other 140 177
------ ------
Total other income 920 939
OTHER EXPENSES
Salaries and employee benefits 1,387 1,302
Occupancy, furniture & equipment, net 384 352
Data processing related 160 146
Losses on lease residuals -- 90
Taxes, other than income 98 91
Professional fees 109 85
Other 513 529
------ ------
Total other expenses 2,651 2,595
------ ------
INCOME BEFORE INCOME TAXES 1,739 1,652
INCOME TAX EXPENSE 496 452
------ ------
NET INCOME $1,243 $1,200
====== ======
BASIC EARNINGS PER SHARE $ 0.47 $ 0.46
====== ======
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.45
====== ======
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 (Loss) 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
Aquisition 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
========= ==== ====== ======= ===== ===== ====== =======
Accumulated
Number of Unearned Other
shares Common Retained Treasury ESOP Comprehensive
issued Stock Surplus Earnings Stock Shares Income (Loss) Total
--------- ------ ------- -------- -------- -------- ------------- -------
Balance December 31, 2004 2,705,715 $270 $5,336 $40,222 ($149) ($327) $333 $45,685
Comprehensive Income:
Net Income 1,243 1,243
Change in unrealized gains (losses)on
securities available for sale, net of
reclassification adjustment and tax
effects (957) (957)
Total comprehensive income 286
-------
Cash dividends declared $.18 per share (481) (481)
Stock options exercised (3) 48 45
Tax benefit of stock options exercised 7 7
Release of treasury stock for ESOP 22 22
Acquisition of treasury stock (78) (78)
Release of earned ESOP shares 81 28 109
--------- ---- ------ ------- ----- ----- ----- -------
Balance, March 31, 2005 2,705,715 $270 $5,421 $40,984 ($157) ($299) ($624) $45,595
========= ==== ====== ======= ===== ===== ===== =======
See accompanying notes to the unaudited consolidated financial statements.
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cashflows (Unaudited)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,243 $ 1,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 125
Depreciation 133 136
Amortization of intangible assets 13 13
Deferred income taxes (350) (101)
Net amortization of securities premiums and discounts 124 104
Net realized gain on sales of securities (77) (178)
Earnings on life insurance policy (62) (79)
Net gain on sale of mortgage loans and servicing (40) (58)
Mortgage loans originated for sale (3,934) (3,556)
Proceeds from sale of mortgage loans and servicing 3,974 3,614
Tax benefit of stock options exercised 7 1
Release of ESOP shares 154 131
Decrease (increase) in accrued interest receivable and other assets 226 675
Increase (decrease) in accrued interest payable and other liabilities 427 120
-------- --------
Net cash provided by operating activities 1,938 2,147
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 81 6,532
Proceeds from maturities and principal reductions on mortgage-backed
securities 2,602 16,545
Purchases (6,748) (14,062)
Securities held to maturity, proceeds from maturities 630 --
(Increase) decrease in investment in FHLB stock (252) 168
Net increase in loans (11,323) (84)
Purchase of bank premises and equipment (119) (96)
-------- --------
Net cash provided by (used in) investing activities (15,129) 9,003
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,697) (1,229)
Net increase (decrease) in short term borrowings 1,974 (3,784)
Stock options exercised 44 63
Acquisition of treasury stock (101) (93)
Cash dividends paid (480) (448)
-------- --------
Net cash used in financing activities (260) (5,491)
-------- --------
Increase (decrease) in cash and cash equivalents (13,451) 5,659
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,666 9,174
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,215 $ 14,833
======== ========
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 month period ended March 31,
2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005 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, 2004.
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,
-----------------
2005 2004
----- -----
Basic EPS weighted average shares outstanding 2,665 2,636
Dilutive effect of stock options 60 55
----- -----
Diluted EPS weighted average shares outstanding 2,725 2,691
===== =====
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 recognition
provisions of FASB Statement No. 123 "Accounting for Stock-Based Compensation",
to stock based employee compensation.
7
Three Months ended March 31
---------------------------
(in thousands, except for per share data)
2005 2004
--------- ---------
Net income as reported $ 1,243 $ 1,200
Total stock-based employee compensation determined
under fair value based method for all awards, net
of taxes (49) (36)
--------- ---------
Pro forma net income $ 1,194 $ 1,164
========= =========
Earnings per share (basic)
As Reported $ .47 $ .46
Pro forma .45 .44
Earnings per share (assuming dilution)
As Reported .46 .45
Pro forma .44 .43
During the three months ended March 31, 2005, there were 2,393 stock options
exercised at an average exercise price of $18.37.
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, 2005 and 2004
were $1,414,000 and $1,350,000 respectively. Cash payments for income taxes in
2005 were $3,000 compared to $2,350 in 2004. Non-cash investing activity for
2005 and 2004 included foreclosed mortgage loans and repossession of other
assets of $23,000 and $140,000, 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
---------------------------
2005 2004
-------- ------
Unrealized holding gains/(losses)
on available for sale securities $(1,529) $ 728
Reclassification adjustment for gains
realized in income (77) (178)
-------- ------
Net unrealized gain/(losses) (1,452) 550
Income tax (benefit) expense (495) 186
-------- ------
Other comprehensive income ($957) $364
========= ======
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) March 31
--------
2005 2004
------- -------
Commitments to grant loans $11,056 $11,511
Unfunded commitments under lines of credit 31,495 27,575
Standby letters of credit 1,831 2,213
------- -------
$44,382 $41,299
======= =======
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
9
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, 2005 for guarantees under
standby letters of credit issued is not material.
8. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
FAS 123(R)
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Statement No. 123(R) will require compensation costs
related to share based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the compliance dates for Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). Under the new rule, the Company is required to adopt
SFAS No. 123R in the first annual period beginning after June 15, 2005. The
Company has not yet determined the method of adoption or the effect of adopting
SFAS No. 123R, and it has not determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under SFAS No.
123.
SOP 03-3
In December 2003, the Accounting Standards Executive Committee issued Statement
of Position 03-3 (SOP 03-3), "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer." SOP 03-3 addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities acquired in a
transfer, including business combinations, if those differences are
attributable, at least in part, to credit quality. SOP 03-3 is effective for
loans for debt securities acquired in fiscal years beginning after December 15,
2004. The Company adopted the provisions of SOP 03-3 on January 1, 2005.
SAB 107
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R) on January 1, 2006.
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
10
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, 2005 were $413.2 million compared to $411.6
million as of December 31, 2004.
SECURITIES
- ----------
The fair value of securities available for sale as of March 31, 2005 was
$119.5 million increasing from $116.9 million as of December 31, 2004. The
increase was principally due to growth in short-term callable bonds of U.S.
Government Agencies.
The Company has securities in an unrealized loss position. In Management's
opinion, the unrealized losses reflect changes in interest subsequent to the
acquisition of specific securities. Management believes that the unrealized
losses represent temporary impairment of the securities, as the Company has the
intent and ability to hold these investments until maturity or market price
recovery.
LOANS RECEIVABLE
- ----------------
Total loans receivable were $266.0 million as of March 31, 2005, an
increase of $11.2 million from $254.8 as of December 31, 2004. The increase was
principally in commercial real estate loans in the Monroe County market area.
Residential real estate loans decreased $2.7 million principally due to the sale
of $3.1 million of 30 year fixed rate mortgage loans. The loans were sold for
interest rate risk management. The Company had a gain of $40,000 on the
transaction, included in Other Income. The indirect lending portfolio (included
in Consumer Loans to Individuals) declined $1.4 million to $18.8 million as of
March 31, 2005. As the Company is focusing its efforts on increasing real estate
lending through its branch system, it anticipates a further decrease in indirect
financing throughout 2005.
11
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, 2005 December 31, 2004
---------------------- ---------------------
$ % $ %
-------- ----- -------- -----
Real Estate-Residential $ 87,873 33.0 $ 90,606 35.5
Commercial 122,568 46.0 111,164 43.6
Construction 5,097 1.9 4,890 1.9
Commercial, financial and agricultural 23,844 9.0 20,263 7.9
Consumer loans to individuals 27,027 10.1 28,193 11.1
-------- ----- -------- -----
Total loans 266,409 100.0% 255,116 100.0%
Unearned income and deferred fees (377) (359)
-------- --------
266,032 254,757
Allowance for loan losses (3,523) (3,448)
-------- --------
Net loans receivable $262,509 $231,309
======== ========
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
---------------------
2005 2004
------ ------
Balance, beginning $3,448 $3,267
Provision for loan losses 100 125
Charge-offs (47) (98)
Recoveries 22 8
------ ------
Net charge-offs (25) (90)
------ ------
Balance, ending $3,523 $3,302
====== ======
Allowance to total loans 1.32% 1.41%
Net charge-offs to average loans
(annualized) .04% .16%
The allowance for loan losses totaled $3,523,000 as of March 31, 2005 and
represented 1.32% of total loans, compared to $3,448,000 at year end, and
$3,302,000 as of March 31, 2004. Net charge-offs for the three month period
ended March 31, 2005, totaled $25,000 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, 2005 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, 2005, non-performing loans totaled $92,000, which is .03%
of total loans compared to $67,000, or .03% of total loans at December 31, 2004.
The following table sets forth information regarding non-performing loans and
foreclosed real estate at the date indicated:
(dollars in thousands) March 31, 2005 December 31, 2004
-------------- -----------------
Loans accounted for on a non accrual basis:
Commercial and all other $ - $ -
Real Estate 82 32
Consumer 8 8
----- -----
Total 90 40
Accruing loans which are contractually
past due 90 days or more 2 27
----- -----
Total non-performing loans 92 67
Foreclosed real estate - -
----- -----
Total non-performing assets $ 92 $ 67
===== =====
Allowance for loans losses
coverage of non-performing loans 38.7x 51.5x
Non-performing loans to total loans .03% .03%
Non-performing assets to total assets .02% .02%
DEPOSITS
- --------
Total deposits as of March 31, 2005 were $316.9 million declining slightly
from $318.6 million as of December 31, 2004.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) March 31, 2005 December 31, 2004
-------------- -----------------
Non-interest bearing demand $ 46,774 $ 44,450
Interest bearing demand 42,136 41,336
Money Market 41,884 51,125
Savings 60,218 60,064
Time deposits < $100,000 91,079 88,387
Time deposits > $100,000 34,857 33,283
- -------- --------
Total $316,948 $318,645
======== ========
Money Market accounts declined $9.2 million principally due to a shift of
deposits by a local school district from money market account to short-term CDs,
included in Time deposits > $100,000.
-
SHORT-TERM BORROWINGS
- ---------------------
Short-term borrowings as of March 31, 2005 were $25.0 million compared to
$23.0 million as of December 31, 2004. A decrease of $6.2 million in cash
management accounts was offset by short-term borrowings from the FHLB.
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
13
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,
2005 2004
------- -------
(In thousands)
Commitments to grant loans $11,056 $15,748
Unfunded commitments under lines of credit 31,495 30,611
Standby letters of credit 1,831 1,791
------- -------
$44,382 $48,150
======= =======
STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
- ---------------------------------------
At March 31, 2005, total stockholders' equity totaled $45.6 million,
compared to $45.7 million as of December 31, 2004. The net change in
stockholders' equity included $1,243,000 in net income, that was partially
offset by $481,000 of dividends declared. In addition, accumulated other
comprehensive income decreased $957,000 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 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, 2005 December 31, 2004
-------------- -----------------
Tier 1 Capital
(To average assets) 11.20% 11.11%
Tier 1 Capital
(To risk-weighted assets) 15.33% 15.91%
Total Capital
(To risk-weighted assets) 16.69% 17.34%
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, 2005 and
December 31, 2004.
14
LIQUIDITY
- ---------
As of March 31, 2005, the Company had cash and cash equivalent of $7.2
million in the form of cash, due from banks, and short-term deposits with other
institutions. In addition, the Company had total securities available for sale
of $119.5 million which could be used for liquidity needs. This totals $126.7
million and represents 30.7% of total assets compared to $137.6 million and
33.4% of total assets as of December 31, 2004. This decrease in cash and cash
equivalent is due to the utilization of $13.1 million of Federal Funds sold as
of December 31, 2004 to fund loan growth. The Company also monitors other
liquidity measures, all of which were within the Company's policy guidelines as
of March 31, 2005 and December 31, 2004. 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 $142.3 million, of which $38.5
million was outstanding as of March 31, 2005 and $31 million as of December 31,
2004.
15
RESULTS OF OPERATIONS
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
(Tax-Equivalent Basis, dollars in thousands) Three Months Ended March 31,
------------------------------------------------------------------------
2005 2004
----------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 1,855 $ 11 2.37% $ 2,709 $ 6 0.89%
Interest bearing deposits with banks 76 - - 105 1 0.86
Securities held-to-maturity 5,412 129 9.53 5,748 126 8.77
Securities available for sale:
Taxable 102,178 788 3.08 104,029 864 3.32
Tax-exempt 18,565 255 5.49 18,558 277 5.97
-------- ------ -------- ------
Total securities available for sale (1) 120,743 1,043 3.46 122,587 1,141 3.72
Loans receivable (4) (5) 258,380 3,950 6.12 231,865 3,571 6.16
-------- ------ -------- ------
Total interest earning assets 386,466 5,133 5.31 363,014 4,845 5.34
Non-interest earning assets:
Cash and due from banks 7,525 8,254
Allowance for loan losses (3,496) (3,303)
Other assets 14,508 14,836
-------- --------
Total non-interest earning assets 18,537 19,787
-------- --------
Total Assets $405,003 $382,801
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $ 88,753 167 0.75% $ 86,440 131 0.61%
Savings 59,477 69 0.46 56,370 65 0.46
Time 123,904 751 2.42 121,309 712 2.35
-------- ------ -------- ------
Total interest bearing deposits 272,134 987 1.45 264,119 908 1.38
Short-term borrowings 17,116 99 2.31 10,882 25 0.92
Long-term debt 23,000 317 5.51 23,000 323 5.62
-------- ------ -------- ------
Total interest bearing liabilities 312,250 1,403 1.80 298,001 1,256 1.69
Non-interest bearing liabilities:
Demand deposits 45,603 39,076
Other liabilities 1,158 2,183
-------- --------
Total non-interest bearing liabilities 46,761 41,259
Stockholders' equity 45,992 43,541
-------- --------
Total Liabilities and Stockholders' Equity $405,003 $382,801
======== ========
Net interest income (tax equivalent basis) 3,730 3.52% 3,589 3.65%
==== ====
Tax-equivalent basis adjustment (160) (156)
------ ------
Net interest income $3,570 $3,433
====== ======
Net interest margin (tax equivalent basis) 3.86% 3.95%
==== ====
(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.
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.
Increase/(Decrease)
-------------------
Three months ended March 31, 2005 Compared to
---------------------------------------------
Three months ended March 31, 2004
---------------------------------
Variance due to
---------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold ............................... $ (12) $ 17 $ 5
Interest bearing deposits with banks ............. -- (1) (1)
Securities held to maturity ...................... (34) 37 3
Securities available for sale:
Taxable ........................................ (15) (61) (76)
Tax-exempt securities .......................... 1 (23) (22)
----- ----- -----
Total securities ............................. (14) (84) (98)
Loans receivable ................................. 554 (175) 379
----- ----- -----
Total interest earning assets .................... 494 (206) 288
Interest bearing liabilities:
Interest-bearing demand and money market ....... 4 32 36
Savings ........................................ 4 -- 4
Time ........................................... 15 24 39
----- ----- -----
Total interest bearing deposits ............. 23 56 79
Short-term borrowings ............................ 20 54 74
Other borrowings ................................. -- (6) (6)
Total interest bearing liabilities ............... 43 104 147
----- ----- -----
Net interest income (tax-equivalent basis) ....... $ 450 $(309) $ 141
===== ===== =====
17
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 TO
- --------------------------------------------------------------------------------
MARCH 31, 2004
- --------------
GENERAL
- -------
For the three months ended March 31, 2005, net income totaled $1,243,000,
an increase of $43,000, or 3.6%, over $1,200,000 earned in the similar period of
2004. Earnings per share for the current period were $.47 basic and $.46 on a
diluted basis, compared to $.46 basic and $.45 on a fully diluted basis for the
three months ended March 31,2004. The resulting return on average assets and
return on average equity for the three months ended March 31, 2005, were 1.24%
and 10.96%, respectively compared to 1.26% and 11.08%, respectively for the
similar period in 2003.
The following table sets forth changes in net income:
Dollars in thousands Three months ended
------------------
March 31, 2005 to March 31, 2004
--------------------------------
Net income three months ended March 31, 2004 $ 1,200
-------
Change due to:
Net interest income 137
Provision for loan losses 25
Net realized gains on sales of securities (101)
Gains on sale of loans (17)
All other income 99
Salaries and employee benefits (85)
All other expenses 29
Income tax effect (44)
-------
Net income three months ended March 31, 2005 $ 1,243
=======
NET INTEREST INCOME
- -------------------
Net interest income on a fully taxable equivalent basis (fte) for the three
months ended March 31, 2005, totaled $3,730,000, an increase of $141,000 or
3.9%, over the similar period in 2004. The fte net interest spread and net
interest margin were 3.52% and 3.86% decreasing from 3.65% and 3.95%
respectively for the three months ended March 31, 2004.
Interest income (fte) totaled $5,133,000 at a yield of 5.31% compared to
$4,845,000 at an average yield of 5.34% in 2004. Short-term rates have
increased, with the prime rate at 5.25% as of March 31, 2005 compared to 4.00%
as of March 31, 2004. This positive effect on floating rate loans was offset by
the cumulative effect of lower fixed rate earning assets that have been put on
the balance sheet over the past three years. The decrease in yield was offset by
an increase of $23.5 million or 6.50% in average earning assets. The growth was
in average loans which increased $26.5 million. Loans represented 66.9% of total
average earning assets for the three months ended March 31, 2005 compared to
63.9% for the similar period in 2004.
Interest expense for the three months ended March 31, 2005 totaled
$1,403,000 at an average cost of 1.80% compared to $1,256,000 and 1.69% for the
similar period in 2004. The average cost of funds was impacted by higher
short-term rates which increased the cost of time deposits from 2.35% to 2.42%
in the current period. The Company funded a portion of its loan growth with
short-term borrowings. The average cost of short-term borrowings was 2.31% for
the three months ended March 31, 2005, this is higher than the average cost of
interest-bearing deposits which was 1.45% for the same period.
18
OTHER INCOME
- ------------
Other income totaled $920,000 for the three months ended March 31, 2005,
compared to $939,000 during the similar period in 2004. Net realized gains on
sales of securities were $77,000 in 2005 compared to $178,000 in 2004. The
Company also sold $3.1 million of 30 year fixed rate mortgages, for interest
rate risk management, for a gain of $40,000, compared to $57,000 gains on sales
of $3.6 million mortgages in 2004.
Service charges and fees totaled $579,000 for the current period compared
to $441,000 in the prior. The increase was due to $146,000 increase in overdraft
fee income as a result of increased volume related to the Bank's Overdraft
Manager Service.
OTHER EXPENSES
- --------------
Other expenses for the three months ended March 31, 2005 totaled
$2,651,000, an increase of $56,000, or 2.2%, when compared to $2,595,000 for the
similar period in 2004. Salary and benefits increased $85,000 to $1,387,000,
principally due to increases in expense related to the employee stock ownership
plan (ESOP) of $35,000 and health care insurance, $7,000. The loss on lease
residuals was $90,000 for the period in 2004, with no expense incurred for the
similar period in 2005. The remaining leased vehicles were sold in 2004.
INCOME TAX EXPENSE
- ------------------
Income tax expense totaled $496,000 for an effective tax rate of 28.5% for
the period ending March 31, 2005 compared to $452,000 and 27.4% for the similar
period in 2004. 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, 2005 from the information
presented in the Form 10-K for the year-ended December 31, 2004.
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, 2005 - - - -
February 1-February 28, 2005 - - - -
March 1 - March 31, 2005 2,201 (1) $35.35 - -
----- ------ ------------- -----------
2,201 $35.35 - -
===== ====== ============= ===========
(1) Purchases related to the Company's Employee Stock Ownership Plan (ESOP)
related to purchase of shares from terminated participants.
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. EXHIBITS
(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**
20
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 Section 1350 Certification (Chief Executive Officer and
Chief Financial Officer)
- ---------------------------
* 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,
2005.
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, 2005 By: /s/ William W. Davis, Jr.
--------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2005 By: /s/ Lewis J. Critelli
--------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22