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, 2006
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 0-28366
-------
Norwood Financial Corp.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828306
-------------------------------------------------------------------------------
(State or other jurisdiction 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of May 12, 2006
--------------------------------------- ------------------------------
Common stock, par value $0.10 per share 2,667,061
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
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. Qualitative and Quantitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 23
Signatures 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
March 31, December 31,
2006 2005
--------- ---------
(unaudited)
ASSETS
Cash and due from banks $ 9,330 $ 9,746
Interest bearing deposits with banks 22 70
--------- ---------
Cash and cash equivalents 9,352 9,816
Securities available for sale 116,659 115,814
Securities held to maturity, fair value 2006:
$976, 2005: $1,480 953 1,452
Loans receivable (net of unearned income) 291,840 290,890
Less: Allowance for loan losses 3,743 3,669
--------- ---------
Net loans receivable 288,097 287,221
Investment in FHLB Stock 2,073 1,620
Bank premises and equipment, net 5,508 5,393
Accrued interest receivable 1,979 1,812
Other assets 9,509 10,428
--------- ---------
TOTAL ASSETS $ 434,130 $ 433,556
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 54,505 $ 50,891
Interest bearing 285,002 289,712
--------- ---------
Total deposits 339,507 340,603
Short-term borrowings 19,765 18,564
Long-term debt 23,000 23,000
Accrued interest payable 1,626 1,691
Other liabilities 1,735 1,590
--------- ---------
TOTAL LIABILITIES 385,633 385,448
STOCKHOLDERS' EQUITY
Common stock, $.10 par value per share, authorized
10,000,000 shares issued 2006: 2,841,000, 2005:
2,705,715 shares 284 270
Surplus 5,730 5,648
Retained earnings 44,497 43,722
Treasury stock at cost: 2006: 35,267 shares, 2005:
21,189 (1,029) (633)
Unearned ESOP shares (77) (127)
Accumulated other comprehensive loss (908) (772)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 48,497 48,108
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 434,130 $ 433,556
========= =========
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
------------------
2006 2005
------ ------
INTEREST INCOME
Loans receivable, including fees $4,944 $3,920
Securities 1,050 1,041
Other 2 12
------ ------
Total interest income 5,996 4,973
INTEREST EXPENSE
Deposits 1,590 987
Short-term borrowings 187 99
Long-term debt 293 317
------ ------
Total interest expense 2,070 1,403
------ ------
NET INTEREST INCOME 3,926 3,570
PROVISION FOR LOAN LOSSES 70 100
------ ------
NET INTEREST INCOME AFTER
PROVSION FOR LOAN LOSSES 3,856 3,470
OTHER INCOME
Service charges and fees 590 579
Income from fiduciary activities 77 84
Net realized gains on sales of securities 7 77
Gain on sale of loans -- 40
Other 150 140
------ ------
Total other income 824 920
OTHER EXPENSES
Salaries and employee benefits 1,406 1,387
Occupancy, furniture & equipment, net 380 384
Data processing related 156 160
Taxes, other than income 113 98
Professional fees 113 109
Other 598 513
------ ------
Total other expenses 2,766 2,651
------ ------
INCOME BEFORE INCOME TAXES 1,914 1,739
INCOME TAX EXPENSE 581 496
------ ------
NET INCOME $1,333 $1,243
====== ======
BASIC EARNINGS PER SHARE $ 0.48 $ 0.44
====== ======
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.43
====== ======
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
(dollars in thousands, except per share data)
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 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
Aquisition 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
========= ==== ====== ======= ===== ===== ===== =======
Accumulated
Number of Unearned Other
shares Common Retained Treasury ESOP Comprehensive
issued Stock Surplus Earnings Stock Shares Income (Loss) Total
------ ----- ---------------- ----- ------ ------------- -----
Balance December 31, 2005 2,705,715 $270 $5,648 $43,722 ($633) ($127) ($772) $48,108
Comprehensive Income:
Net Income 1,333 1,333
Change in unrealized losses on securities
available for sale, net of
reclassification adjustment and tax effects (136) (136)
-------
Total comprehensive income 1,197
-------
Cash dividends declared, $.21 per share (558) (558)
5% Stock dividend 135,285 14 (14) 0
Acquisition of treasury stock (396) (396)
Release of earned ESOP shares 96 50 146
--------- ---- ------ ------- ------- ----- ----- -------
Balance, March 31, 2006 2,841,000 $284 $5,730 $44,497 ($1,029) ($77) ($908) $48,497
========= ==== ====== ======= ======= ===== ===== =======
See accompanying notes to the unaudited consolidated financial statements.
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,333 $ 1,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 70 100
Depreciation 123 133
Amortization of intangible assets 13 13
Deferred income taxes (129) (350)
Net amortization of securities premiums and discounts 92 124
Net realized gain on sales of securities (7) (77)
Earnings on life insurance policy (64) (62)
Net gain on sale of mortgage loans and servicing - (40)
Mortgage loans originated for sale - (3,934)
Proceeds from sale of mortgage loans and servicing - 3,974
Tax benefit of stock options exercised - 7
Release of ESOP shares 146 154
Decrease in accrued interest receivable and other assets 959 226
Increase in accrued interest payable and other liabilities 153 427
-------- --------
Net cash provided by operating activities 2,689 1,938
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales - 81
Proceeds from maturities and principal reductions on mortgage-backed securities 3,622 2,602
Purchases (4,765) (6,748)
Securities held to maturity, proceeds from maturities 505 630
Increase in investment in FHLB stock (453) (252)
Net increase in loans (972) (11,323)
Purchase of bank premises and equipment (238) (119)
-------- --------
Net cash used in investing activities (2,301) (15,129)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,096) (1,697)
Net increase in short term borrowings 1,201 1,974
Stock options exercised - 44
Acquisition of treasury stock (396) (101)
Cash dividends paid (561) (480)
-------- --------
Net cash used in financing activities (852) (260)
-------- --------
Decrease in cash and cash equivalents (464) (13,451)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,816 20,666
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,352 $ 7,215
======== ========
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 accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. 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, 2006 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2006 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, 2005.
3. Stock Dividend and Earnings Per Share
-------------------------------------
On April 11, 2006, the Board of Directors declared a 5% stock dividend
on common stock outstanding, payable May 26, 2006 to shareholders of record on
May 12, 2006. The stock dividend will result in the issuance of 135,285
additional common shares. All per share data has been adjusted for the effect of
the stock dividend.
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,
---------
2006 2005
---- ----
Basic EPS weighted average shares outstanding 2,797 2,798
Dilutive effect of stock options 55 63
----- -----
Diluted EPS weighted average shares outstanding 2,852 2,861
===== =====
7
4. Stock Based Compensation
------------------------
Prior to January 1, 2006, the Company's stock option plan was accounted
for under the recognition and measurement provisions of APB Opinion No. 25
(Opinion 25), Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock
Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure) (collectively SFAS 123). No stock-based
employee compensation cost was recognized in the Company's consolidated
statements of earnings through December 31, 2005, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. Effective January 1, 2006, the Company
adopted the fair value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment (SFAS 123R), using the modified-prospective transition
method. Under that transition method, compensation cost recognized in 2006
includes: (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006 based on the grant date fair value
calculated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to December
31, 2005, based on a grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). As of December 31, 2005, all stock options were fully
vested and no stock options were granted during the three months ended March 31,
2006. Therefore no expense related to stock based compensation was incurred for
the period ending March 31, 2006.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
123 to options granted under the Company's stock option plan for the three
months ended March 31, 2005. For purposes of this pro forma disclosure, the
value of the options is estimated using the Black-Scholes option pricing model
and is being amortized to expense over the options' vesting periods.
Three Months Ended
------------------
March 31, 2005
--------------
(in thousands, except for per share data)
Net income as reported $1,243
Total stock-based employee compensation cost, net of
tax, which would have been included in the determination
of net income if the fair value based method had been
applied to all awards (49)
-----
Pro forma net income $1,194
=====
Earnings per share (basic)
As Reported $ .44
Pro forma .43
Diluted earnings per share (assuming dilution)
As Reported .43
Pro forma .42
8
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, 2006 and 2005
were $2,124,000 and $1,414,000 respectively. Cash payments for income taxes in
2006 were $5,000 compared to $3,000 in 2005. Non-cash investing activity for
2006 and 2005 included foreclosed mortgage loans and repossession of other
assets of $26,000 and $23,000, respectively.
6. Comprehensive Income
--------------------
Accounting principles generally accepted in the United States of
America 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.
(in thousands) Three Months Ended March 31
---------------------------
2006 2005
---- ----
Unrealized holding losses
on available for sale securities $(199) $(1,375)
Reclassification adjustment for gains
realized in income (7) (77)
----- -----
Net unrealized losses (206) (1,452)
Income tax benefit (70) (495)
----- -----
Other comprehensive loss $(136) $(957)
===== =====
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
consolidated 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,
--------------------
2006 2005
---- ----
Commitments to grant loans $18,971 $11,056
Unfunded commitments under lines of credit 31,532 31,495
Standby letters of credit 7,120 1,831
------- -------
$57,623 $44,382
======= =======
9
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 payments required under the corresponding guarantees. The current amount
of the liability as of March 31, 2006 for guarantees under standby letters of
credit issued is not material.
8. New Accounting Pronouncements
-----------------------------
FAS 155
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments"("SFAS No. 155"). SFAS No. 155 amends FASB Statement No.
133 and FASB Statement No. 140, and improves the financial reporting of certain
hybrid financial instruments by requiring more consistent accounting that
eliminates exemptions and provides a means to simplify the accounting for these
instruments. Specifically, SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company is required
to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal year
2007. Management does not believe the adoption of SFAS No. 155 will have a
material impact on the Company's consolidated financial position and results of
operations.
FAS 156
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets -- An Amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for the Company will be as of the beginning of fiscal 2007. The Company
does not believe that the adoption of SFAS 156 will have a significant effect on
its consolidated financial statements.
10
FSP No. FAS 123(R)-4
In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event." This Position amends SFAS 123(R) to incorporate that a cash settlement
feature that can be exercised only upon the occurrence of a contingent event
that is outside the employee's control does not meet certain conditions in SFAS
123(R) until it becomes probable that the event will occur. The guidance in this
FASB Staff Position shall be applied upon initial adoption of Statement 123(R).
This FASB Staff Position did not have a significant effect on the Company's
consolidated financial statements.
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, demand for real estate and general
economic conditions. The Company undertakes no obligation to publicly release
the results of any revisions to those forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, accounting for stock options, the valuation of deferred tax assets and
the determination of other-than-temporary impairment losses on securities.
Please refer to the discussion of the allowance for loan losses calculation
under "Non-performing Assets and Allowance for Loan Losses" in the "Financial
Condition" section. For periods ending prior to January 1, 2006, the Company
accounted 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 was 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 adopted SFAS
No. 123(R) "Share-Based Payment" as of January 1, 2006. However, no stock
options were awarded in 2005 or for the three months ended March 31, 2006. The
Norwood Financial Corp, 2006 Stock Option Plan was approved on April 25, 2006.
The Company expects to grant options in the second quarter of 2006. The Company
expects SFAS No. 123(R) to have a negative impact on its consolidated financial
position, results of operations and cash flows in subsequent periods.
11
The deferred income taxes reflect temporary differences in the
recognition of the revenue and expenses for tax reporting and financial
statement purposes, principally because certain items are recognized in
different periods for financial reporting and tax return purposes. Although
realization is not assured, the Company believes it is more likely than not that
all deferred tax assets will be realized.
In estimating other-than-temporary impairment losses on securities, the
Company considers 1) the length of time and extent to which the fair value has
been less than cost 2) the financial condition of the issuer and 3) the intent
and ability of the Company to hold the security to allow for a recovery to fair
value.
Changes in Financial Condition
------------------------------
General
-------
Total assets as of March 31, 2006 were $434.1 million compared to
$433.6 million as of December 31, 2005.
Securities
----------
The fair value of securities available for sale as of March 31, 2006
was $116.7 million compared to $115.8 million as of December 31, 2005. The
Company purchased $4.8 million of securities to offset $3.6 million of
maturities and principal reductions on mortgage-backed securities.
The Company has securities in an unrealized loss position. In
Management's opinion, the unrealized losses reflect changes in interest rates
subsequent to the acquisition of specific securities. The Company's
available-for-sale portfolio has an average repricing term of 1.9 years.
Interest rates in the 2-3 year section of the treasury yield curve have
increased 100 basis points in the last year impacting the fair value of
individual securities. Management believes that the unrealized losses represent
temporary impairment of the securities, as a result of changes in interest
rates. The Company has the intent and ability to hold these investments until
maturity or market price recovery.
Loans Receivable
----------------
Loans receivable totaled $291.8 million compared to $290.9 million as
of December 31, 2005. Commercial real estate loans decreased $6.2 million due to
the pay off of a short-term $6.7 million loan originated in the first quarter of
2005. This was offset by $5.0 million increase in commercial loans and $3.3
million growth in residential real estate loans.
12
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, 2006 December 31, 2005
-------------------- --------------------
$ % $ %
--------- ----- --------- -----
Real Estate-Residential $ 103,957 35.6% $ 100,705 34.6%
Commercial 127,285 43.6 133,495 45.8
Construction 6,183 2.1 5,944 2.0
Commercial, financial and agricultural 31,718 10.9 26,755 9.2
Consumer loans to individuals 23,105 7.9 24,353 8.4
--------- ----- --------- -----
Total loans 292,248 100.0% 291,252 100.0%
===== =====
Deferred fees (408) (362)
--------- ----------
291,840 290,890
Allowance for loan losses (3,743) (3,669)
--------- ----------
Net loans receivable $ 288,097 $ 287,221
========= ==========
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
---------------------
2006 2005
------- -------
Balance, beginning $ 3,669 $ 3,448
Provision for loan losses 70 100
Charge-offs (27) (47)
Recoveries 31 22
------- -------
Net (charge-offs)/recoveries 4 (25)
------- -------
Balance, ending $ 3,743 $ 3,523
======= =======
Allowance to total loans 1.28% 1.32%
Net (charge-offs) recoveries to average loans
(annualized) .01% (.04%)
The allowance for loan losses totaled $3,743,000 as of March 31, 2006
and represented 1.28% of total loans, compared to $3,669,000 at year end, and
$3,523,000 as of March 31, 2005. The Company had net recoveries for the three
months ended March 31, 2006 of $4,000 compared to net charge-offs of $25,000 in
2005. 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 and loan classifications, large dollar
exposures and loan growth. Management considers the allowance adequate at March
31, 2006 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.
13
As of March 31, 2006, non-performing loans totaled $398,000, which is
..14% of total loans compared to $353,000, or .12% of total loans at December 31,
2005. The following table sets forth information regarding non-performing loans
and foreclosed real estate at the date indicated:
(dollars in thousands) March 31, 2006 December 31, 2005
-------------- -----------------
Loans accounted for on a non accrual basis:
Commercial and all other $ - $ -
Real Estate 330 330
Consumer 20 11
---- ----
Total 350 341
Accruing loans which are contractually
Past due 90 days or more 48 12
---- ----
Total non-performing loans 398 353
Foreclosed real estate - -
---- ----
Total non-performing assets $398 $353
==== ====
Allowance for loans losses
coverage of non-performing loans 9.4x 10.4x
Non-performing loans to total loans .14% .12%
Non-performing assets to total assets .09% .08%
14
Deposits
--------
Total deposits as of March 31, 2006 were $339.5 million declining
slightly from $340.6 million as of December 31, 2005.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) March 31, 2006 December 31, 2005
-------------- -----------------
Non-interest bearing demand $ 54,505 $ 50,891
Interest bearing demand 41,294 40,738
Money Market 60,498 52,194
Savings 52,082 53,311
Time deposits <$100,000 95,947 94,612
Time deposits >$100,000 35,181 48,857
-------- --------
Total $339,507 $340,603
======== ========
Money Market accounts increased $8.3 million principally due to short term funds
on deposit from one corporate customer. Time deposits greater than $100,000
decreased $13.7 million principally due to the scheduled maturities of
short-term CDs from local school districts.
Short-term Borrowings
---------------------
Short-term borrowings as of March 31, 2006 were $19.8 million
compared to $18.6 million as of December 31, 2005. Short-term borrowings consist
of the following:
(dollars in thousands) March 31, 2006 December 31, 2005
-------------- -----------------
Securities sold under agreements to purchase $12,091 $12,464
Federal funds purchased 7,290 5,100
U.S. Treasury demand notes 384 1,000
------- -------
$19,765 $18,564
======= =======
Off-Balance Sheet Arrangements
------------------------------
The Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
15
A summary of the contractual amount of the Company's financial
instrument commitments is as follows:
March 31, December 31,
2006 2005
---- ----
(in thousands)
Commitments to grant loans $18,971 $16,078
Unfunded commitments under lines of credit 31,532 29,969
Standby letters of credit 7,120 6,791
------- -------
$57,623 $52,838
======= =======
Stockholders' Equity and Capital Ratios
---------------------------------------
At March 31, 2006, total stockholders' equity totaled $48.5 million,
compared to $48.1 million as of December 31, 2005. The net change in
stockholders' equity included $1,333,000 in net income, that was partially
offset by $558,000 of dividends declared. In addition, accumulated other
comprehensive loss increased $136,000 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 (loss) could materially fluctuate for each interim and
year-end period.
A comparison of the Company's regulatory capital ratios is as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Tier 1 Capital
(To average assets) 11.17% 11.05%
Tier 1 Capital
(To risk-weighted assets) 15.41% 15.29%
Total Capital
(To risk-weighted assets) 16.78% 16.63%
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, 2006 and
December 31, 2005.
Liquidity
---------
As of March 31, 2006, the Company had cash and cash equivalents of
$9.4 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 $116.7 million which could be used for liquidity needs. This totals
$126.0 million and represents 29.0% of total assets compared to $125.6 million
and 29.0% of total assets as of December 31, 2005. The Company also monitors
other liquidity measures, all of which were within the Company's policy
guidelines as of March 31, 2006 and December 31, 2005. 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 total available under these lines was $35 million with $7.3 million
outstanding as of March 31, 2006. The approximate borrowing capacity from the
FHLB was $158.8 million, of which $23 million was outstanding as of March 31,
2006 and December 31, 2005.
16
Results of Operations
---------------------
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
---------------------------------------------------------------------
2006 2005
--------------------------------- -------------------------------
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%
Interest bearing deposits with banks 150 2 5.33 76 - -
Securities held-to-maturity 1,062 25 9.42 5,412 129 9.53
Securities available for sale:
Taxable 99,225 858 3.46 102,178 788 3.08
Tax-exempt 19,135 267 5.58 18,565 255 5.49
-------- ------ -------- ------
Total securities available for sale 118,360 1,125 3.80 120,743 1,043 3.46
Loans receivable (4) (5) 290,414 4,994 6.88 258,380 3,950 6.12
-------- ------ -------- ------
Total interest earning assets 409,986 6,146 6.00 386,466 5,133 5.31
Non-interest earning assets:
Cash and due from banks 8,113 7,525
Allowance for loan losses (3,709) (3,496)
Other assets 16,661 14,508
-------- --------
Total non-interest earning assets 21,065 18,537
-------- --------
Total Assets $431,051 $405,003
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand and money market $ 96,967 359 1.48% $ 88,753 167 0.75%
Savings 52,720 61 0.46 59,477 69 0.46
Time 138,217 1,170 3.39 123,904 751 2.42
-------- ------ -------- ------
Total interest bearing deposits 287,904 1,590 2.21 272,134 987 1.45
Short-term borrowings 19,163 187 3.90 17,116 99 2.31
Long-term debt 23,000 293 5.10 23,000 317 5.51
-------- ------ -------- ------
Total interest bearing liabilities 330,067 2,070 2.51 312,250 1,403 1.80
Non-interest bearing liabilities:
Demand deposits 50,222 45,603
Other liabilities 2,207 1,158
-------- --------
Total non-interest bearing liabilities 52,429 46,761
Stockholders' equity 48,555 45,992
-------- --------
Total Liabilities and Stockholders' Equity $431,051 $405,003
======== ========
Net interest income (tax equivalent basis) 4,076 3.49% 3,730 3.52%
==== ====
Tax-equivalent basis adjustment (150) (160)
------ ------
Net interest income $3,926 $3,570
====== ======
Net interest margin (tax equivalent basis) 3.98% 3.86%
==== ====
(1) Interest and yields are presented on a tax-equivalent basis using a
marginal tax rate of 34%.
(2) Average balances have been calculated based on daily balances.
(3) Annualized
(4) Loan balances include non-accrual loans and are net of unearned income.
(5) Loan yields include the effect of amortization of deferred fees, net of
costs.
17
Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
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, 2006 Compared to
---------------------------------------------
Three months ended March 31, 2005
---------------------------------
Variance due to
---------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest earning assets:
Federal funds sold $ (5) $ (6) $ (11)
Interest bearing deposits with banks -- 2 2
Securities held to maturity (102) (2) (104)
Securities available for sale:
Taxable (134) 204 70
Tax-exempt securities 8 4 12
------- ------- -------
Total securities (126) 208 82
Loans receivable 520 524 1,044
------- ------- -------
Total interest earning assets 287 726 1,013
Interest bearing liabilities:
Interest-bearing demand and money market 17 175 192
Savings (8) -- (8)
Time 95 324 419
------- ------- -------
Total interest bearing deposits 104 499 603
Short-term borrowings 13 75 88
Other borrowings -- (24) (24)
------- ------- -------
Total interest bearing liabilities 117 550 667
------- ------- -------
Net interest income (tax-equivalent basis) $ 170 $ 176 $ 346
======= ======= =======
18
Comparison of Operating Results for The Three Months Ended March 31, 2006 to
--------------------------------------------------------------------------------
March 31, 2005
--------------
General
-------
For the three months ended March 31, 2006, net income totaled
$1,333,000, an increase of $90,000, or 7.2%, over $1,243,000 earned in the
similar period of 2005. Earnings per share for the current period were $.48
basic and $.47 on a diluted basis, compared to $.44 basic and $.43 on a fully
diluted basis for the three months ended March 31, 2005. The resulting return on
average assets and return on average equity for the three months ended March 31,
2006, was 1.25% and 11.14%, respectively, compared to 1.24% and 10.96%,
respectively, for the similar period in 2005.
The following table sets forth changes in net income:
Dollars in thousands Three months ended
------------------
March 31, 2006 to March 31, 2005
--------------------------------
Net income-three months ended March 31, 2005 $1,243
Change due to:
Net interest income 356
Provision for loan losses 30
Net realized gains on sales of securities (70)
Gains on sale of loans (40)
All other income 14
Salaries and employee benefits (19)
All other expenses (96)
Income tax effect (85)
------
Net income-three months ended March 31, 2006 $1,333
======
Net Interest Income
-------------------
Net interest income on a fully taxable equivalent basis (fte) for the
three months ended March 31, 2006 totaled $4,076,000, an increase of $346,000 or
9.3% over the similar period in 2005. The net interest spread (fte) and net
interest margin were 3.49% and 3.98%, respectively, for the three months ended
March 31, 2006.
Interest income (fte) totaled $6,146,000 with an average yield of
6.00%, increasing from $5,133,000 and 5.31% for the 2005 period. The increase
was partially due to growth in the loan portfolio. Average loans increased $32.0
million and represented 70.8% of average earning assets for the three months
ended March 31, 2006 compared to 66.9% of average earning assets for the similar
period in 2005. The average yield (fte) on loans also increased, to 6.88% for
the 2006 period from 6.12% for the similar period in 2005. This increase in
yield was principally the result of the increase in the prime interest rate
which was 7.75% as of March 31, 2006. The increase in prime rate increases the
yield on the Company's floating rate commercial loan portfolio and on home
equity lines of credit.
Interest expense for the three months ended March 31, 2006 totaled
$2,070,000 at an average cost of 2.51% increasing from $1,403,000 and 1.80% for
the similar period in 2005. As a result of the increase in short-term interest
rates the Company as increased rates on money market accounts and short-term
CDs. The cost of time
19
deposits averaged 3.39% for the 2006 period compared to 2.42% for the similar
period in 2005. The Company expects the cost of time deposits to increase in
2006 as lower rate instruments are maturing and are then repricing at the
current higher interest rates. Deposits have also shifted to higher costing
instruments with time deposits representing 41.2% of average interest bearing
liabilities in the 2006 period compared to 39.7% for the 2005 period.
Other Income
------------
Other income totaled $824,000 for the three months ended March 31,
2006 a decrease of $96,000 from $920,000 for the similar period in 2005. Net
realized gains on sales of securities decreased $70,000, from $77,000 in 2005 to
$7,000 in 2006. For the three months ended March 31, 2005, the Company sold $3.1
million of 30 year fixed rate residential mortgages at a gain of $40,000 with no
such transactions in the 2006 period.
Other Expenses
--------------
Other expenses for the three months ended March 31, 2006 totaled
$2,766,000, an increase of $115,000, or 4.3% over the similar period in 2005.
Health insurance premium expenses, included in salaries and employee benefits
increased $32,000 to $111,000. The Company incurred a $50,000 loss in a robbery
at one of its branch locations in the three months ended March 31, 2006.
Income Tax Expense
------------------
Income tax expense totaled $581,000 for an effective tax rate of
30.3% for the period ending March 31, 2006 compared to $496,000 and 28.5% for
the similar period in 2005. 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
-----------
Interest rate sensitivity and the repricing characteristics of assets
and liabilities are managed by the Asset and Liability Management Committee
(ALCO). The principal objective of ALCO is to maximize net interest income
within acceptable levels of risk, which are established by policy. Interest rate
risk is monitored and managed by using financial modeling techniques to measure
the impact of changes in interest rates.
Net interest income, which is the primary source of the Company's
earnings, is impacted by changes in interest rates and the relationship of
different interest rates. To manage the impact of the rate changes, the balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities at approximately the same time intervals. The Company uses net
interest simulation to assist in interest rate risk management. The process
includes simulating various interest rate environments and their impact on net
interest income. As of March 31, 2006, the level of net interest income at risk
in a 200 basis points change in interest rates was within the Company's policy
limits. The Company's policy allows for a decline of no more than 8% of net
interest income.
Imbalance in repricing opportunities at a given point in time
reflects interest-sensitivity gaps measured as the difference between
rate-sensitive assets and rate-sensitive liabilities. These are static gap
measurements that do not take into account any future activity, and as such are
principally used as early indications of potential interest rate exposures over
specific intervals.
20
As of March 31, 2006, the Bank had a positive 90 day interest
sensitivity gap of $19.6 million or 4.5% of total assets, decreasing from $24.4
million, 5.6% of total assets as of December 31, 2005. A positive gap means that
rate-sensitive assets are greater than rate-sensitive liabilities at the time
interval. This would indicate that in a rising rate environment, the yield on
interest-earning assets would increase faster than the cost of interest-bearing
liabilities in the 90 day time frame. The repricing intervals are managed by
ALCO strategies, including adjusting the average life of the investment
portfolio, pricing of deposit liabilities to attract longer term time deposits,
loan pricing to encourage variable rate products and evaluation of loan sales of
long term fixed rate mortgages.
March 31, 2006
--------------
Rate Sensitivity Table
----------------------
3 Months 3-12 Months 1 to 3 Years 3 Years Total
-------- ----------- ------------ ------- -----
Federal funds sold and interest bearing deposits $ 22 $ -- $ -- $ -- $ 22
Securities 11,634 39,236 45,928 20,814 117,612
Loans Receivable 96,652 48,288 63,683 83,217 291,840
------- ------- -------- --------- --------
Total RSA 108,308 87,524 109,611 104,031 409,474
Non-maturity interest-bearing deposits 24,134 26,447 69,798 33,495 153,874
Time Deposits 36,460 56,466 30,823 7,379 131,128
Other 28,115 4,479 10,171 -- 42,765
------- ------- -------- --------- --------
Total RSL 88,709 87,392 110,792 40,874 327,767
Interest Sensitivity Gap $19,599 $ 132 ($1,181) $63,157 $81,707
Cumulative Gap 19,599 19,731 18,550 81,707
RSA/RSL-cumulative 122.1% 111.2% 106.5% 124.9%
December 31, 2005
Interest Sensitivity Gap $24,402 ($5,676) $1,642 $56,582 $76,950
Cumulative Gap 24,402 18,726 20,368 76,950
RSA/RSL-cumulative 126.6% 110.7% 107.1% 123.2%
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.
21
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 1A. Risk Factors
There have been no material changes in the risk factors affecting the Company
that were identified in Item 1A of Part I of the Company's Form 10-K for the
year ended December 31, 2005
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 (2)
--------- ----- ----------- ---------------
January 1-January 31, 2006 7,100 $31.63 7,100 103,900
February 1-February 28, 2006 - - - -
March 1 - March 31, 2006 5,299 (1) $32.25 - -
------ ------ ----- -------
12,399 $31.89 - 103,900
====== ====== ===== =======
(1) Purchases related to the Company's Employee Stock Ownership Plan (ESOP)
related to purchase of shares from terminated participants.
(2) On June 15, 2005, the Registrant announced its intention to repurchase up to
5% of its outstanding common stock (approximately 134,000 shares) in the open
market.
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
22
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***
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*****
10.12 2006 Stock Option Plan ******
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 to 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 to the identically numbered exhibits
to the Registrant's Form 8-K filed with the Commission March 6, 2006.
*** Incorporated herein by reference to the identically numbered exhibits
of the Registrant's Form 10-K filed with the Commission on March 31,
1997.
**** Incorporated herein by reference to 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.
****** Incorporated herein by reference to the Registrant's Form 8-K filed
with the Commission on April 25, 2006.
23
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 11, 2006 By: /s/William W. Davis, Jr.
-------------------------------------
William W. Davis, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 11, 2006 By: /s/Lewis J. Critelli
-------------------------------------
Lewis J. Critelli
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
24