UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q 10-Q/A
Amendment No. 1
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20192020
OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 0-28364
Norwood Financial Corp.Corp
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-2828306 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |
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.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.10 per share | NWFL | The Nasdaq Stock Market LLC |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act): ☐ Yes ☒ 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 | ||
Common stock, par value $0.10 per share |
NORWOOD FINANCIAL CORP.
FORM10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
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Item 1. Financial StatementsEXPLANATORY NOTE
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets(unaudited)
(dollars in thousands, except share and per share data)
| September 30, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 20,067 | $ | 18,039 | ||||
Interest-bearing deposits with banks | 848 | 309 | ||||||
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Cash and cash equivalents | 20,915 | 18,348 | ||||||
Securities available for sale, at fair value | 211,199 | 243,277 | ||||||
Loans receivable | 905,582 | 850,182 | ||||||
Less: Allowance for loan losses | 8,405 | 8,452 | ||||||
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Net loans receivable | 897,177 | 841,730 | ||||||
Regulatory stock, at cost | 3,137 | 3,926 | ||||||
Bank premises and equipment, net | 13,927 | 13,846 | ||||||
Bank owned life insurance | 38,562 | 37,932 | ||||||
Accrued interest receivable | 3,726 | 3,776 | ||||||
Foreclosed real estate owned | 1,572 | 1,115 | ||||||
Goodwill | 11,331 | 11,331 | ||||||
Other intangibles | 257 | 336 | ||||||
Other assets | 14,053 | 8,942 | ||||||
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TOTAL ASSETS | $ | 1,215,856 | $ | 1,184,559 | ||||
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LIABILITIES | ||||||||
Deposits: | ||||||||
Non-interest bearing demand | $ | 231,211 | $ | 201,457 | ||||
Interest-bearing | 743,222 | 745,323 | ||||||
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Total deposits | 974,433 | 946,780 | ||||||
Short-term borrowings | 52,778 | 53,046 | ||||||
Other borrowings | 35,906 | 52,284 | ||||||
Accrued interest payable | 2,623 | 1,806 | ||||||
Other liabilities | 15,222 | 8,358 | ||||||
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TOTAL LIABILITIES | 1,080,962 | 1,062,274 | ||||||
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STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, no par value per share, authorized: 5,000,000 shares; issued: none | — | — | ||||||
Common stock, $0.10 par value per share, authorized: 2019: 20,000,000 shares, 2018: 10,000,000 shares issued: 2019: 6,314,688 shares, 2018: 6,295,113 shares | 632 | 630 | ||||||
Surplus | 49,052 | 48,322 | ||||||
Retained earnings | 84,522 | 78,434 | ||||||
Treasury stock at cost: 2019: 13,807 shares, 2018: 2,470 shares | (455 | ) | (81 | ) | ||||
Accumulated other comprehensive income (loss) | 1,143 | (5,020 | ) | |||||
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TOTAL STOCKHOLDERS’ EQUITY | 134,894 | 122,285 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,215,856 | $ | 1,184,559 | ||||
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See accompanying notesThis Amendment No. 1 to the unaudited consolidated financial statements.
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income(unaudited)
(dollars in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Loans receivable, including fees | $ | 10,776 | $ | 9,301 | $ | 31,074 | $ | 26,645 | ||||||||
Securities | 1,278 | 1,483 | 4,155 | 4,543 | ||||||||||||
Other | 5 | 2 | 70 | 63 | ||||||||||||
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Total interest income | 12,059 | 10,786 | 35,299 | 31,251 | ||||||||||||
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INTEREST EXPENSE | ||||||||||||||||
Deposits | 1,787 | 1,116 | 5,355 | 3,198 | ||||||||||||
Short-term borrowings | 135 | 111 | 344 | 201 | ||||||||||||
Other borrowings | 246 | 171 | 827 | 442 | ||||||||||||
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Total interest expense | 2,168 | 1,398 | 6,526 | 3,841 | ||||||||||||
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NET INTEREST INCOME | 9,891 | 9,388 | 28,773 | 27,410 | ||||||||||||
PROVISION FOR LOAN LOSSES | 300 | 375 | 1,050 | 1,350 | ||||||||||||
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 9,591 | 9,013 | 27,723 | 26,060 | ||||||||||||
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OTHER INCOME | ||||||||||||||||
Service charges and fees | 1,200 | 1,129 | 3,283 | 3,211 | ||||||||||||
Income from fiduciary activities | 167 | 151 | 454 | 463 | ||||||||||||
Net realized gains on sales of securities | 169 | 13 | 233 | 213 | ||||||||||||
Gain on sale of loans, net | 15 | 15 | 125 | 15 | ||||||||||||
Earnings and proceeds on bank owned life insurance | 222 | 297 | 630 | 848 | ||||||||||||
Other | 109 | 392 | 358 | 716 | ||||||||||||
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Total other income | 1,882 | 1,997 | 5,083 | 5,466 | ||||||||||||
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OTHER EXPENSES | ||||||||||||||||
Salaries and employee benefits | 3,667 | 3,577 | 10,915 | 10,445 | ||||||||||||
Occupancy, furniture & equipment, net | 916 | 910 | 2,780 | 2,659 | ||||||||||||
Data processing and related operations | 480 | 368 | 1,400 | 1,027 | ||||||||||||
Taxes, other than income | 179 | 153 | 520 | 480 | ||||||||||||
Professional fees | 276 | 301 | 752 | 760 | ||||||||||||
Federal Deposit Insurance Corporation insurance | (5 | ) | 87 | 150 | 265 | |||||||||||
Foreclosed real estate | 24 | (26 | ) | 37 | 68 | |||||||||||
Amortization of intangibles | 23 | 29 | 79 | 97 | ||||||||||||
Other | 1,231 | 1,173 | 3,591 | 3,372 | ||||||||||||
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Total other expenses | 6,791 | 6,572 | 20,224 | 19,173 | ||||||||||||
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INCOME BEFORE INCOME TAXES | 4,682 | 4,438 | 12,582 | 12,353 | ||||||||||||
INCOME TAX EXPENSE | 775 | 728 | 1,963 | 2,001 | ||||||||||||
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NET INCOME | $ | 3,907 | $ | 3,710 | $ | 10,619 | $ | 10,352 | ||||||||
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BASIC EARNINGS PER SHARE | $ | 0.62 | $ | 0.59 | $ | 1.70 | $ | 1.66 | ||||||||
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DILUTED EARNINGS PER SHARE | $ | 0.62 | $ | 0.58 | $ | 1.68 | $ | 1.64 | ||||||||
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See accompanying notes to the unaudited consolidated financial statements.
NORWOOD FINANCIAL CORP.
Consolidated Statements of Comprehensive Income (unaudited)
(dollars in thousands)
| Three Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
Net income | $ | 3,907 | $ | 3,710 | ||||
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Other comprehensive income (loss): | ||||||||
Investment securities available for sale: | ||||||||
Unrealized holding gain (loss) | 1,059 | (1,830 | ) | |||||
Tax effect | (224 | ) | 384 | |||||
Reclassification of investment securities gains recognized in net income | (169 | ) | (13 | ) | ||||
Tax effect | 37 | 3 | ||||||
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Other comprehensive income (loss) | 703 | (1,456 | ) | |||||
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Comprehensive Income | $ | 4,610 | $ | 2,254 | ||||
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| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
Net income | $ | 10,619 | $ | 10,352 | ||||
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Other comprehensive income (loss): | ||||||||
Investment securities available for sale: | ||||||||
Unrealized holding gain (loss) | 8,034 | (7,160 | ) | |||||
Tax effect | (1,688 | ) | 1,503 | |||||
Reclassification of investment securities gains recognized in net income | (233 | ) | (213 | ) | ||||
Tax effect | 50 | 45 | ||||||
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Other comprehensive income (loss) | 6,163 | (5,825 | ) | |||||
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Comprehensive Income | $ | 16,782 | $ | 4,527 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended September 30, 2019 and 2018
(dollars in thousands, except share and per share data)
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance, December 31, 2018 | 6,295,113 | $ | 630 | $ | 48,322 | $ | 78,434 | 2,470 | $ | (81 | ) | $ | (5,020 | ) | $ | 122,285 | ||||||||||||||||
Net Income | — | — | — | 10,619 | — | — | — | 10,619 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 6,163 | 6,163 | ||||||||||||||||||||||||
Cash dividends declared ($0.72 per share) | — | — | — | (4,531 | ) | — | — | — | (4,531 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock | — | — | 217 | — | — | — | — | 217 | ||||||||||||||||||||||||
Acquisition of treasury stock | — | — | — | — | 11,337 | (374 | ) | — | (374 | ) | ||||||||||||||||||||||
Stock options exercised | 19,575 | 2 | 357 | — | — | — | — | 359 | ||||||||||||||||||||||||
Compensation expense related to stock options | — | — | 156 | — | — | — | — | 156 | ||||||||||||||||||||||||
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Balance, September 30, 2019 | 6,314,688 | $ | 632 | $ | 49,052 | $ | 84,522 | 13,807 | $ | (455 | ) | $ | 1,143 | $ | 134,894 | |||||||||||||||||
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| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Loss | Total | |||||||||||||||||||||||||
Balance, December 31, 2017 | 6,256,063 | $ | 626 | $ | 47,431 | $ | 70,426 | 2,608 | $ | (77 | ) | $ | (2,667 | ) | $ | 115,739 | ||||||||||||||||
Net Income | — | — | — | 10,352 | — | — | — | 10,352 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (5,825 | ) | (5,825 | ) | ||||||||||||||||||||||
Cash dividends declared ($0.66 per share) | — | — | — | (4,133 | ) | — | — | — | (4,133 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock | — | — | 154 | — | — | — | — | 154 | ||||||||||||||||||||||||
Acquisition of treasury stock | — | — | — | — | 5,446 | (179 | ) | — | (179 | ) | ||||||||||||||||||||||
Stock options exercised | 18,450 | 2 | 325 | — | (2,325 | ) | 68 | — | 395 | |||||||||||||||||||||||
Compensation expense related to stock options | — | — | 177 | — | — | — | — | 177 | ||||||||||||||||||||||||
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Balance, September 30, 2018 | 6,274,513 | $ | 628 | $ | 48,087 | $ | 76,645 | 5,729 | $ | (188 | ) | $ | (8,492 | ) | $ | 116,680 | ||||||||||||||||
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See accompanying notes to the unaudited consolidated financial statements.
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Three Months Ended September 30, 2019 and 2018
(dollars in thousands, except share and per share data)
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance, June 30, 2019 | 6,304,413 | $ | 630 | $ | 48,741 | $ | 82,127 | 13,807 | $ | (455 | ) | $ | 440 | $ | 131,483 | |||||||||||||||||
Net Income | — | — | — | 3,907 | — | — | — | 3,907 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 703 | 703 | ||||||||||||||||||||||||
Cash dividends declared ($0.24 per share) | — | — | — | (1,512 | ) | — | — | — | (1,512 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock | — | — | 72 | — | — | — | — | 72 | ||||||||||||||||||||||||
Acquisition of treasury stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock options exercised | 10,275 | 2 | 187 | — | — | — | — | 189 | ||||||||||||||||||||||||
Compensation expense related to stock options | — | — | 52 | — | — | — | — | 52 | ||||||||||||||||||||||||
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Balance, September 30, 2019 | 6,314,688 | $ | 632 | $ | 49,052 | $ | 84,522 | 13,807 | $ | (455 | ) | $ | 1,143 | $ | 134,894 | |||||||||||||||||
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| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Loss | Total | |||||||||||||||||||||||||
Balance, June 30, 2018 | 6,266,388 | $ | 627 | $ | 47,815 | $ | 74,315 | 5,729 | $ | (188 | ) | $ | (7,036 | ) | $ | 115,533 | ||||||||||||||||
Net Income | — | — | — | 3,710 | — | — | — | 3,710 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (1,456 | ) | (1,456 | ) | ||||||||||||||||||||||
Cash dividends declared ($0.22 per share) | — | — | — | (1,380 | ) | — | — | — | (1,380 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock | — | — | 52 | — | — | — | — | 52 | ||||||||||||||||||||||||
Acquisition of treasury stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock options exercised | 8,125 | 1 | 161 | — | — | — | — | 162 | ||||||||||||||||||||||||
Compensation expense related to stock options | — | — | 59 | — | — | — | — | 59 | ||||||||||||||||||||||||
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Balance, September 30, 2018 | 6,274,513 | $ | 628 | $ | 48,087 | $ | 76,645 | 5,729 | $ | (188 | ) | $ | (8,492 | ) | $ | 116,680 | ||||||||||||||||
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See accompanying notes to the unaudited consolidated financial statements.
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income | $ | 10,619 | $ | 10,352 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,050 | 1,350 | ||||||
Depreciation | 739 | 665 | ||||||
Amortization of intangible assets | 79 | 97 | ||||||
Deferred income taxes | (176 | ) | (198 | ) | ||||
Net amortization of securities premiums and discounts | 1,104 | 1,308 | ||||||
Net realized gain on sales of securities | (232 | ) | (213 | ) | ||||
Earnings and proceeds on life insurance policies | (630 | ) | (848 | ) | ||||
Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net | (67 | ) | (42 | ) | ||||
Net gain on sale of loans | (125 | ) | (15 | ) | ||||
Loans originated for sale | (2,767 | ) | (752 | ) | ||||
Proceeds from sale of loans originated for sale | 2,846 | 767 | ||||||
Compensation expense related to stock options | 156 | 177 | ||||||
Compensation expense related to restricted stock | 217 | 154 | ||||||
Decrease (increase) in accrued interest receivable | 50 | (76 | ) | |||||
Increase in accrued interest payable | 817 | 271 | ||||||
Other, net | 1,017 | 1,062 | ||||||
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Net cash provided by operating activities | 14,697 | 14,059 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Securities available for sale: | ||||||||
Proceeds from sales | 22,862 | 17,745 | ||||||
Proceeds from maturities and principal reductions on mortgage-backed securities | 21,211 | 22,848 | ||||||
Purchases | (5,066 | ) | (15,458 | ) | ||||
Purchase of regulatory stock | (2,963 | ) | (3,865 | ) | ||||
Redemption of regulatory stock | 3,752 | 4,109 | ||||||
Net increase in loans | (57,891 | ) | (56,275 | ) | ||||
Purchase of premises and equipment | (1,056 | ) | (598 | ) | ||||
Proceeds from sales of foreclosed real estate owned | 312 | 696 | ||||||
Proceeds from sales of bank premises and equipment | 246 | — | ||||||
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Net cash used in investing activities | (18,593 | ) | (30,798 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 27,653 | 10,330 | ||||||
Net (decrease) increase in short-term borrowings | (268 | ) | 10,290 | |||||
Repayments of other borrowings | (22,378 | ) | (9,296 | ) | ||||
Proceeds from other borrowings | 6,000 | 10,000 | ||||||
Stock options exercised | 359 | 395 | ||||||
Purchase of treasury stock | (374 | ) | (179 | ) | ||||
Cash dividends paid | (4,529 | ) | (4,130 | ) | ||||
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Net cash provided by financing activities | 6,463 | 17,410 | ||||||
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Increase in cash and cash equivalents | 2,567 | 671 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 18,348 | 16,697 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 20,915 | $ | 17,368 | ||||
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NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited) (continued)
(dollars in thousands)
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash payments for: | ||||||||
Interest on deposits and borrowings | $ | 5,709 | $ | 3,570 | ||||
Income taxes paid, net of refunds | $ | 1,447 | $ | 1,547 | ||||
Supplemental Schedule of Noncash Investing Activities: | ||||||||
Transfers of loans to foreclosed real estate and repossession of other assets | $ | 1,478 | $ | 333 | ||||
Dividends payable | $ | 1,512 | $ | 1,379 | ||||
See accompanying notes to the unaudited consolidated financial statements.
Notes to the Unaudited Consolidated Financial Statements
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The unaudited consolidated financial statements include the accountsQuarterly Report on Form 10-Q (this “Amended Form 10-Q”) of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) andCorp (the “Company”) amends the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc. All significant intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions toCompany’s Quarterly Report on Form10-Q. 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 10-Q 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 consolidated financial position and results of operations of the Company. The operating results for the three month and nine month periodsquarter ended SeptemberJune 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other future interim period.
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Management has determined that the primary sources of revenue emanating from interest income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans, commitment fees, and fees from financial guarantees are not within the scope of ASC 606. As a result, no changes were made during the period related to those sources of revenue.
The following presents noninterest income, segregated by revenue streamsin-scope andout-of-scope of Topic 606, for the three and nine months ended September 30:
| Three months ended September 30, | ||||||||
| (dollars in thousands) | 2019 | 2018 | ||||||
Noninterest Income | ||||||||
In-scope of Topic 606: | ||||||||
Service charges on deposit accounts | $ | 72 | $ | 66 | ||||
ATM fees | 106 | 108 | ||||||
Overdraft fees | 323 | 372 | ||||||
Safe deposit box rental | 22 | 23 | ||||||
Loan related service fees | 228 | 152 | ||||||
Debit card fees | 370 | 358 | ||||||
Fiduciary activities | 167 | 151 | ||||||
Commissions on mutual funds and annuities | 30 | 51 | ||||||
Other income | 143 | 374 | ||||||
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Noninterest Income (in-scope of Topic 606) | 1,461 | 1,655 | ||||||
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Out-of-scope of Topic 606: | ||||||||
Net realized gains on sales of securities | 169 | 13 | ||||||
Loan servicing fees | 15 | 17 | ||||||
Gains on sales of loans | 15 | 15 | ||||||
Earnings on and proceeds from bank-owned life insurance | 222 | 297 | ||||||
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Noninterest Income (out-of-scope of Topic 606) | 421 | 342 | ||||||
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Total Noninterest Income | $ | 1,882 | $ | 1,997 | ||||
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| Nine months ended September 30, | ||||||||
| (dollars in thousands) | 2019 | 2018 | ||||||
Noninterest Income | ||||||||
In-scope of Topic 606: | ||||||||
Service charges on deposit accounts | $ | 205 | $ | 195 | ||||
ATM fees | 287 | 299 | ||||||
Overdraft fees | 1,017 | 1,137 | ||||||
Safe deposit box rental | 71 | 76 | ||||||
Loan related service fees | 451 | 387 | ||||||
Debit card fees | 1,067 | 991 | ||||||
Fiduciary activities | 454 | 463 | ||||||
Commissions on mutual funds and annuities | 111 | 154 | ||||||
Other income | 379 | 651 | ||||||
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Noninterest Income (in-scope of Topic 606) | 4,042 | 4,353 | ||||||
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Out-of-scope of Topic 606: | ||||||||
Net realized gains on sales of securities | 233 | 213 | ||||||
Loan servicing fees | 53 | 37 | ||||||
Gains on sales of loans | 125 | 15 | ||||||
Earnings on and proceeds from bank-owned life insurance | 630 | 848 | ||||||
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Noninterest Income (out-of-scope of Topic 606) | 1,041 | 1,113 | ||||||
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Total Noninterest Income | $ | 5,083 | $ | 5,466 | ||||
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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 reflect 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 restricted stock, and are determined using the treasury stock method.
The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share.
| (in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
Weighted average shares outstanding | 6,296 | 6,264 | 6,293 | 6,259 | ||||||||||||
Less: Unvested restricted shares | (35 | ) | (30 | ) | (35 | ) | (30 | ) | ||||||||
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Basic EPS weighted average shares outstanding | 6,261 | 6,234 | 6,258 | 6,229 | ||||||||||||
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Basic EPS weighted average shares outstanding | 6,261 | 6,234 | 6,258 | 6,229 | ||||||||||||
Add: Dilutive effect of stock options and restricted shares | 48 | 70 | 50 | 72 | ||||||||||||
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Diluted EPS weighted average shares outstanding | 6,309 | 6,304 | 6,308 | 6,301 | ||||||||||||
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For the three and nine month periods ended September 30, 2019, there were 60,650 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $31.61 per share as of September 30, 2019.
For the three and nine month periods ended September 30, 2018, there were no stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $39.16 per share on September 30, 2018.
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No awards were granted during the nine-month period ended September 30, 2019. As of September 30, 2019, there was $52,000 of total unrecognized compensation cost related tonon-vested options granted in 2018 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2019. Compensation costs related to stock options amounted to $156,000 and $177,000 during the nine-month periods ended September 30, 2019 and 2018, respectively.
A summary of the Company’s stock option activity for the nine-month period ended September 30, 2019 is as follows:
| Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||
Outstanding at January 1, 2019 | 208,700 | $ | 22.54 | 5.9 Yrs. | $ | 2,183 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Exercised | (19,575 | ) | 18.32 | 3.5 Yrs. | 283 | |||||||||||
Forfeited | — | — | — | — | ||||||||||||
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Outstanding at September 30, 2019 | 189,125 | $ | 22.98 | 5.4 Yrs. | $ | 1,691 | ||||||||||
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Exercisable at September 30, 2019 | 160,225 | $ | 21.29 | 4.7 Yrs. | $ | 1,691 | ||||||||||
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Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $31.61 per share as of September 30, 2019 and $33.00 per share as of December 31, 2018.
A summary of the Company’s restricted stock activity for the nine-month periods ended September 30, 2019 and 2018 is as follows:
| 2019 | 2018 | |||||||||||||||
| Number of Restricted Stock | Weighted-Average Grant Date Fair Value | Number of Restricted Stock | Weighted-Average Grant Date Fair Value | |||||||||||||
Non-vested, January 1, | 34,615 | $ | 27.82 | 30,415 | $ | 24.46 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Vested | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
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Non-vested, September 30, | 34,615 | $ | 27.82 | 30,415 | $ | 24.46 | ||||||||||
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The expected future compensation expense relating to the 34,615 shares ofnon-vested restricted stock outstanding as of September 30, 2019 is $746,000. This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $217,000 and $154,000 during the nine-month periods ended September 30, 2019 and 2018, respectively.
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The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three months and nine months ended September 30, 2019 and 2018:
| Unrealized gains (losses) on available for sale securities (a) | ||||
Balance as of June 30, 2019 | $ | 440 | ||
Other comprehensive income before reclassification | 835 | |||
Amount reclassified from accumulated other comprehensive loss | (132 | ) | ||
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Total other comprehensive income | 703 | |||
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Balance as of September 30, 2019 | $ | 1,143 | ||
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| Unrealized gains (losses) on available for sale securities (a) | ||||
Balance as of June 30, 2018 | $ | (7,036 | ) | |
Other comprehensive loss before reclassification | (1,446 | ) | ||
Amount reclassified from accumulated other comprehensive loss | (10 | ) | ||
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Total other comprehensive loss | (1,456 | ) | ||
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Balance as of September 30, 2018 | $ | (8,492 | ) | |
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| Unrealized gains (losses) on available for sale securities (a) | ||||
Balance as of December 31, 2018 | $ | (5,020 | ) | |
Other comprehensive income before reclassification | 6,346 | |||
Amount reclassified from accumulated other comprehensive loss | (183 | ) | ||
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Total other comprehensive income | 6,163 | |||
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Balance as of September 30, 2019 | $ | 1,143 | ||
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| Unrealized gains (losses) on available for sale securities (a) | ||||
Balance as of December 31, 2017 | $ | (2,667 | ) | |
Other comprehensive loss before reclassification | (5,657 | ) | ||
Amount reclassified from accumulated other comprehensive loss | (168 | ) | ||
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Total other comprehensive loss | (5,825 | ) | ||
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Balance as of September 30, 2018 | $ | (8,492 | ) | |
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The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss (in thousands) for the three months and nine months ended September 30, 2019 and 2018:
Details about other comprehensive income | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) (a) | Affected Line Item in Consolidated Statements of Income | ||||||||||
| Three months ended September 30, | ||||||||||||
| 2019 | 2018 | |||||||||||
Unrealized gains on available for sale securities | $ | 169 | $ | 13 | Net realized gains on sales of securities | |||||||
| (37 | ) | (3 | ) | Income tax expense | ||||||||
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| $ | 132 | $ | 10 | |||||||||
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| 2019 | 2018 | |||||||||||
Unrealized gains on available for sale securities | $ | 233 | $ | 213 | Net realized gains on sales of securities | |||||||
| (50 | ) | (45 | ) | Income tax expense | ||||||||
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| $ | 183 | $ | 168 | |||||||||
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The Bank is a party to financial instruments withoff-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 foron-balance sheet instruments.
A summary of the Bank’s financial instrument commitments is as follows:
| (in thousands) | September 30, | |||||||
| 2019 | 2018 | |||||||
Commitments to grant loans | $ | 49,806 | $ | 51,225 | ||||
Unfunded commitments under lines of credit | 65,854 | 78,024 | ||||||
Standby letters of credit | 3,687 | 4,410 | ||||||
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| $ | 119,347 | $ | 133,659 | |||||
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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 acase-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 September 30, 2019 for guarantees under standby letters of credit issued is not material.
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The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale were as follows:
| September 30, 2019 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In Thousands) | ||||||||||||||||
Available for Sale: | ||||||||||||||||
States and political subdivisions | $ | 78,145 | $ | 1,396 | $ | (14 | ) | $ | 79,527 | |||||||
Corporate obligations | 6,200 | 5 | (4 | ) | 6,201 | |||||||||||
Mortgage-backed securities-government sponsored entities | 126,087 | 346 | (962 | ) | 125,471 | |||||||||||
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Total debt securities | $ | 210,432 | $ | 1,747 | $ | (980 | ) | $ | 211,199 | |||||||
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| December 31, 2018 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In Thousands) | ||||||||||||||||
Available for Sale: | ||||||||||||||||
States and political subdivisions | $ | 99,218 | $ | 385 | $ | (1,990 | ) | $ | 97,613 | |||||||
Corporate obligations | 8,896 | — | (256 | ) | 8,640 | |||||||||||
Mortgage-backed securities-government sponsored entities | 142,197 | 25 | (5,198 | ) | 137,024 | |||||||||||
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Total debt securities | $ | 250,311 | $ | 410 | $ | (7,444 | ) | $ | 243,277 | |||||||
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The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):
| September 30, 2019 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
States and political subdivisions | $ | 7,697 | $ | (12) | $ | 481 | $ | (2) | $ | 8,178 | $ | (14) | ||||||||||||
Corporate obligations | — | — | 3,109 | (4) | 3,109 | (4) | ||||||||||||||||||
Mortgage-backed securities-government sponsored entities | 25,071 | (118) | 64,124 | (844) | 89,195 | (962) | ||||||||||||||||||
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| $ | 32,768 | $ | (130) | $ | 67,714 | $ | (850) | $ | 100,482 | $ | (980) | |||||||||||||
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| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
States and political subdivisions | $ | 19,140 | $ | (390 | ) | $ | 56,740 | $ | (1,600 | ) | $ | 75,880 | $ | (1,990 | ) | |||||||||
Corporate obligations | 2,045 | (21 | ) | 6,595 | (235 | ) | 8,640 | (256 | ) | |||||||||||||||
Mortgage-backed securities-government sponsored entities | 8,444 | (22 | ) | 122,950 | (5,176 | ) | 131,394 | (5,198 | ) | |||||||||||||||
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| $ | 29,629 | $ | (433 | ) | $ | 186,285 | $ | (7,011 | ) | $ | 215,914 | $ | (7,444 | ) | ||||||||||
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At September 30, 2019, the Company had 30 debt securities in an unrealized loss position in the less than twelve months category and 58 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2019. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.
The amortized cost and fair value of debt securities as of September 30, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
| Available for Sale | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In Thousands) | ||||||||
Due in one year or less | $ | 4,365 | $ | 4,378 | ||||
Due after one year through five years | 17,693 | 17,705 | ||||||
Due after five years through ten years | 33,194 | 33,365 | ||||||
Due after ten years | 29,093 | 30,280 | ||||||
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| 84,345 | 85,728 | |||||||
Mortgage-backed securities-government sponsored entities | 126,087 | 125,471 | ||||||
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| $ | 210,432 | $ | 211,199 | |||||
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Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross realized gains | $ | 169 | $ | 13 | $ | 233 | $ | 213 | ||||||||
Gross realized losses | — | — | — | — | ||||||||||||
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Net realized gain | $ | 169 | $ | 13 | $ | 233 | $ | 213 | ||||||||
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Proceeds from sales of securities | $ | 19,326 | $ | 3,162 | $ | 22,862 | $ | 17,745 | ||||||||
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Securities with a carrying value of $179,075,000 and $169,984,000 at September 30, 2019 and 2018, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
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Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):
| September 30, 2019 | December 31, 2018 | |||||||||||||||
Real Estate Loans: | ||||||||||||||||
Residential | $ | 230,624 | 25.5 | % | $ | 235,523 | 27.7 | % | ||||||||
Commercial | 384,376 | 42.4 | 374,790 | 44.1 | ||||||||||||
Construction | 18,267 | 2.0 | 17,445 | 2.0 | ||||||||||||
Commercial, financial and agricultural | 126,835 | 14.0 | 110,542 | 13.0 | ||||||||||||
Consumer loans to individuals | 145,547 | 16.1 | 112,002 | 13.2 | ||||||||||||
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Total loans | 905,649 | 100.0 | % | 850,302 | 100.0 | % | ||||||||||
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Deferred fees, net | (67 | ) | (120 | ) | ||||||||||||
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Total loans receivable | 905,582 | 850,182 | ||||||||||||||
Allowance for loan losses | (8,405 | ) | (8,452 | ) | ||||||||||||
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Net loans receivable | $ | 897,177 | $ | 841,730 | ||||||||||||
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The following table presents information regarding loans acquired and accounted for in accordance with ASC310-30 (in thousands):
| September 30, 2019 | December 31, 2018 | |||||||
Outstanding Balance | $ | 946 | $ | 1,055 | ||||
Carrying Amount | $ | 807 | $ | 886 | ||||
As a result of the acquisition of Delaware Bancshares, Inc. (“Delaware”2020 (the “Original Form 10-Q”), the Company added $1,397,000 of loans that were accounted for in accordance with ASC310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on aloan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, foreclosed real estate owned totaled $1,572,000 and $1,115,000, respectively. During the nine months ended September 30, 2019, the Company acquired three properties viadeed-in-lieu transactions which have subsequently been sold, and foreclosed on one commercial property with a carrying value of $608,000. The Company also disposed of three properties that were previously transferred to foreclosed real estate owned with a carrying value of $151,000 through the sale of the properties. As of September 30, 2019, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $300,000.
The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:
| Real Estate Loans | ||||||||||||||||||||||||
| Commercial | Consumer | |||||||||||||||||||||||
| Residential | Commercial | Construction | Loans | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 514 | $ | — | $ | — | $ | — | $ | 514 | ||||||||||||
Loans acquired with deteriorated credit quality | 577 | 230 | — | — | — | 807 | ||||||||||||||||||
Collectively evaluated for impairment | 230,047 | 383,632 | 18,267 | 126,835 | 145,547 | 904,328 | ||||||||||||||||||
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Total Loans | $ | 230,624 | $ | 384,376 | $ | 18,267 | $ | 126,835 | $ | 145,547 | $ | 905,649 | ||||||||||||
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| Residential | Commercial | Construction | Loans | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 1,319 | $ | — | $ | — | $ | — | $ | 1,319 | ||||||||||||
Loans acquired with deteriorated credit quality | 630 | 256 | — | — | — | 886 | ||||||||||||||||||
Collectively evaluated for impairment | 234,893 | 373,215 | 17,445 | 110,542 | 112,002 | 848,097 | ||||||||||||||||||
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Total Loans | $ | 235,523 | $ | 374,790 | $ | 17,445 | $ | 110,542 | $ | 112,002 | $ | 850,302 | ||||||||||||
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The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.
| Recorded Investment | Unpaid Principal Balance | Associated Allowance | ||||||||||
| (in thousands) | ||||||||||||
September 30, 2019 | ||||||||||||
With no related allowance recorded: | ||||||||||||
Real Estate Loans: | ||||||||||||
Commercial | $ | 514 | $ | 1,101 | $ | — | ||||||
|
|
|
|
|
| |||||||
Subtotal | 514 | 1,101 | — | |||||||||
|
|
|
|
|
| |||||||
Total: | ||||||||||||
Real Estate Loans: | ||||||||||||
Commercial | 514 | 1,101 | — | |||||||||
|
|
|
|
|
| |||||||
Total Impaired Loans | $ | 514 | $ | 1,101 | $ | — | ||||||
|
|
|
|
|
| |||||||
| Recorded Investment | Unpaid Principal Balance | Associated Allowance | ||||||||||
| (in thousands) | ||||||||||||
December 31, 2018 | ||||||||||||
With no related allowance recorded: | ||||||||||||
Real Estate Loans: | ||||||||||||
Commercial | $ | 1,319 | $ | 1,747 | $ | — | ||||||
|
|
|
|
|
| |||||||
Subtotal | 1,319 | 1,747 | — | |||||||||
|
|
|
|
|
| |||||||
Total: | ||||||||||||
Real Estate Loans: | ||||||||||||
Commercial | 1,319 | 1,747 | — | |||||||||
|
|
|
|
|
| |||||||
Total Impaired Loans | $ | 1,319 | $ | 1,747 | $ | — | ||||||
|
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|
|
|
| |||||||
The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2019 and 2018, respectively (in thousands):
| Average Recorded Investment | Interest Income Recognized | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
Real Estate Loans: | ||||||||||||||||
Residential | $ | — | $ | 23 | $ | — | $ | — | ||||||||
Commercial | 633 | 1,217 | — | 15 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 633 | $ | 1,240 | $ | — | $ | 15 | ||||||||
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|
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|
| |||||||||
The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2019 and 2018, respectively (in thousands):
| Average Recorded Investment | Interest Income Recognized | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
Real Estate Loans: | ||||||||||||||||
Residential | $ | — | $ | 23 | $ | — | $ | — | ||||||||
Commercial | 759 | 1,195 | 24 | 45 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 759 | $ | 1,218 | $ | 24 | $ | 45 | ||||||||
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|
|
|
| |||||||||
Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of September 30, 2019 and December 31, 2018, troubled debt restructured loans totaled $102,000 and $1.1 million, respectively, with no specific reserve. For the nine-month period ended September 30, 2019, there were no new loans identified as troubled debt restructurings. During 2019, the Company recognized acharge-off of $451,000 on a loan that was previously identified as a troubled debt restructuring. The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $608,000.
For the nine-month period ended September 30, 2018, there were no new loans identified as troubled debt restructurings nor did the Company recognize any write-down on loans that were previously identified as a troubled debt restructuring.
Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign orre-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2019 and December 31, 2018 (in thousands):
| Special | Doubtful | |||||||||||||||||||
| Pass | Mention | Substandard | or Loss | Total | ||||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Commercial real estate loans | $ | 368,796 | $ | 12,301 | $ | 3,279 | $ | — | $ | 384,376 | ||||||||||
Commercial loans | 126,371 | 252 | 212 | — | 126,835 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 495,167 | $ | 12,553 | $ | 3,491 | $ | — | $ | 511,211 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Special | Doubtful | |||||||||||||||||||
| Pass | Mention | Substandard | or Loss | Total | ||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Commercial real estate loans | $ | 360,838 | $ | 7,918 | $ | 6,034 | $ | — | $ | 374,790 | ||||||||||
Commercial loans | 109,966 | 82 | 494 | — | 110,542 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 470,804 | $ | 8,000 | $ | 6,528 | $ | — | $ | 485,332 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2019 and December 31, 2018 (in thousands):
| Performing | Nonperforming | Total | ||||||||||
September 30, 2019 | ||||||||||||
Residential real estate loans | $ | 229,857 | $ | 767 | $ | 230,624 | ||||||
Construction | 18,267 | — | 18,267 | |||||||||
Consumer loans | 145,490 | 57 | 145,547 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 393,614 | $ | 824 | $ | 394,438 | ||||||
|
|
|
|
|
| |||||||
| Performing | Nonperforming | Total | ||||||||||
December 31, 2018 | ||||||||||||
Residential real estate loans | $ | 234,725 | $ | 798 | $ | 235,523 | ||||||
Construction | 17,445 | — | 17,445 | |||||||||
Consumer loans | 112,002 | — | 112,002 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 364,172 | $ | 798 | $ | 364,970 | ||||||
|
|
|
|
|
| |||||||
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2019 and December 31, 2018 (in thousands):
| Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days Past Due and still accruing | Non-Accrual | Total Past Due and Non-Accrual | Total Loans | ||||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||||||
Real Estate loans | ||||||||||||||||||||||||||||
Residential | $ | 228,976 | $ | 692 | $ | 189 | $ | — | $ | 767 | $ | 1,648 | $ | 230,624 | ||||||||||||||
Commercial | 383,667 | 114 | 54 | — | 541 | 709 | 384,376 | |||||||||||||||||||||
Construction | 18,267 | — | — | — | — | — | 18,267 | |||||||||||||||||||||
Commercial loans | 126,795 | 14 | — | — | 26 | 40 | 126,835 | |||||||||||||||||||||
Consumer loans | 145,161 | 183 | 146 | — | 57 | 386 | 145,547 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 902,866 | $ | 1,003 | $ | 389 | $ | — | $ | 1,391 | $ | 2,783 | $ | 905,649 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days Past Due and still accruing | Non-Accrual | Total Past Due and Non-Accrual | Total Loans | ||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Real Estate loans | ||||||||||||||||||||||||||||
Residential | $ | 234,201 | $ | 373 | $ | 151 | $ | — | $ | 798 | $ | 1,322 | $ | 235,523 | ||||||||||||||
Commercial | 372,617 | 1,043 | 788 | — | 342 | 2,173 | 374,790 | |||||||||||||||||||||
Construction | 17,445 | — | — | — | — | — | 17,445 | |||||||||||||||||||||
Commercial loans | 110,191 | 320 | 31 | — | — | 351 | 110,542 | |||||||||||||||||||||
Consumer loans | 111,796 | 171 | 35 | — | — | 206 | 112,002 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 846,250 | $ | 1,907 | $ | 1,005 | $ | — | $ | 1,140 | $ | 4,052 | $ | 850,302 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.
As of September 30, 2019, the allocation of the allowance pertaining to commercial real estate loans is $889,000 lower than the allocation as of December 31, 2018. This decrease is due primarily to a reduction in the historical factor which decreased from 0.42% as of December 31, 2018 to 0.21% at September 30, 2019. Also contributing to the reduced reserve balance is a decrease in the qualitative factor related to the annualized growth rate and large balance loans, which was partially offset by an increase due to a declining economy. Increases in other loan categories reflect loan growth and replenishment offiled with the allowance due to charge offs.
The following table presents the allowance for loan losses by the classes of the loan portfolio:
| (In thousands) | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, December 31, 2018 | $ | 1,328 | $ | 5,455 | $ | 93 | $ | 712 | $ | 864 | $ | 8,452 | ||||||||||||
Charge Offs | (90 | ) | (615 | ) | — | (254 | ) | (246 | ) | (1,205 | ) | |||||||||||||
Recoveries | 20 | 18 | — | 31 | 39 | 108 | ||||||||||||||||||
Provision for loan losses | 310 | (292 | ) | 14 | 454 | 564 | 1,050 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance, September 30, 2019 | $ | 1,568 | $ | 4,566 | $ | 107 | $ | 943 | $ | 1,221 | $ | 8,405 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Ending balance collectively evaluated for impairment | $ | 1,568 | $ | 4,566 | $ | 107 | $ | 943 | $ | 1,221 | $ | 8,405 | ||||||||||||
| (In thousands) | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, June 30, 2019 | $ | 1,447 | $ | 4,694 | $ | 112 | $ | 896 | $ | 1,079 | $ | 8,228 | ||||||||||||
Charge Offs | (15 | ) | — | — | (20 | ) | (111 | ) | (146 | ) | ||||||||||||||
Recoveries | 5 | 4 | — | 10 | 4 | 23 | ||||||||||||||||||
Provision for loan losses | 131 | (132 | ) | (5 | ) | 57 | 249 | 300 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance, September 30, 2019 | $ | 1,568 | $ | 4,566 | $ | 107 | $ | 943 | $ | 1,221 | $ | 8,405 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| (In thousands) | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, December 31, 2017 | $ | 1,272 | $ | 5,265 | $ | 90 | $ | 463 | $ | 544 | $ | 7,634 | ||||||||||||
Charge Offs | (85 | ) | (244 | ) | — | (246 | ) | (189 | ) | (764 | ) | |||||||||||||
Recoveries | 2 | 33 | — | — | 25 | 60 | ||||||||||||||||||
Provision for loan losses | 185 | 205 | 4 | 497 | 459 | 1,350 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance, September 30, 2018 | $ | 1,374 | $ | 5,259 | $ | 94 | $ | 714 | $ | 839 | $ | 8,280 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Ending balance collectively evaluated for impairment | $ | 1,374 | $ | 5,259 | $ | 94 | $ | 714 | $ | 839 | $ | 8,280 | ||||||||||||
| (In thousands) | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, June 30, 2018 | $ | 1,455 | $ | 5,247 | $ | 128 | $ | 690 | $ | 806 | $ | 8,326 | ||||||||||||
Charge Offs | (10 | ) | (110 | ) | — | (241 | ) | (72 | ) | (433 | ) | |||||||||||||
Recoveries | — | 2 | — | — | 10 | 12 | ||||||||||||||||||
Provision for loan losses | (71 | ) | 120 | (34 | ) | 265 | 95 | 375 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance, September 30, 2018 | $ | 1,374 | $ | 5,259 | $ | 94 | $ | 714 | $ | 839 | $ | 8,280 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The Company’s primary business activity as of September 30, 2019 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy.
As of September 30, 2019, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $80.7 million of loans outstanding, or 8.9% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $65.0 million, or 7.2% of loans outstanding. During 2019, the Company did not recognize any charge offs in the named concentrations.
|
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring ornon-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on aNon-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2018 Form10-K. In accordance with ASU2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on anon-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk. Loans are considered a Level 3 classification.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:
| Fair Value Measurement Using | ||||||||||||||||
| Reporting Date | ||||||||||||||||
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| (In thousands) | ||||||||||||||||
September 30, 2019 | ||||||||||||||||
Available for Sale: | ||||||||||||||||
States and political subdivisions | $ | 79,527 | $ | — | $ | 79,527 | $ | — | ||||||||
Corporate obligations | 6,201 | — | 6,201 | — | ||||||||||||
Mortgage-backed securities-government sponsored entities | 125,471 | — | 125,471 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 211,199 | $ | — | $ | 211,199 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| (In thousands) | ||||||||||||||||
December 31, 2018 | ||||||||||||||||
Available for Sale: | ||||||||||||||||
States and political subdivisions | $ | 97,613 | $ | — | $ | 97,613 | $ | — | ||||||||
Corporate obligations | 8,640 | — | 8,640 | — | ||||||||||||
Mortgage-backed securities-government sponsored entities | 137,024 | — | 137,024 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 243,277 | $ | — | $ | 243,277 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Securities:
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not
traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/ornon-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.
Assets and Liabilities Required to be Measured and Reported at Fair Value on aNon-Recurring Basis
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:
| Fair Value Measurement Using Reporting Date | ||||||||||||||||
| (In thousands) | ||||||||||||||||
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
September 30, 2019 | ||||||||||||||||
Impaired Loans | $ | 514 | $ | — | $ | — | $ | 514 | ||||||||
Foreclosed Real Estate Owned | 1,572 | — | — | 1,572 | ||||||||||||
December 31, 2018 | ||||||||||||||||
Impaired Loans | $ | 1,319 | $ | — | $ | — | $ | 1,319 | ||||||||
Foreclosed Real Estate Owned | 1,115 | — | — | 1,115 | ||||||||||||
Impaired loans (generally carried at fair value):
The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.
As of September 30, 2019, the fair value investment in impaired loans totaled $514,000 which included five loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of September 30, 2019, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $587,000 over the life of the loans.
As of December 31, 2018, the fair value investment in impaired loans totaled $1,319,000 which included six loans which did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of December 31, 2018, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $428,000 over the life of the loans.
Foreclosed real estate owned (carried at fair value):
Real estate properties acquired through loan foreclosures, or by deed in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
The following table presents additional quantitative information about assets measured at fair value on anon-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
| (dollars in thousands) | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||||||||
September 30, 2019 | ||||||||||||||||
Impaired loans | $ | 311 | | Appraisal of collateral(1) | | | Appraisal adjustments(2) | | 10.00-10.00% (10.00%) | |||||||
Impaired loans | $ | 203 | | Present value of future cash flows | | Loan discount rate | 4.00-6.97% (5.35%) | |||||||||
Foreclosed real estate owned | $ | 1,572 | | Appraisal of collateral(1) | | Liquidation Expenses(2) | 7.00-10.00% (8.16%) | |||||||||
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
| (dollars in thousands) | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||||||||
December 31, 2018 | ||||||||||||||||
Impaired loans | $ | 232 | | Appraisal of collateral(1) | | | Appraisal adjustments(2) | | 10.00-81.54% (56.06%) | |||||||
Impaired loans | $ | 1,087 | | Present value of future cash flows | | Loan discount rate | 4.00-6.00% (5.80%) | |||||||||
Foreclosed real estate owned | $ | 1,115 | | Appraisal of collateral(1) | | Liquidation Expenses(2) | 7.00-85.71% (7.80%) | |||||||||
|
|
Assets and Liabilities Not Required to be Measured or Reported at Fair Value
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018.
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Mortgage servicing rights (generally carried at cost)
The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Other borrowings (carried at cost):
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.
The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at September 30, 2019 and December 31, 2018. (In thousands)
| Fair Value Measurements at September 30, 2019 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents (1) | $ | 20,915 | $ | 20,915 | $ | 20,915 | $ | — | $ | — | ||||||||||
Loans receivable, net | 897,177 | 917,146 | — | — | 917,146 | |||||||||||||||
Mortgage servicing rights | 180 | 220 | — | — | 220 | |||||||||||||||
Regulatory stock (1) | 3,137 | 3,137 | 3,137 | — | — | |||||||||||||||
Bank owned life insurance (1) | 38,562 | 38,562 | 38,562 | — | — | |||||||||||||||
Accrued interest receivable (1) | 3,726 | 3,726 | 3,726 | — | — | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 974,433 | 977,729 | 632,151 | — | 345,045 | |||||||||||||||
Short-term borrowings (1) | 52,778 | 52,778 | 52,778 | — | — | |||||||||||||||
Other borrowings | 35,906 | 36,229 | — | — | 36,229 | |||||||||||||||
Accrued interest payable (1) | 2,623 | 2,623 | 2,623 | — | — | |||||||||||||||
Off-balance sheet financial instruments: | ||||||||||||||||||||
Commitments to extend credit and outstanding letters of credit | — | — | — | — | — | |||||||||||||||
| Fair Value Measurements at December 31, 2018 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents (1) | $ | 18,348 | $ | 18,348 | $ | 18,348 | $ | — | $ | — | ||||||||||
Loans receivable, net | 841,730 | 840,134 | — | — | 840,134 | |||||||||||||||
Mortgage servicing rights | 178 | 220 | — | — | 220 | |||||||||||||||
Regulatory stock (1) | 3,926 | 3,926 | 3,926 | — | — | |||||||||||||||
Bank owned life insurance (1) | 37,932 | 37,932 | 37,932 | — | — | |||||||||||||||
Accrued interest receivable (1) | 3,776 | 3,776 | 3,776 | — | — | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 946,780 | 945,773 | 601,604 | — | 344,169 | |||||||||||||||
Short-term borrowings (1) | 53,046 | 53,046 | 53,046 | — | — | |||||||||||||||
Other borrowings | 52,284 | 52,043 | — | — | 52,043 | |||||||||||||||
Accrued interest payable (1) | 1,806 | 1,806 | 1,806 | — | — | |||||||||||||||
Off-balance sheet financial instruments: | ||||||||||||||||||||
Commitments to extend credit and outstanding letters of credit | — | — | — | — | — | |||||||||||||||
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Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU2016-02,Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments
over the lease term on a straight-line basis. ASU2016-02 was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU2018-11,“Leases (Topic 842)—Targeted Improvements,”which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issuedASU2018-20, “Leases (Topic 842)- Narrow-Scope Improvements for Lessors,”which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU2016-02, ASU2018-11 and ASU2018-20 on January 1, 2019, we recorded recognized aright-of-use assets and related lease liabilities totaling $5.3 million each, which are recorded in other assets and other liabilities, respectively.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU2016-13,Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued inmid-November. We expect to recognize aone-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any suchone-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU2017-04,Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15,(the “SEC”) on August 7, 2020. All other entities, includingnot-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued inmid-November. This Update is not expected to have a significant impact on the Company’s financial statements.
In February 2017, the FASB issued ASU2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan’s interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.
ASU2018-04,Investments – Debt Securities (Topic 320) andRegulated Operations (Topic 980) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117.
In May 2018, the FASB issued ASU2018-06,Codification Improvements to Topic 942, Financial Services – Depository and Lending, which supersedes outdated guidance related to the Office of the Comptroller of the Currency (OCC)’s Banking Circular 202,Accounting for Net Deferred Tax Charges(Circular 202), because that guidance has been rescinded by the OCC and no longer is relevant.
In August 2018, the FASB issued ASU2018-12,Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This Update is intended to improve financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities, by requiring updated assumptions for liability measurement, standardizing the liability discount rate, simplifying and improving the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts by requiring those benefits to be measured at fair value instead of using two different measurement models, simplifying the amortization of deferred acquisition costs, and increasing transparency by improving the effectiveness of disclosures. This Update is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On October 16, 2019, the FASB voted to defer the effective date for ASC 944, Financial Services – Insurance, for public business entities that are SEC filers, except for smaller reporting companies, to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years and for all other entities, including smaller reporting companies, to fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The final ASU is expected to be issued inmid-November. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU2018-14,Compensation – Retirement Benefits (Topic715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of aone-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Subtopic350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred forinternal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include aninternal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2018, the FASB issued ASU2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update2017-12. For public business entities that already have adopted the amendments in Update2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update2017-12. This Update is not expected to have a significant impact on the Company’s financial statements.
In October, 2018, the FASB issued ASU2018-17,Consolidation (Topic 810), which made improvements in 1) applying the variable interest entity (VIE) guidance to private companies under common control and 2) considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. Under the amendments in this Update, a private company may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. In addition, indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In November, 2018, the FASB issued ASU2018-18,Collaborative Arrangements (Topic 808), which made the following targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements (1) clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (2) addunit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In April 2019, the FASB issued ASU2019-04,Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued inmid-November.Topic 815, Derivatives and Hedgingamendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update.Topic 825, Financial Instrumentsamendmentsare effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2019, the FASB issued ASU2019-05,Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC825-10.3. The election must be applied on aninstrument-by-instrument basis and is not available for eitheravailable-for-sale orheld-to-maturity debt securities. For entities that elect the
fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU2016-13, the effective dates and transition requirements are the same as those in ASU2016-13. For entities that have adopted ASU2016-13, ASU2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued inmid-November. The Company is currently evaluatingfiling this Amended Form 10-Q because the impactOriginal Form 10-Q inadvertently omitted the adoptionsignatures of the standard will have on the Company’s financial position or results of operations.
In July 2019, the FASB issued ASU2019-07,Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure UpdatePresident and Simplification, and Nos.33-10231 and33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates.This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule ReleasesNo. 33-10532,Disclosure Update and Simplification, and Nos.33-10231 and33-10442,Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.
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:
possible future impairment of intangible assets
our ability to effectively manage future growth
loan losses in excess of our allowance
risks inherent in commercial lending
real estate collateral which is subject to declines in value
potential other-than-temporary impairments
soundness of other financial institutions
interest rate risks
potential liquidity risk
deposits acquired through competitive bidding
availability of capital
regional economic factors
loss of senior officers
comparatively low legal lending limits
risks of new capital requirements
potential impact of Tax Cuts and Jobs Act
limited market for the Company’s stock
restrictions on ability to pay dividends
common stock may lose value
insider ownership
issuing additional shares may dilute ownership
competitive environment
certain anti-takeover provisions
extensive and complex governmental regulation and associated cost
cybersecurity
Norwood Financial Corp. 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 for the year ended December 31, 2018 (incorporated by reference in Item 8 of the Form10-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, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.
The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock.
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 that it is more likely than not that all deferred tax assets will be realized.
The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
Management determines the appropriate classification of debt securities at the time of purchase andre-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at September 30, 2019 and December 31, 2018 represent temporary impairment of the securities, related to changes in interest rates.
In connection with acquisitions, the Company recorded goodwill in the amount of $11.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Company or the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss.
Changes in Financial Condition
General
Total assets as of September 30, 2019 were $1.216 billion compared to $1.185 billion as of December 31, 2018. The increase reflects growth in loans which were funded by an increase in deposits and cash flows from securities.
Securities
The fair value of securities available for sale as of September 30, 2019 was $211.2 million compared to $243.3 million as of December 31, 2018. The decrease in the securities portfolio is the result of sales, calls, maturities and principal reductions of securities. The fair value of the portfolio increased $7.8 million due to a reduction in unrealized losses on securities related to the decrease in interest rates during the first nine months of 2019.
The carrying value of the Company’s securities portfolio(Available-for Sale) consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||||||||||
| (dollars in thousands) | Amount | % of portfolio | Amount | % of portfolio | ||||||||||||
States and political subdivisions | $ | 79,527 | 37.7 | % | $ | 97,613 | 40.1 | % | ||||||||
Corporate obligations | 6,201 | 2.9 | 8,640 | 3.6 | ||||||||||||
Mortgage-backed securities-government sponsored entities | 125,471 | 59.4 | 137,024 | 56.3 | ||||||||||||
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Total | $ | 211,199 | 100.0 | % | $ | 243,277 | 100.0 | % | ||||||||
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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. Management believes that the unrealized losses on all holdings 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
Loans receivable totaled $905.6 million at September 30, 2019 compared to $850.2 million as of December 31, 2018. The increase in loans receivable includes a $29.5 million increase in retail loans and a $25.9 million increase in commercial loans.
The allowance for loan losses totaled $8,405,000 as of September 30, 2019 and represented 0.93% of total loans outstanding, compared to $8,452,000, or 0.99% of total loans, at December 31, 2018. The Company had net charge-offs for the nine months ended September 30, 2019 of $1,205,000 compared to $704,000 in the corresponding period in 2018. The increase in charge-offs was due to one large commercial loan relationship which was written down by $336,000 during the second quarter of 2019, and one commercial real estate credit which was written down by $451,000 and subsequently transferred to foreclosed real estate during the first quarter of 2019. The Company’s management 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, and loan growth. Management considers the allowance adequate at September 30, 2019 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any that might be incurred in the future.
As of September 30, 2019,non-performing loans totaled $1,391,000, or 0.15% of total loans compared to $1,140,000, or 0.13%, of total loans at December 31, 2018. At September 30, 2019,non-performing assets totaled $2,963,000, or 0.24%, of total assets, compared to $2,255,000, or 0.19%, of total assets at December 31, 2018.
The following table sets forth information regardingnon-performing loans and foreclosed real estate at the dates indicated:
| (dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Loans accounted for on anon-accrual basis: | ||||||||
Real Estate | ||||||||
Residential | $ | 767 | $ | 798 | ||||
Commercial | 541 | 342 | ||||||
Construction | — | — | ||||||
Commercial, financial and agricultural | 26 | — | ||||||
Consumer loans to individuals | 57 | — | ||||||
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Totalnon-accrual loans * | 1,391 | 1,140 | ||||||
Accruing loans which are contractually past due 90 days or more | — | — | ||||||
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Totalnon-performing loans | 1,391 | 1,140 | ||||||
Foreclosed real estate | 1,572 | 1,115 | ||||||
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Totalnon-performing assets | $ | 2,963 | $ | 2,255 | ||||
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Allowance for loans losses | $ | 8,405 | $ | 8,452 | ||||
Coverage ofnon-performing loans | 604.24 | % | 741.40 | % | ||||
Non-performing loans to total loans | 0.15 | % | 0.13 | % | ||||
Non-performing loans to total assets | 0.11 | % | 0.10 | % | ||||
Non-performing assets to total assets | 0.24 | % | 0.19 | % | ||||
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Deposits
During the nine-month period ended September 30, 2019, total deposits increased $27.7 million due primarily to a $29.8 million increase in demand deposits which reflects seasonal activity in municipal account relationships. All other deposits decreased $2.1 million, net.
The following table sets forth deposit balances as of the dates indicated:
| (dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Non-interest bearing demand | $ | 231,211 | $ | 201,457 | ||||
Interest-bearing demand | 99,671 | 88,917 | ||||||
Money market deposit accounts | 135,404 | 137,636 | ||||||
Savings | 166,398 | 173,593 | ||||||
Time deposits <$100,000 | 146,779 | 145,343 | ||||||
Time deposits >$100,000 | 194,970 | 199,834 | ||||||
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Total | $ | 974,433 | $ | 946,780 | ||||
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Borrowings
Other borrowings as of September 30, 2019, totaled $35.9 million compared to $52.3 million as of December 31, 2018. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, decreased slightly due to an $11.3 million reduction in overnight borrowings, which was partially offset by an $11.2 million increase in repurchase agreements.
Other borrowings consisted of the following:
| (dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Notes with the FHLB: | ||||||||
Amortizing fixed rate borrowing due January 2019 at 1.393% | $ | — | $ | 423 | ||||
Term fixed rate borrowing due August 2019 at 1.606% | — | 10,000 | ||||||
Amortizing fixed rate borrowing due June 2020 at 1.490% | 1,548 | 3,079 | ||||||
Amortizing fixed rate borrowing due July 2020 at 2.77% | 4,234 | 7,962 | ||||||
Amortizing fixed rate borrowing due December 2020 at 1.706% | 1,290 | 2,051 | ||||||
Amortizing fixed rate borrowing due December 2020 at 3.06% | 3,161 | 5,000 | ||||||
Amortizing fixed rate borrowing due March 2022 at 1.748% | 2,227 | 2,877 | ||||||
Amortizing fixed rate borrowing due August 2022 at 1.94% | 5,838 | — | ||||||
Amortizing fixed rate borrowing due October 2022 at 1.88% | 5,022 | 6,200 | ||||||
Amortizing fixed rate borrowing due October 2023 at 3.24% | 8,286 | 9,692 | ||||||
Amortizing fixed rate borrowing due December 2023 at 3.22% | 4,300 | 5,000 | ||||||
|
|
|
| |||||
| $ | 35,906 | $ | 52,284 | |||||
|
|
|
| |||||
Stockholders’ Equity and Capital Ratios
As of September 30, 2019, stockholders’ equity totaled $134.9 million, compared to $122.3 million as of December 31, 2018. The net change in stockholders’ equity included $10.6 million of net income that was partially offset by $4.5 million of dividends declared. In addition, total equity increased $6.2 million due to an increase in the fair value of securities in the available for sale portfolio, net of tax. This increase in fair value is the result of a change in interest rates and spreads, 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 andyear-end period.
A comparison of the Company’s consolidated regulatory capital ratios is as follows:
| September 30, 2019 | December 31, 2018 | |||||||
Tier 1 Capital | ||||||||
(To average assets) | 10.07 | % | 9.82 | % | ||||
Tier 1 Capital | ||||||||
(To risk-weighted assets) | 13.01 | % | 13.04 | % | ||||
Common Equity Tier 1 Capital | ||||||||
(To risk-weighted assets) | 13.01 | % | 13.04 | % | ||||
Total Capital | ||||||||
(To risk-weighted assets) | 13.91 | % | 14.00 | % | ||||
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain“available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless aone-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2019.
Liquidity
As of September 30, 2019, the Company had cash and cash equivalents of $20.9 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 $211.2 million which could be used for liquidity needs. This totals $232.1 million of liquidity and represents 19.1% of total assets compared to $261.6 million and 22.1% of total assets as of December 31, 2018. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2019 and December 31, 2018. Based upon these measures, the Company believes its liquidity is adequate.
Capital Resources
The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2020. There were no borrowings under this line as of September 30, 2019 and December 31, 2018.
The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of September 30, 2019 and December 31, 2018.
The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of September 30, 2019 and December 31, 2018.
The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $423,726,000 as of September 30, 2019, of which $38,103,000 and $67,873,000 was outstanding at September 30, 2019 and December 31, 2018, respectively. Additionally, as of September 30, 2019, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $55.0 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $45.0 million outstanding in the form of Letters of Credit as of December 31, 2018. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which arenon-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable andtax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on pages 40 and 44. Although the Company believes that thesenon-GAAP financial measures enhance investors’ understanding of our business and performance, thesenon-GAAP financial measures should not be considered an alternative to GAAP measures.
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands) | Three Months Ended September 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Average Balance (2) | Interest (1) | Average Rate (3) | Average Balance (2) | Interest (1) | Average Rate (3) | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 693 | $ | 5 | 2.89 | % | $ | 471 | $ | 2 | 1.70 | % | ||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 147,079 | 798 | 2.17 | 168,086 | 895 | 2.13 | ||||||||||||||||||
Tax-exempt (1) | 80,099 | 608 | 3.04 | 97,966 | 744 | 3.04 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total securities available for sale (1) | 227,178 | 1,406 | 2.48 | 266,052 | 1,639 | 2.46 | ||||||||||||||||||
Loans receivable (1) (4) (5) | 897,850 | 10,890 | 4.85 | 813,092 | 9,402 | 4.63 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | 1,125,721 | 12,301 | 4.37 | 1,079,615 | 11,043 | 4.09 | ||||||||||||||||||
Non-interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 14,968 | 14,629 | ||||||||||||||||||||||
Allowance for loan losses | (8,344 | ) | (8,440 | ) | ||||||||||||||||||||
Other assets | 83,474 | 67,247 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Totalnon-interest earning assets | 90,098 | 73,436 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Assets | $ | 1,215,819 | $ | 1,153,051 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand and money market | $ | 232,893 | $ | 173 | 0.30 | $ | 231,234 | $ | 110 | 0.19 | ||||||||||||||
Savings | 168,972 | 26 | 0.06 | 179,897 | 23 | 0.05 | ||||||||||||||||||
Time | 348,890 | 1,588 | 1.82 | 310,502 | 983 | 1.27 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing deposits | 750,755 | 1,787 | 0.95 | 721,633 | 1,116 | 0.62 | ||||||||||||||||||
Short-term borrowings | 56,136 | 135 | 0.96 | 50,998 | 111 | 0.87 | ||||||||||||||||||
Other borrowings | 39,349 | 246 | 2.50 | 36,028 | 171 | 1.90 | ||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 846,240 | 2,168 | 1.02 | 808,659 | 1,398 | 0.69 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 218,893 | 217,258 | ||||||||||||||||||||||
Other liabilities | 16,649 | 9,829 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Totalnon-interest bearing liabilities | 235,542 | 227,087 | ||||||||||||||||||||||
Stockholders’ equity | 134,037 | 117,305 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,215,819 | $ | 1,153,051 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income/spread (tax equivalent basis) | 10,133 | 3.35 | % | 9,645 | 3.40 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Tax-equivalent basis adjustment | (242 | ) | (257 | ) | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ | 9,891 | $ | 9,388 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 3.60 | % | 3.57 | % | ||||||||||||||||||||
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|
| |||||||||||||||||||||
|
|
|
|
|
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
| Increase/(Decrease) Three months ended September 30, 2019 Compared to Three months ended September 30, 2018 Variance due to | ||||||||||||
| Volume | Rate | Net | ||||||||||
| (dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Interest-bearing deposits with banks | $ | 1 | $ | 2 | $ | 3 | ||||||
Securities available for sale: | ||||||||||||
Taxable | (112 | ) | 15 | (97 | ) | |||||||
Tax-exempt securities | (136 | ) | — | (136 | ) | |||||||
|
|
|
|
|
| |||||||
Total securities | (248 | ) | 15 | (233 | ) | |||||||
Loans receivable | 1,005 | 483 | 1,488 | |||||||||
|
|
|
|
|
| |||||||
Total interest-earning assets | 758 | �� | 500 | 1,258 | ||||||||
|
|
|
|
|
| |||||||
Interest-bearing liabilities: | ||||||||||||
Interest-bearing demand and money market | 1 | 62 | 63 | |||||||||
Savings | (1 | ) | 4 | 3 | ||||||||
Time | 161 | 444 | 605 | |||||||||
|
|
|
|
|
| |||||||
Total interest-bearing deposits | 161 | 510 | 671 | |||||||||
Short-term borrowings | 12 | 12 | 24 | |||||||||
Other borrowings | 19 | 56 | 75 | |||||||||
|
|
|
|
|
| |||||||
Total interest-bearing liabilities | 192 | 578 | 770 | |||||||||
|
|
|
|
|
| |||||||
Net interest income(tax-equivalent basis) | $ | 566 | $ | (78 | ) | $ | 488 | |||||
|
|
|
|
|
| |||||||
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
Comparison of Operating Results for the Three Months Ended September 30, 2019 to September 30, 2018
General
For the three months ended September 30, 2019, net income totaled $3,907,000 compared to $3,710,000 earned in the similar period in 2018. The increase in net income for the three months ended September 30, 2019 was due primarily to a $503,000 improvement in net interest income. Earnings per share for the current period were $0.62 per share for basic shares and fully diluted shares compared to $0.59 per share for basic shares and $0.58 per share for fully diluted shares for the three months ended September 30, 2018. The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2019 were 1.27% and 11.56%, respectively, compared to 1.28% and 12.55%, respectively, for the similar period in 2018.
The following table sets forth changes in net income:
| (dollars in thousands) | Three months ended | |||
| September 30, 2019 to September 30, 2018 | ||||
Net income three months ended September 30, 2018 | $ | 3,710 | ||
Change due to: | ||||
Net interest income | 503 | |||
Provision for loan losses | 75 | |||
Net gains on sales | 156 | |||
Other income | (271 | ) | ||
Salaries and employee benefits | (90 | ) | ||
Occupancy, furniture and equipment | (6 | ) | ||
Data processing and related operations | (112 | ) | ||
Foreclosed real estate | (50 | ) | ||
All other expenses | 39 | |||
Income tax expense | (47 | ) | ||
|
| |||
Net income three months ended September 30, 2019 | $ | 3,907 | ||
|
| |||
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2019 totaled $10,133,000 which was $488,000 higher than the comparable period in 2018. The increase in net interest income was due primarily to a $1,488,000 increase in interest income (fte) on loans.Tax-equivalent interest income was negatively impacted by a $233,000 decrease in securities income. The fte net interest spread and net interest margin were 3.35% and 3.60%, respectively, for the three months ended September 30, 2019 compared to 3.40% and 3.57%, respectively, for the similar period in 2018. The decrease in the net interest spread reflects the increased cost of funding.
Interest income (fte) totaled $12,301,000 with a yield on average earning assets of 4.37% compared to $11,043,000 and 4.09% for the 2018 period. Average loans increased $84.8 million over the comparable period of last year, while average securities decreased $38.9 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.126 billion for the three months ended September 30, 2019, an increase of $46.1 million over the average for the similar period in 2018.
Interest expense for the three months ended September 30, 2019 totaled $2,168,000 at an average cost of 1.02% compared to $1,398,000 and 0.69% for the similar period in 2018. The increase in average cost reflects the rising rates on borrowed funds and certificates of deposit. The average cost of time deposits, which is the most significant component of funding, increased to 1.82% from 1.27% for the similar period in the prior year.
Provision for Loan Losses
The Company’s provision for loan losses for the three months ended September 30, 2019 was $300,000 compared to $375,000 for the three months ended September 30, 2018. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $123,000 for the quarter ended September 30, 2019, compared to $421,000 for the similar period in 2018. At September 30, 2019, the allowance for loan losses represented 0.93% of loans receivable and 604% ofnon-performing loans.
Other Income
Other income totaled $1,882,000 for the three months ended September 30, 2019, compared to $1,997,000 for the similar period in 2018. The decrease was due primarily to a $75,000 reduction in earnings and proceeds on bank-owned life insurance policies and a $283,000 reduction in other income due to a litigation settlement in the 2018 period. Gains on sales of securities increased $156,000 over the comparable period in 2018.
Other Expense
Other expense for the three months ended September 30, 2019 totaled $6,791,000, which was $219,000 higher than the same period of 2018 due primarily to a $90,000 increase in salaries and benefits expenses and a $112,000 increase in data processing costs. All other operating expenses increased $17,000, net. The efficiency ratio was 56.5% during the three months ended September 30, 2019 and 2018.
Income Tax Expense
Income tax expense totaled $775,000 for an effective tax rate of 16.6% for the period ended September 30, 2019 compared to $728,000 for an effective tax rate of 16.4% for the similar period in 2018.
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands) | Nine Months Ended September 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
| (2) | (1) | (3) | (2) | (1) | (3) | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest bearing deposits with banks | $ | 3,853 | $ | 70 | 2.42 | % | $ | 4,789 | $ | 63 | 1.75 | % | ||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 152,404 | 2,545 | 2.23 | 169,475 | 2,674 | 2.10 | ||||||||||||||||||
Tax-exempt (1) | 89,369 | 2,038 | 3.04 | 103,217 | 2,366 | 3.06 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total securities available for sale (1) | 241,773 | 4,583 | 2.53 | 272,692 | 5,040 | 2.46 | ||||||||||||||||||
Loans receivable (1) (4) (5) | 877,283 | 31,419 | 4.78 | 789,700 | 26,950 | 4.55 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | 1,122,909 | 36,072 | 4.28 | 1,067,181 | 32,053 | 4.00 | ||||||||||||||||||
Non-interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 14,473 | 14,317 | ||||||||||||||||||||||
Allowance for loan losses | (8,472 | ) | (8,203 | ) | ||||||||||||||||||||
Other assets | 79,743 | 67,882 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Totalnon-interest earning assets | 85,744 | 73,996 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Assets | $ | 1,208,653 | $ | 1,141,177 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand and money market | $ | 230,748 | $ | 486 | 0.28 | $ | 236,390 | $ | 335 | 0.19 | ||||||||||||||
Savings | 172,148 | 77 | 0.06 | 179,489 | 67 | 0.05 | ||||||||||||||||||
Time | 356,222 | 4,792 | 1.79 | 317,549 | 2,796 | 1.17 | ||||||||||||||||||
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|
|
|
|
|
| |||||||||||||||||
Total interest-bearing deposits | 759,118 | 5,355 | 0.94 | 733,428 | 3,198 | 0.58 | ||||||||||||||||||
Short-term borrowings | 48,957 | 344 | 0.94 | 39,310 | 201 | 0.68 | ||||||||||||||||||
Other borrowings | 45,059 | 827 | 2.45 | 33,982 | 442 | 1.73 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 853,134 | 6,526 | 1.02 | 806,720 | 3,841 | 0.63 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 210,900 | 209,323 | ||||||||||||||||||||||
Other liabilities | 15,252 | 9,237 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Totalnon-interest bearing liabilities | 226,152 | 218,560 | ||||||||||||||||||||||
Stockholders’ equity | 129,367 | 115,897 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,208,653 | $ | 1,141,177 | ||||||||||||||||||||
|
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|
| |||||||||||||||||||||
Net interest income/spread (tax equivalent basis) | 29,546 | 3.26 | % | 28,212 | 3.37 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Tax-equivalent basis adjustment | (773 | ) | (802 | ) | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ 28,773 | $ | 27,410 | |||||||||||||||||||||
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|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 3.51 | % | 3.52 | % | ||||||||||||||||||||
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|
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
| Increase/(Decrease) Nine months ended September 30, 2019 Compared to Nine months ended September 30, 2018 Variance due to | ||||||||||||
| Volume | Rate | Net | ||||||||||
| (dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Interest-bearing deposits with banks | $ | (15 | ) | $ | 22 | $ | 7 | |||||
Securities available for sale: | ||||||||||||
Taxable | (215 | ) | 86 | (129 | ) | |||||||
Tax-exempt securities | (315 | ) | (13 | ) | (328 | ) | ||||||
|
|
|
|
|
| |||||||
Total securities | (530 | ) | 73 | (457 | ) | |||||||
Loans receivable | 3,015 | 1,454 | 4,469 | |||||||||
|
|
|
|
|
| |||||||
Total interest-earning assets | 2,470 | 1,549 | 4,019 | |||||||||
|
|
|
|
|
| |||||||
Interest-bearing liabilities: | ||||||||||||
Interest-bearing demand and money market | (11 | ) | 162 | 151 | ||||||||
Savings | (3 | ) | 13 | 10 | ||||||||
Time | 476 | 1,520 | 1,996 | |||||||||
|
|
|
|
|
| |||||||
Total interest-bearing deposits | 462 | 1,695 | 2,157 | |||||||||
Short-term borrowings | 60 | 83 | 143 | |||||||||
Other borrowings | 175 | 210 | 385 | |||||||||
|
|
|
|
|
| |||||||
Total interest-bearing liabilities | 697 | 1,988 | 2,685 | |||||||||
|
|
|
|
|
| |||||||
Net interest income(tax-equivalent basis) | $ | 1,773 | $ | (439 | ) | $ | 1,334 | |||||
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|
|
|
|
| |||||||
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
Comparison of Operating Results for the Nine Months Ended September 30, 2019 to September 30, 2018
General
For the nine months ended September 30, 2019, net income totaled $10,619,000 compared to $10,352,000 earned in the similar period in 2018. The increase in net income for the nine months ended September 30, 2019 was due primarily to a $1,363,000 increase in net interest income. Earnings per share for the current period were $1.70 per share for basic shares and $1.68 for fully diluted shares compared to $1.66 per share for basic shares and $1.64 per share for fully diluted shares for the nine months ended September 30, 2018. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2019 were 1.17% and 10.97%, respectively, compared to 1.21% and 11.94%, respectively, for the similar period in 2018.
The following table sets forth changes in net income:
| (dollars in thousands) | Nine months ended | |||
| September 30, 2019 to September 30, 2018 | ||||
Net income nine months ended September 30, 2018 | $ | 10,352 | ||
Change due to: | ||||
Net interest income | 1,363 | |||
Provision for loan losses | 300 | |||
Net gains on sales | 130 | |||
Other income | (513 | ) | ||
Salaries and employee benefits | (470 | ) | ||
Occupancy, furniture and equipment | (121 | ) | ||
Data processing and related operations | (373 | ) | ||
Foreclosed real estate | 31 | |||
All other expenses | (118 | ) | ||
Income tax expense | 38 | |||
|
| |||
Net income nine months ended September 30, 2019 | $ | 10,619 | ||
|
| |||
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2019 totaled $29,546,000 which was $1,334,000 higher than the comparable period in 2018. The increase in net interest income was due primarily to a $4,469,000 increase in interest income (fte) on loans.Tax-equivalent interest income was negatively impacted by a $457,000 decrease in securities income. The fte net interest spread and net interest margin were 3.26% and 3.51%, respectively, for the nine months ended September 30, 2019 compared to 3.37% and 3.52%, respectively, for the similar period in 2018. The decrease in the net interest spread and margin reflects the increased cost of funding.
Interest income (fte) totaled $36,072,000 with a yield on average earning assets of 4.28%, compared to $32,053,000 and 4.00% for the 2018 period. Average loans increased $87.6 million over the comparable period of last year, while average securities decreased $30.9 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.209 billion for the nine months ended September 30, 2019, an increase of $67.5 million over the average for the similar period in 2018.
Interest expense for the nine months ended September 30, 2019 totaled $6,526,000 at an average cost of 1.02% compared to $3,841,000 and 0.63% for the similar period in 2018. The increase in average cost reflects the rising interest rates on borrowed funds and certificates of deposit. The average cost of time deposits, which is the most significant component of funding, increased to 1.79% from 1.17% for the similar period in the prior year.
Provision for Loan Losses
The Company’s provision for loan losses for the nine months ended September 30, 2019 was $1,050,000 compared to $1,350,000 for the nine months ended September 30, 2018. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $1,097,000 for the nine months ended September 30, 2019 compared to $704,000 for the similar period in 2018. The increase in charge-offs was due primarily to two commercial credits which were written down by $786,000 in the aggregate during the 2019 period. At September 30, 2019, the allowance for loan losses represented 0.93% of loans receivable and 604% ofnon-performing loans.
Other Income
Other income totaled $5,083,000 for the nine months ended September 30, 2019 compared to $5,466,000 for the similar period in 2018. The decrease was due primarily to a $218,000 decrease in earnings and proceeds on bank-owned life insurance policies and a $358,000 decrease in other income due to the settlement of litigation in the 2018 period. Gains from the sales of loans and securities increased $130,000 over the first nine months of 2018, while all other items included in other income increased $63,000, net.
Other Expenses
Other expenses for the nine months ended September 30, 2019 totaled $20,224,000 which was $1,051,000 higher than the same period of 2018 due primarily to a $470,000 increase in salaries and benefits expenses and a $373,000 increase in data processing costs. All other operating expenses increased $208,000, net. The efficiency ratio for the first nine months of 2019 was 58.4% compared to 56.9% during the same period of 2018.
Income Tax Expense
Income tax expense totaled $1,963,000 for an effective tax rate of 15.6% for the period ended September 30, 2019 compared to $2,001,000 for an effective tax rate of 16.2% for the similar period in 2018.
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 September 30, 2019, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.
Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). 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.
As of September 30, 2019, the Company had a positive90-day interest sensitivity gap of $16.1 million or 1.3% of total assets, compared to the $18.7 million negative gap, or (1.6)% of total assets, as of December 31, 2018. Rate-sensitive assets repricing within 90 days increased $22.8 million due primarily to a $16.3 million increase in loans and a $5.9 million increase in securities. Rate-sensitive liabilities repricing within 90 days decreased $12.0 million since year end due to a $9.9 million decrease in borrowings and a $3.3 million decrease in time deposits repricing. 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, yield on interest-earning assets in the90-day time frame could increase faster than the cost of interest-bearing liabilities. 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.
Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently preparednon-maturity deposit study for Wayne Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over aten-year period. The Company believes the study provides pertinent data to support the assumptions used in modelingnon-maturity deposits.
September 30, 2019
Rate Sensitivity Table
(dollars in thousands)
| 3 Months | 3-12 Months | 1 to 3 Years | Over 3 Years | Total | ||||||||||||||||
Federal funds sold and interest-bearing deposits | $ | 848 | $ | — | $ | — | $ | — | $ | 848 | ||||||||||
Securities | 12,710 | 35,716 | 59,137 | 103,636 | 211,199 | |||||||||||||||
Loans Receivable | 151,604 | 166,461 | 296,280 | 291,237 | 905,582 | |||||||||||||||
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Total RSA | $ | 165,162 | $ | 202,177 | $ | 355,417 | $ | 394,873 | $ | 1,117,629 | ||||||||||
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Non-maturity interest-bearing deposits | $ | 60,709 | $ | 59,128 | $ | 157,532 | $ | 124,104 | $ | 401,473 | ||||||||||
Time Deposits | 70,416 | 135,891 | 99,088 | 36,354 | 341,749 | |||||||||||||||
Borrowings | 17,961 | 29,028 | 38,056 | 3,639 | 88,684 | |||||||||||||||
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Total RSL | $ | 149,086 | $ | 224,047 | $ | 294,676 | $ | 164,097 | $ | 831,906 | ||||||||||
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Interest Sensitivity Gap | $ | 16,076 | $ | (21,870 | ) | $ | 60,741 | $ | 230,776 | $ | 285,723 | |||||||||
Cumulative Gap | 16,076 | (5,794 | ) | 54,947 | 285,723 | |||||||||||||||
RSA/RSL-cumulative | 110.8 | % | 98.4 | % | 108.2 | % | 134.3 | % | ||||||||||||
December 31, 2018 | ||||||||||||||||||||
Interest Sensitivity Gap | $ | (18,749 | ) | $ | (60,791 | ) | $ | 18,852 | $ | 303,804 | $ | 243,116 | ||||||||
Cumulative Gap | (18,749 | ) | (79,540 | ) | (60,688 | ) | 243,116 | |||||||||||||
RSA/RSL-cumulative | 88.4 | % | 79.8 | % | 91.1 | % | 128.6 | % | ||||||||||||
Item 4. Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Executive Vice President and Chief Financial Officer on the effectivenesssignature page to the Original Form 10-Q.
As required by Rule 12b-15 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, summarizedas amended, new certifications by the Company’s principal executive officer and reported withinprincipal financial officer are included in this Amended Form 10-Q.
Except as described above, no other amendments have been made to the time periods specifiedOriginal Form 10-Q. This Amended Form 10-Q does not reflect events that occurred after the date of the Original Form 10-Q, and except as described above, the Company has not modified or updated disclosures contained in the Securities and Exchange Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reportingOriginal Form 10-Q to reflect any events that occurred duringafter 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.
Not applicable.
There have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part 1date of the Company’sOriginal Form10-K for the year ended December 31, 2018. 10-Q.
Item 2. Unregistered Sales of Equity Sales and Use of Proceeds6. Exhibits
(a)Unregistered Sales of Equity Securities. Not Applicable.
(b)Use of Proceeds. Not Applicable
(c)Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended September 30, 2019.
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Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
None
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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 | ||||||||
Date: | August 10, 2020 | By: | /s/ Lewis J. Critelli | |||||
Lewis J. Critelli | ||||||||
President and Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
Date: August 10, 2020 | /s/ William S. Lance | |||||||
William S. Lance | ||||||||
Executive Vice President and | ||||||||
Chief Financial Officer | ||||||||
(Principal Financial Officer) |
54
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 hereunto duly authorized.
NORWOOD FINANCIAL CORP | |||
| By: | /s/ Lewis J. Critelli | |
Lewis J. Critelli President and Chief Executive Officer (Duly Authorized Representative) | |||