NORWOOD FINANCIAL CORP - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-28364
Norwood Financial 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) |
Registrants 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 Regulation S-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, a non-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 Rule 12b-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 Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding as of August 1, 2019 | |
Common stock, par value $0.10 per share |
6,292,106 |
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019
Page Number |
||||||
PART I - |
CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP. | |||||
Item 1. |
Financial Statements (unaudited) | 3 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 33 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 47 | ||||
Item 4. |
Controls and Procedures | 49 | ||||
PART II - |
OTHER INFORMATION | |||||
Item 1. |
Legal Proceedings | 49 | ||||
Item 1A. |
Risk Factors | 49 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 49 | ||||
Item 3. |
Defaults Upon Senior Securities | 50 | ||||
Item 4. |
Mine Safety Disclosures | 50 | ||||
Item 5. |
Other Information | 50 | ||||
Item 6. |
Exhibits | 50 | ||||
52 |
2
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands, except share and per share data)
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 14,207 | $ | 18,039 | ||||
Interest-bearing deposits with banks |
4,265 | 309 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
18,472 | 18,348 | ||||||
Securities available for sale, at fair value |
238,083 | 243,277 | ||||||
Loans receivable |
887,673 | 850,182 | ||||||
Less: Allowance for loan losses |
8,228 | 8,452 | ||||||
|
|
|
|
|||||
Net loans receivable |
879,445 | 841,730 | ||||||
Regulatory stock, at cost |
3,155 | 3,926 | ||||||
Bank premises and equipment, net |
13,880 | 13,846 | ||||||
Bank owned life insurance |
38,340 | 37,932 | ||||||
Accrued interest receivable |
3,979 | 3,776 | ||||||
Foreclosed real estate owned |
1,677 | 1,115 | ||||||
Goodwill |
11,331 | 11,331 | ||||||
Other intangibles |
280 | 336 | ||||||
Other assets |
13,886 | 8,942 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 1,222,528 | $ | 1,184,559 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Non-interest bearing demand |
$ | 221,764 | $ | 201,457 | ||||
Interest-bearing |
759,460 | 745,323 | ||||||
|
|
|
|
|||||
Total deposits |
981,224 | 946,780 | ||||||
Short-term borrowings |
48,094 | 53,046 | ||||||
Other borrowings |
44,024 | 52,284 | ||||||
Accrued interest payable |
3,008 | 1,806 | ||||||
Other liabilities |
14,695 | 8,358 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES |
1,091,045 | 1,062,274 | ||||||
|
|
|
|
|||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, no par value per share, authorized 5,000,000 shares |
| | ||||||
Common stock, $0.10 par value per share, authorized: 2019: 20,000,000 shares, 2018: 10,000,000 shares issued: 2019: 6,304,413 shares, 2018: 6,295,113 shares |
630 | 630 | ||||||
Surplus |
48,741 | 48,322 | ||||||
Retained earnings |
82,127 | 78,434 | ||||||
Treasury stock at cost: 2019: 13,807 shares, 2018: 2,470 shares |
(455 | ) | (81 | ) | ||||
Accumulated other comprehensive income (loss) |
440 | (5,020 | ) | |||||
|
|
|
|
|||||
TOTAL STOCKHOLDERS EQUITY |
131,483 | 122,285 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,222,528 | $ | 1,184,559 | ||||
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
3
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans receivable, including fees |
$ | 10,328 | $ | 8,857 | $ | 20,298 | $ | 17,344 | ||||||||
Securities |
1,435 | 1,536 | 2,876 | 3,060 | ||||||||||||
Other |
51 | 43 | 66 | 61 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
11,814 | 10,436 | 23,240 | 20,465 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
1,839 | 1,052 | 3,568 | 2,082 | ||||||||||||
Short-term borrowings |
85 | 38 | 209 | 90 | ||||||||||||
Other borrowings |
278 | 131 | 581 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
2,202 | 1,221 | 4,358 | 2,443 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INTEREST INCOME |
9,612 | 9,215 | 18,882 | 18,022 | ||||||||||||
PROVISION FOR LOAN LOSSES |
300 | 425 | 750 | 975 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INTEREST INCOME AFTER |
||||||||||||||||
PROVISION FOR LOAN LOSSES |
9,312 | 8,790 | 18,132 | 17,047 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
OTHER INCOME |
||||||||||||||||
Service charges and fees |
1,052 | 1,101 | 2,083 | 2,082 | ||||||||||||
Income from fiduciary activities |
145 | 175 | 287 | 311 | ||||||||||||
Net realized gains on sales of securities |
64 | 58 | 64 | 200 | ||||||||||||
Gain on sale of loans, net |
67 | | 110 | | ||||||||||||
Earnings and proceeds on bank owned life insurance |
207 | 279 | 408 | 552 | ||||||||||||
Other |
106 | 161 | 249 | 323 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income |
1,641 | 1,774 | 3,201 | 3,468 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
OTHER EXPENSES |
||||||||||||||||
Salaries and employee benefits |
3,599 | 3,406 | 7,248 | 6,868 | ||||||||||||
Occupancy, furniture & equipment, net |
940 | 857 | 1,864 | 1,749 | ||||||||||||
Data processing and related operations |
472 | 340 | 920 | 658 | ||||||||||||
Taxes, other than income |
179 | 153 | 340 | 327 | ||||||||||||
Professional fees |
226 | 229 | 476 | 459 | ||||||||||||
Federal Deposit Insurance Corporation insurance |
84 | 86 | 155 | 178 | ||||||||||||
Foreclosed real estate |
(10 | ) | 114 | 13 | 95 | |||||||||||
Amortization of intangibles |
27 | 33 | 56 | 68 | ||||||||||||
Other |
1,268 | 1,135 | 2,361 | 2,198 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
6,785 | 6,353 | 13,433 | 12,600 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
INCOME BEFORE INCOME TAXES |
4,168 | 4,211 | 7,900 | 7,915 | ||||||||||||
INCOME TAX EXPENSE |
646 | 698 | 1,188 | 1,273 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INCOME |
$ | 3,522 | $ | 3,513 | $ | 6,712 | $ | 6,642 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
BASIC EARNINGS PER SHARE |
$ | 0.56 | $ | 0.57 | $ | 1.07 | $ | 1.07 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
DILUTED EARNINGS PER SHARE |
$ | 0.56 | $ | 0.56 | $ | 1.06 | $ | 1.06 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
4
NORWOOD FINANCIAL CORP.
Consolidated Statements of Comprehensive Income (unaudited)
(dollars in thousands)
Three Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Net income |
$ | 3,522 | $ | 3,513 | ||||
|
|
|
|
|||||
Other comprehensive income (loss): |
||||||||
Investment securities available for sale: |
||||||||
Unrealized holding gain (loss) |
3,250 | (840 | ) | |||||
Tax effect |
(682 | ) | 177 | |||||
Reclassification of investment securities gains recognized in net income |
(64 | ) | (58 | ) | ||||
Tax effect |
13 | 12 | ||||||
|
|
|
|
|||||
Other comprehensive income (loss) |
2,517 | (709 | ) | |||||
|
|
|
|
|||||
Comprehensive Income |
$ | 6,039 | $ | 2,804 | ||||
|
|
|
|
|||||
Six Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Net income |
$ | 6,712 | $ | 6,642 | ||||
|
|
|
|
|||||
Other comprehensive income (loss): |
||||||||
Investment securities available for sale: |
||||||||
Unrealized holding gain (loss) |
6,975 | (5,330 | ) | |||||
Tax effect |
(1,464 | ) | 1,119 | |||||
Reclassification of investment securities gains recognized in net income |
(64 | ) | (200 | ) | ||||
Tax effect |
13 | 42 | ||||||
|
|
|
|
|||||
Other comprehensive income (loss) |
5,460 | (4,369 | ) | |||||
|
|
|
|
|||||
Comprehensive Income |
$ | 12,172 | $ | 2,273 | ||||
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
5
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders Equity (unaudited)
Six Months Ended June 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 |
| | | 6,712 | | | | 6,712 | ||||||||||||||||||||||||
Other comprehensive income |
| | | | | | 5,460 | 5,460 | ||||||||||||||||||||||||
Cash dividends declared ($0.48 per share) |
| | | (3,019 | ) | | | | (3,019 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock |
| | 145 | | | | | 145 | ||||||||||||||||||||||||
Acquisition of treasury stock |
| | | | 11,337 | (374 | ) | | (374 | ) | ||||||||||||||||||||||
Stock options exercised |
9,300 | | 170 | | | | | 170 | ||||||||||||||||||||||||
Compensation expense related to stock options |
| | 104 | | | | | 104 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, June 30, 2019 |
6,304,413 | $ | 630 | $ | 48,741 | $ | 82,127 | 13,807 | $ | (455 | ) | $ | 440 | $ | 131,483 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
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 |
| | | 6,642 | | | | 6,642 | ||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | (4,369 | ) | (4,369 | ) | ||||||||||||||||||||||
Cash dividends declared ($0.44 per share) |
| | | (2,753 | ) | | | | (2,753 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock |
| | 102 | | | | | 102 | ||||||||||||||||||||||||
Acquisition of treasury stock |
| | | | 5,446 | (179 | ) | | (179 | ) | ||||||||||||||||||||||
Stock options exercised |
10,325 | 1 | 164 | | (2,325 | ) | 68 | | 233 | |||||||||||||||||||||||
Compensation expense related to stock options |
| | 118 | | | | | 118 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, June 30, 2018 |
6,266,388 | $ | 627 | $ | 47,815 | $ | 74,315 | 5,729 | $ | (188 | ) | $ | (7,036 | ) | $ | 115,533 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
6
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders Equity (unaudited)
Three Months Ended June 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, March 31, 2019 |
6,301,263 | $ | 630 | $ | 48,559 | $ | 80,115 | 13,807 | $ | (455 | ) | $ | (2,077 | ) | $ | 126,772 | ||||||||||||||||
Net Income |
| | | 3,522 | | | | 3,522 | ||||||||||||||||||||||||
Other comprehensive income |
| | | | | | 2,517 | 2,517 | ||||||||||||||||||||||||
Cash dividends declared ($0.24 per share) |
| | | (1,510 | ) | | | | (1,510 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock |
| | 73 | | | | | 73 | ||||||||||||||||||||||||
Acquisition of treasury stock |
| | | | | | | | ||||||||||||||||||||||||
Stock options exercised |
3,150 | | 57 | | | | | 57 | ||||||||||||||||||||||||
Compensation expense related to stock options |
| | 52 | | | | | 52 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, June 30, 2019 |
6,304,413 | $ | 630 | $ | 48,741 | $ | 82,127 | 13,807 | $ | (455 | ) | $ | 440 | $ | 131,483 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
Shares | Amount | Surplus | Earnings | Shares | Amount | Loss | Total | |||||||||||||||||||||||||
Balance, March 31, 2018 |
6,257,563 | $ | 626 | $ | 47,548 | $ | 72,179 | 5,729 | $ | (188 | ) | $ | (6,327 | ) | $ | 113,838 | ||||||||||||||||
Net Income |
| | | 3,513 | | | | 3,513 | ||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | (709 | ) | (709 | ) | ||||||||||||||||||||||
Cash dividends declared ($0.22 per share) |
| | | (1,377 | ) | | | | (1,377 | ) | ||||||||||||||||||||||
Compensation expense related to restricted stock |
| | 51 | | | | | 51 | ||||||||||||||||||||||||
Acquisition of treasury stock |
| | | | | | | | ||||||||||||||||||||||||
Stock options exercised |
8,825 | 1 | 157 | | | | | 158 | ||||||||||||||||||||||||
Compensation expense related to stock options |
| | 59 | | | | | 59 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, June 30, 2018 |
6,266,388 | $ | 627 | $ | 47,815 | $ | 74,315 | 5,729 | $ | (188 | ) | $ | (7,036 | ) | $ | 115,533 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
7
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands) | ||||||||
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net Income |
$ | 6,712 | $ | 6,642 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
750 | 975 | ||||||
Depreciation |
487 | 437 | ||||||
Amortization of intangible assets |
56 | 68 | ||||||
Deferred income taxes |
(25 | ) | (202 | ) | ||||
Net amortization of securities premiums and discounts |
732 | 885 | ||||||
Net realized gain on sales of securities |
(64 | ) | (200 | ) | ||||
Earnings and proceeds on life insurance policies |
(408 | ) | (552 | ) | ||||
(Gain) loss on sales and write-downs of fixed assets and foreclosed real estate owned, net |
(65 | ) | 9 | |||||
Net gain on sale of loans |
(110 | ) | | |||||
Mortgage loans originated for sale |
(2,191 | ) | | |||||
Proceeds from sale of loans originated for sale |
2,255 | | ||||||
Compensation expense related to stock options |
104 | 118 | ||||||
Compensation expense related to restricted stock |
145 | 102 | ||||||
(Increase) decrease in accrued interest receivable |
(203 | ) | 44 | |||||
Increase in accrued interest payable |
1,202 | 27 | ||||||
Other, net |
234 | 853 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
9,611 | 9,206 | ||||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Securities available for sale: |
||||||||
Proceeds from sales |
3,626 | 14,583 | ||||||
Proceeds from maturities and principal reductions on mortgage-backed securities |
12,877 | 15,151 | ||||||
Purchases |
(5,066 | ) | (14,269 | ) | ||||
Purchase of regulatory stock |
(1,666 | ) | (1,158 | ) | ||||
Redemption of regulatory stock |
2,437 | 2,350 | ||||||
Net increase in loans |
(39,398 | ) | (40,393 | ) | ||||
Purchase of premises and equipment |
(757 | ) | (467 | ) | ||||
Proceeds from sales of foreclosed real estate owned |
205 | 467 | ||||||
Proceeds from sales of bank premises and equipment |
246 | | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(27,496 | ) | (23,736 | ) | ||||
|
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase in deposits |
34,444 | 21,505 | ||||||
Net (decrease) increase in short-term borrowings |
(4,952 | ) | 795 | |||||
Repayments of other borrowings |
(8,260 | ) | (5,662 | ) | ||||
Stock options exercised |
170 | 233 | ||||||
Acquisition of treasury stock |
(374 | ) | (179 | ) | ||||
Cash dividends paid |
(3,019 | ) | (2,752 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
18,009 | 13,940 | ||||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
124 | (590 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
18,348 | 16,697 | ||||||
|
|
|
|
|||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 18,472 | $ | 16,107 | ||||
|
|
|
|
8
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited) (continued)
(dollars in thousands) | ||||||||
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash payments for: |
||||||||
Interest on deposits and borrowings |
$ | 3,156 | $ | 2,416 | ||||
Income taxes paid, net of refunds |
$ | 862 | $ | 1,097 | ||||
Supplemental Schedule of Noncash Investing Activities: |
||||||||
Transfers of loans to foreclosed real estate and repossession of other assets |
$ | 1,003 | $ | 333 | ||||
Dividends payable |
$ | 1,510 | $ | 1,377 |
See accompanying notes to the unaudited consolidated financial statements.
9
Notes to the Unaudited Consolidated Financial Statements
1. | Basis of Presentation |
The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Banks 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 to Form 10-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 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 six month periods ended June 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.
2. | Revenue Recognition |
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 streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30:
Three months ended | ||||||||
(dollars in thousands) | June 30, | |||||||
Noninterest Income | 2019 | 2018 | ||||||
In-scope of Topic 606: |
||||||||
Service charges on deposit accounts |
$ | 66 | $ | 64 | ||||
ATM fees |
91 | 95 | ||||||
Overdraft fees |
343 | 381 | ||||||
Safe deposit box rental |
23 | 23 | ||||||
Loan related service fees |
94 | 155 | ||||||
Debit card fees |
371 | 338 | ||||||
Fiduciary activities |
145 | 174 | ||||||
Commissions on mutual funds and annuities |
26 | 60 | ||||||
Other income |
120 | 137 | ||||||
|
|
|
|
|||||
Noninterest Income (in-scope of Topic 606) |
1,279 | 1,427 | ||||||
|
|
|
|
|||||
Out-of-scope of Topic 606: |
||||||||
Net realized gains on sales of securities |
64 | 58 | ||||||
Loan servicing fees |
24 | 10 | ||||||
Gains on sales of loans |
67 | | ||||||
Earnings on and proceeds from bank-owned life insurance |
207 | 279 | ||||||
|
|
|
|
|||||
Noninterest Income (out-of-scope of Topic 606) |
362 | 347 | ||||||
|
|
|
|
|||||
Total Noninterest Income |
$ | 1,641 | $ | 1,774 | ||||
|
|
|
|
10
Six months ended | ||||||||
(dollars in thousands) | June 30, | |||||||
Noninterest Income | 2019 | 2018 | ||||||
In-scope of Topic 606: |
||||||||
Service charges on deposit accounts |
$ | 133 | $ | 129 | ||||
ATM fees |
181 | 191 | ||||||
Overdraft fees |
694 | 765 | ||||||
Safe deposit box rental |
49 | 53 | ||||||
Loan related service fees |
223 | 235 | ||||||
Debit card fees |
697 | 633 | ||||||
Fiduciary activities |
287 | 311 | ||||||
Commissions on mutual funds and annuities |
81 | 103 | ||||||
Other income |
235 | 276 | ||||||
|
|
|
|
|||||
Noninterest Income (in-scope of Topic 606) |
2,580 | 2,696 | ||||||
|
|
|
|
|||||
Out-of-scope of Topic 606: |
||||||||
Net realized gains on sales of securities |
64 | 200 | ||||||
Loan servicing fees |
39 | 20 | ||||||
Gains on sales of loans |
110 | | ||||||
Earnings on and proceeds from bank-owned life insurance |
408 | 552 | ||||||
|
|
|
|
|||||
Noninterest Income (out-of-scope of Topic 606) |
621 | 772 | ||||||
|
|
|
|
|||||
Total Noninterest Income |
$ | 3,201 | $ | 3,468 | ||||
|
|
|
|
3. | Earnings Per Share |
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share 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 | Six Months Ended | ||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Weighted average shares outstanding |
6,290 | 6,256 | 6,292 | 6,256 | ||||||||||||
Less: Unvested restricted shares |
(35 | ) | (31 | ) | (35 | ) | (31 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic EPS weighted average shares outstanding |
6,255 | 6,225 | 6,257 | 6,225 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic EPS weighted average shares outstanding |
6,255 | 6,225 | 6,257 | 6,225 | ||||||||||||
Add: Dilutive effect of stock options and restricted shares |
60 | 50 | 62 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted EPS weighted average shares outstanding |
6,315 | 6,275 | 6,319 | 6,276 | ||||||||||||
|
|
|
|
|
|
|
|
11
For the three and six month periods ending June 30, 2019, 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 $34.81 per share on June 30, 2019.
For the three and six month periods ending June 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 $36.02 per share on June 30, 2018.
4. | Stock-Based Compensation |
No awards were granted during the six-month period ending June 30, 2019. As of June 30, 2019, there was $104,000 of total unrecognized compensation cost related to non-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 $104,000 and $118,000 during the six-month periods ended June 30, 2019 and 2018, respectively.
A summary of the Companys stock option activity for the six-month period ended June 30, 2019 is as follows:
Weighted | ||||||||||||||||||||
Average Exercise | Weighted Average | Aggregate | ||||||||||||||||||
Price | Remaining | Intrinsic Value | ||||||||||||||||||
Options | Per Share | Contractual Term | ($000) | |||||||||||||||||
Outstanding at January 1, 2019 |
208,700 | $ | 22.54 | 5.9 | Yrs. | $ | 2,183 | |||||||||||||
Granted |
| | | | ||||||||||||||||
Exercised |
(9,300 | ) | 18.31 | 4.1 | Yrs. | 119 | ||||||||||||||
Forfeited |
| | | | ||||||||||||||||
|
|
|||||||||||||||||||
Outstanding at June 30, 2019 |
199,400 | $ | 22.74 | 5.5 | Yrs. | $ | 2,407 | |||||||||||||
|
|
|||||||||||||||||||
Exercisable at June 30, 2019 |
170,500 | $ | 21.11 | 4.8 | Yrs. | $ | 2,335 | |||||||||||||
|
|
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 $34.81 per share as of June 30, 2019 and $33.00 per share as of December 31, 2018.
A summary of the Companys restricted stock activity for the six-month periods ended June 30, 2019 and 2018 is as follows:
2019 | 2018 | |||||||||||||||
Weighted-Average | Weighted-Average | |||||||||||||||
Number of | Grant Date | Number of | Grant Date | |||||||||||||
Restricted Stock | Fair Value | Restricted Stock | Fair Value | |||||||||||||
Non-vested, January 1, |
34,615 | $ | 27.82 | 30,415 | $ | 24.46 | ||||||||||
Granted |
| | | | ||||||||||||
Vested |
| | | | ||||||||||||
Forfeited |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Non-vested, June 30, |
34,615 | $ | 27.82 | 30,415 | $ | 24.46 | ||||||||||
|
|
|
|
|
|
|
|
12
The expected future compensation expense relating to the 34,615 shares of non-vested restricted stock outstanding as of June 30, 2019 is $818,000. This cost will be recognized over the remaining vesting period of 4.5 years. Compensation costs related to restricted stock amounted to $145,000 and $102,000 during the six-month periods ended June 30, 2019 and 2018, respectively.
5. | Accumulated Other Comprehensive Income (Loss) |
The following table presents the changes in accumulated other comprehensive loss (in thousands) by component net of tax for the three months and six months ended June 30, 2019 and 2018:
Unrealized gains (losses) on available for sale securities (a) |
||||
Balance as of March 31, 2019 |
$ | (2,077 | ) | |
Other comprehensive income before reclassification |
2,568 | |||
Amount reclassified from accumulated other comprehensive loss |
(51 | ) | ||
|
|
|||
Total other comprehensive income |
2,517 | |||
|
|
|||
Balance as of June 30, 2019 |
$ | 440 | ||
|
|
|||
Unrealized gains (losses) on available for sale securities (a) |
||||
Balance as of March 31, 2018 |
$ | (6,327 | ) | |
Other comprehensive loss before reclassification |
(663 | ) | ||
Amount reclassified from accumulated other comprehensive loss |
(46 | ) | ||
|
|
|||
Total other comprehensive loss |
(709 | ) | ||
|
|
|||
Balance as of June 30, 2018 |
$ | (7,036 | ) | |
|
|
|||
Unrealized gains (losses) on available for sale securities (a) |
||||
Balance as of December 31, 2018 |
$ | (5,020 | ) | |
Other comprehensive income before reclassification |
5,511 | |||
Amount reclassified from accumulated other comprehensive loss |
(51 | ) | ||
|
|
|||
Total other comprehensive income |
5,460 | |||
|
|
|||
Balance as of June 30, 2019 |
$ | 440 | ||
|
|
|||
Unrealized gains (losses) on available for sale securities (a) |
||||
Balance as of December 31, 2017 |
$ | (2,667 | ) | |
Other comprehensive loss before reclassification |
(4,211 | ) | ||
Amount reclassified from accumulated other comprehensive loss |
(158 | ) | ||
|
|
|||
Total other comprehensive loss |
(4,369 | ) | ||
|
|
|||
Balance as of June 30, 2018 |
$ | (7,036 | ) | |
|
|
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
13
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss (in thousands) for the three months and six months ended June 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 June 30, |
||||||||||
2019 | 2018 | |||||||||
Unrealized gains on available for sale securities |
$ | 64 | $ | 58 | Net realized gains on sales of securities | |||||
(13 | ) | (12 | ) | Income tax expense | ||||||
|
|
|
|
|||||||
$ | 51 | $ | 46 | |||||||
|
|
|
|
|||||||
Six months ended | ||||||||||
June 30, | ||||||||||
2019 | 2018 | |||||||||
Unrealized gains on available for sale securities |
$ | 64 | $ | 200 | Net realized gains on sales of securities | |||||
(13 | ) | (42 | ) | Income tax expense | ||||||
|
|
|
|
|||||||
$ | 51 | $ | 158 | |||||||
|
|
|
|
(a) Amounts in parentheses indicate debits to net income
6. | Off-Balance Sheet Financial Instruments and Guarantees |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the Banks financial instrument commitments is as follows:
(in thousands) | June 30, | |||||||
2019 | 2018 | |||||||
Commitments to grant loans |
$ | 49,936 | $ | 43,280 | ||||
Unfunded commitments under lines of credit |
71,859 | 72,359 | ||||||
Standby letters of credit |
4,305 | 5,733 | ||||||
|
|
|
|
|||||
$ | 126,100 | $ | 121,372 | |||||
|
|
|
|
14
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 customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements 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 June 30, 2019 for guarantees under standby letters of credit issued is not material.
7. | Securities |
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale were as follows:
June 30, 2019 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Available for Sale: |
||||||||||||||||
States and political subdivisions |
$ | 92,821 | $ | 1,186 | $ | (72 | ) | $ | 93,935 | |||||||
Corporate obligations |
8,812 | 17 | (24 | ) | 8,805 | |||||||||||
Mortgage-backed securities-government sponsored entities |
136,572 | 292 | (1,521 | ) | 135,343 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
$ | 238,205 | $ | 1,495 | $ | (1,617 | ) | $ | 238,083 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2018 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | 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 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
$ | 250,311 | $ | 410 | $ | (7,444 | ) | $ | 243,277 | |||||||
|
|
|
|
|
|
|
|
15
The following tables show the Companys 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):
June 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 |
$ | 402 | $ | | $ | 21,268 | $ | (72 | ) | $ | 21,670 | $ | (72 | ) | ||||||||||
Corporate obligations |
| | 5,194 | (24 | ) | 5,194 | (24 | ) | ||||||||||||||||
Mortgage-backed securities-government sponsored entities |
3,497 | (11 | ) | 95,971 | (1,510 | ) | 99,468 | (1,521 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 3,899 | $ | (11 | ) | $ | 122,433 | $ | (1,606 | ) | $ | 126,332 | $ | (1,617 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
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 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 29,629 | $ | (433 | ) | $ | 186,285 | $ | (7,011 | ) | $ | 215,914 | $ | (7,444 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2019, the Company had three debt securities in an unrealized loss position in the less than twelve months category and 114 debt securities in the twelve months or more category. In Managements 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 June 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 |
$ | 2,957 | $ | 2,960 | ||||
Due after one year through five years |
21,142 | 21,144 | ||||||
Due after five years through ten years |
44,101 | 44,298 | ||||||
Due after ten years |
33,433 | 34,338 | ||||||
|
|
|
|
|||||
101,633 | 102,740 | |||||||
Mortgage-backed securities-government sponsored entities |
136,572 | 135,343 | ||||||
|
|
|
|
|||||
$ | 238,205 | $ | 238,083 | |||||
|
|
|
|
16
Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross realized gains |
$ | 64 | $ | 58 | $ | 64 | $ | 200 | ||||||||
Gross realized losses |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gain |
$ | 64 | $ | 58 | $ | 64 | $ | 200 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Proceeds from sales of securities |
$ | 3,299 | $ | 3,822 | $ | 3,626 | $ | 14,583 | ||||||||
|
|
|
|
|
|
|
|
Securities with a carrying value of $196,986,000 and $219,244,000 at June 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.
8. | Loans Receivable and Allowance for Loan Losses |
Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):
June 30, 2019 | December 31, 2018 | |||||||||||||||
Real Estate Loans: |
||||||||||||||||
Residential |
$ | 230,405 | 26.0 | % | $ | 235,523 | 27.7 | % | ||||||||
Commercial |
381,915 | 43.0 | 374,790 | 44.1 | ||||||||||||
Construction |
19,784 | 2.2 | 17,445 | 2.0 | ||||||||||||
Commercial, financial and agricultural |
120,732 | 13.6 | 110,542 | 13.0 | ||||||||||||
Consumer loans to individuals |
134,968 | 15.2 | 112,002 | 13.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
887,804 | 100.0 | % | 850,302 | 100.0 | % | ||||||||||
|
|
|
|
|||||||||||||
Deferred fees, net |
(131 | ) | (120 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total loans receivable |
887,673 | 850,182 | ||||||||||||||
Allowance for loan losses |
(8,228 | ) | (8,452 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net loans receivable |
$ | 879,445 | $ | 841,730 | ||||||||||||
|
|
|
|
The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):
June 30, 2019 | December 31, 2018 | |||||||
Outstanding Balance |
$ | 965 | $ | 1,055 | ||||
Carrying Amount |
$ | 822 | $ | 886 |
As a result of the acquisition of Delaware Bancshares, Inc. (Delaware), the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since
17
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 a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loans effective interest rate, the loans 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 June 30, 2019 and December 31, 2018, foreclosed real estate owned totaled $1,677,000 and $1,115,000, respectively. During the six months ended June 30, 2019, the Company acquired three properties via deed-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 two properties that were previously transferred to foreclosed real estate owned with a carrying value of $46,000 through the sale of the properties. As of June 30, 2019, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $306,000.
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) | ||||||||||||||||||||||||
June 30, 2019 |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 752 | $ | | $ | | $ | | $ | 752 | ||||||||||||
Loans acquired with deteriorated credit quality |
583 | 239 | | | | 822 | ||||||||||||||||||
Collectively evaluated for impairment |
229,822 | 380,924 | 19,784 | 120,732 | 134,968 | 886,230 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Loans |
$ | 230,405 | $ | 381,915 | $ | 19,784 | $ | 120,732 | $ | 134,968 | $ | 887,804 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
Real Estate Loans | ||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||
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 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Loans |
$ | 235,523 | $ | 374,790 | $ | 17,445 | $ | 110,542 | $ | 112,002 | $ | 850,302 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.
Unpaid | ||||||||||||
Recorded | Principal | Associated | ||||||||||
Investment | Balance | Allowance | ||||||||||
(in thousands) | ||||||||||||
June 30, 2019 |
||||||||||||
With no related allowance recorded: |
||||||||||||
Real Estate Loans: |
||||||||||||
Commercial |
$ | 752 | $ | 1,338 | $ | | ||||||
|
|
|
|
|
|
|||||||
Subtotal |
752 | 1,338 | | |||||||||
|
|
|
|
|
|
|||||||
Total: |
||||||||||||
Real Estate Loans: |
||||||||||||
Commercial |
752 | 1,338 | | |||||||||
|
|
|
|
|
|
|||||||
Total Impaired Loans |
$ | 752 | $ | 1,338 | $ | | ||||||
|
|
|
|
|
|
|||||||
Unpaid | ||||||||||||
Recorded | Principal | Associated | ||||||||||
Investment | Balance | 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 | $ | | ||||||
|
|
|
|
|
|
19
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 June 30, 2019 and 2018, respectively (in thousands):
Average Recorded | Interest Income | |||||||||||||||
Investment | Recognized | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Real Estate Loans: |
||||||||||||||||
Residential |
$ | | $ | 23 | $ | | $ | | ||||||||
Commercial |
601 | 1,202 | 24 | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 601 | $ | 1,225 | $ | 24 | $ | 16 | ||||||||
|
|
|
|
|
|
|
|
The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2019 and 2018, respectively (in thousands):
Average Recorded | Interest Income | |||||||||||||||
Investment | Recognized | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Real Estate Loans: |
||||||||||||||||
Residential |
$ | | $ | 23 | $ | | $ | | ||||||||
Commercial |
840 | 1,194 | 24 | 30 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 840 | $ | 1,217 | $ | 24 | $ | 30 | ||||||||
|
|
|
|
|
|
|
|
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 June 30, 2019 and December 31, 2018, troubled debt restructured loans totaled $104,000 and $1.1 million, respectively, with no specific reserve. For the six-month period ended June 30, 2019, there were no new loans identified as troubled debt restructurings. During 2019, the Company recognized a charge-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 six-month period ended June 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.
20
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 Companys 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 or re-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 June 30, 2019 and December 31, 2018 (in thousands):
Special | Doubtful | |||||||||||||||||||
Pass | Mention | Substandard | or Loss | Total | ||||||||||||||||
June 30, 2019 |
||||||||||||||||||||
Commercial real estate loans |
$ | 365,739 | $ | 12,629 | $ | 3,547 | $ | | $ | 381,915 | ||||||||||
Commercial loans |
120,445 | 59 | 228 | | 120,732 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 486,184 | $ | 12,688 | $ | 3,775 | $ | | $ | 502,647 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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 June 30, 2019 and December 31, 2018 (in thousands):
Performing | Nonperforming | Total | ||||||||||
June 30, 2019 |
||||||||||||
Residential real estate loans |
$ | 229,831 | $ | 574 | $ | 230,405 | ||||||
Construction |
19,784 | | 19,784 | |||||||||
Consumer loans |
134,968 | | 134,968 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 384,583 | $ | 574 | $ | 385,157 | ||||||
|
|
|
|
|
|
|||||||
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 | ||||||
|
|
|
|
|
|
21
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 June 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 | ||||||||||||||||||||||
June 30, 2019 |
||||||||||||||||||||||||||||
Real Estate loans |
||||||||||||||||||||||||||||
Residential |
$ | 229,382 | $ | 377 | $ | 72 | $ | | $ | 574 | $ | 1,023 | $ | 230,405 | ||||||||||||||
Commercial |
380,828 | 271 | 64 | | 752 | 1,087 | 381,915 | |||||||||||||||||||||
Construction |
19,784 | | | | | | 19,784 | |||||||||||||||||||||
Commercial loans |
120,646 | 57 | | | 29 | 86 | 120,732 | |||||||||||||||||||||
Consumer loans |
134,811 | 157 | | | | 157 | 134,968 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 885,451 | $ | 862 | $ | 136 | $ | | $ | 1,355 | $ | 2,353 | $ | 887,804 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
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 June 30, 2019, the allocation of the allowance pertaining to commercial real estate loans is $761,000 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 0.29% at June 30, 2019. Also contributing to the reduced reserve balance is a decrease in the qualitative factor related to the annualized growth rate.
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 |
(75 | ) | (615 | ) | | (234 | ) | (135 | ) | (1,059 | ) | |||||||||||||
Recoveries |
15 | 14 | | 21 | 35 | 85 | ||||||||||||||||||
Provision for loan losses |
179 | (160 | ) | 19 | 397 | 315 | 750 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, June 30, 2019 |
$ | 1,447 | $ | 4,694 | $ | 112 | $ | 896 | $ | 1,079 | $ | 8,228 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance individually evaluated for impairment |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Ending balance collectively evaluated for impairment |
$ | 1,447 | $ | 4,694 | $ | 112 | $ | 896 | $ | 1,079 | $ | 8,228 |
22
(In thousands) | Residential Real Estate |
Commercial Real Estate |
Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, March 31, 2019 |
$ | 1,455 | $ | 4,947 | $ | 108 | $ | 811 | $ | 1,028 | $ | 8,349 | ||||||||||||
Charge Offs |
(10 | ) | (146 | ) | | (233 | ) | (72 | ) | (461 | ) | |||||||||||||
Recoveries |
4 | 4 | | 11 | 21 | 40 | ||||||||||||||||||
Provision for loan losses |
(2 | ) | (111 | ) | 4 | 307 | 102 | 300 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, June 30, 2019 |
$ | 1,447 | $ | 4,694 | $ | 112 | $ | 896 | $ | 1,079 | $ | 8,228 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
(75 | ) | (134 | ) | | (5 | ) | (117 | ) | (331 | ) | |||||||||||||
Recoveries |
2 | 31 | | | 15 | 48 | ||||||||||||||||||
Provision for loan losses |
256 | 85 | 38 | 232 | 364 | 975 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, June 30, 2018 |
$ | 1,455 | $ | 5,247 | $ | 128 | $ | 690 | $ | 806 | $ | 8,326 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance individually evaluated for impairment |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Ending balance collectively evaluated for impairment |
$ | 1,455 | $ | 5,247 | $ | 128 | $ | 690 | $ | 806 | $ | 8,326 |
(In thousands) | Residential Real Estate |
Commercial Real Estate |
Construction | Commercial | Consumer | Total | ||||||||||||||||||
Beginning balance, March 31, 2018 |
$ | 1,525 | $ | 5,129 | $ | 120 | $ | 638 | $ | 687 | $ | 8,099 | ||||||||||||
Charge Offs |
(24 | ) | (134 | ) | | (5 | ) | (69 | ) | (232 | ) | |||||||||||||
Recoveries |
1 | 25 | | | 8 | 34 | ||||||||||||||||||
Provision for loan losses |
(47 | ) | 227 | 8 | 57 | 180 | 425 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, June 30, 2018 |
$ | 1,455 | $ | 5,247 | $ | 128 | $ | 690 | $ | 806 | $ | 8,326 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Companys primary business activity as of June 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 regions economy.
As of June 30, 2019, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $75.9 million of loans outstanding, or 8.6% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $67.5 million, or 7.6% of loans outstanding. During 2019, the Company did not recognize any charge offs in the named concentrations.
23
9. | Fair Value of Assets and Liabilities |
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 or non-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 a Non-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 companys 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 Companys 2018 Form 10-K. In accordance with ASU 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-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 June 30, 2019 and December 31, 2018 are as follows:
Fair Value Measurement Using | ||||||||||||||||
Reporting Date | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Description |
(In thousands) | |||||||||||||||
June 30, 2019 |
||||||||||||||||
Available for Sale: |
||||||||||||||||
States and political subdivisions |
$ | 93,935 | $ | | $ | 93,935 | $ | | ||||||||
Corporate obligations |
8,805 | | 8,805 | | ||||||||||||
Mortgage-backed securities-government sponsored entities |
135,343 | | 135,343 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 238,083 | $ | | $ | 238,083 | $ | | ||||||||
|
|
|
|
|
|
|
|
24
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Description |
(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/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, managements best estimate is used. Managements 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 a Non-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 June 30, 2019 and December 31, 2018 are as follows:
(In thousands) | Fair Value Measurement Using Reporting Date | |||||||||||||||
Description |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
June 30, 2019 |
||||||||||||||||
Impaired Loans |
$ | 752 | $ | | $ | | $ | 752 | ||||||||
Foreclosed Real Estate Owned |
1,677 | | | 1,677 | ||||||||||||
December 31, 2018 |
||||||||||||||||
Impaired Loans |
$ | 1,319 | $ | | $ | | $ | 1,319 | ||||||||
Foreclosed Real Estate Owned |
1,115 | | | 1,115 |
25
Impaired loans (generally carried at fair value):
The Company measures impairment generally based on the fair value of the loans 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 June 30, 2019, the fair value investment in impaired loans totaled $752,000 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 June 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, 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 managements 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 a non-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) | ||||||||||||
June 30, 2019 |
||||||||||||||||
Impaired loans |
$ | 647 | |
Appraisal of collateral(1) |
|
|
Appraisal adjustments(2) |
|
10.00-57.58% (14.53% | ) | ||||||
Impaired loans |
$ | 105 | |
Present value of future cash flows |
|
Loan discount rate | 4.00% (4.00% | ) | ||||||||
Foreclosed real estate owned |
$ | 1,677 | |
Appraisal of collateral(1) |
|
Liquidation Expenses(2) | 7.00-10.00% (8.08% | ) |
26
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% | ) |
(1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance. |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
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 Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Companys disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Companys financial instruments at June 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.
27
The estimated fair values of the Banks financial instruments not required to be measured or reported at fair value were as follows at June 30, 2019 and December 31, 2018. (In thousands)
Fair Value Measurements at June 30, 2019 | ||||||||||||||||||||
Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents (1) |
$ | 18,472 | $ | 18,472 | $ | 18,472 | $ | | $ | | ||||||||||
Loans receivable, net |
879,445 | 893,855 | | | 893,855 | |||||||||||||||
Mortgage servicing rights |
183 | 223 | | | 223 | |||||||||||||||
Regulatory stock (1) |
3,155 | 3,155 | 3,155 | | | |||||||||||||||
Bank owned life insurance (1) |
38,340 | 38,340 | 38,340 | | | |||||||||||||||
Accrued interest receivable (1) |
3,979 | 3,979 | 3,979 | | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Deposits |
981,224 | 984,342 | 627,151 | | 357,191 | |||||||||||||||
Short-term borrowings (1) |
48,094 | 48,094 | 48,094 | | | |||||||||||||||
Other borrowings |
44,024 | 44,305 | | | 44,305 | |||||||||||||||
Accrued interest payable (1) |
3,008 | 3,008 | 3,008 | | | |||||||||||||||
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 |
| | | | |
(1) | This financial instrument is carried at cost, which approximates the fair value of the instrument. |
28
10. | New and Recently Adopted Accounting Pronouncements |
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, 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 a right-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. ASU 2016-02 was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842)Targeted Improvements, which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 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 issued ASU 2018-20, 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 ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recorded recognized a right-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 ASU 2016-13, Financial InstrumentsCredit 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 managements 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. ASU 2016-13 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. We expect to recognize a one-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 such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, 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
29
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, 2020. All other entities, including not-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. This Update is not expected to have a significant impact on the Companys financial statements.
In February 2017, the FASB issued ASU 2017-06, 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 plans 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 Companys financial statements.
ASU 2018-04, Investments Debt Securities (Topic 320) and Regulated Operations (Topic 980) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 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 ASU 2018-06, 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 ASU 2018-12, 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. This Update is not expected to have a significant impact on the Companys financial statements.
In August 2018, the FASB issued ASU 2018-13, 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 Companys financial statements.
30
In August 2018, the FASB issued ASU 2018-14, Compensation Retirement Benefits (Topic 715-20). 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 a one-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 Companys financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles Goodwill and Other Internal-Use Software (Subtopic 350-40). 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 for internal-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 obtain internal-use software (and hosting arrangements that include an internal-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 Companys financial statements.
In October 2018, the FASB issued ASU 2018-16, 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 Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, 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 Update 2017-12, 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 Update 2017-12. This Update is not expected to have a significant impact on the Companys financial statements.
In October, 2018, the FASB issued ASU 2018-17, 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 Companys financial statements.
31
In November, 2018, the FASB issued ASU 2018-18, 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) add unit-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 Companys financial statements.
In April 2019, the FASB issued ASU 2019-04, 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. Topic 815, Derivatives and Hedging amendments 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 Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are 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 Companys financial statements.
32
Item 2. Managements 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 Companys 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 Companys consolidated financial statements for the year ended December 31, 2018 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
33
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 Companys 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 and re-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 June 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 June 30, 2019 were $1.223 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.
34
Securities
The fair value of securities available for sale as of June 30, 2019 was $238.1 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 also increased $6.9 million due to a reduction in unrealized losses on securities related to the decrease in interest rates during the first six months of 2019.
The carrying value of the Companys securities portfolio (Available-for Sale) consisted of the following:
June 30, 2019 | December 31, 2018 | |||||||||||||||
(dollars in thousands) | Amount | % of portfolio | Amount | % of portfolio | ||||||||||||
States and political subdivisions |
$ | 93,935 | 39.5 | % | $ | 97,613 | 40.1 | % | ||||||||
Corporate obligations |
8,805 | 3.7 | 8,640 | 3.6 | ||||||||||||
Mortgage-backed securities-government sponsored entities |
135,343 | 56.8 | 137,024 | 56.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 238,083 | 100.0 | % | $ | 243,277 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
The Company has securities in an unrealized loss position. In managements 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 $887.7 million at June 30, 2019 compared to $850.2 million as of December 31, 2018. The increase in loans receivable includes a $20.2 million increase in retail loans and a $17.3 million increase in commercial loans.
The allowance for loan losses totaled $8,228,000 as of June 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 six months ended June 30, 2019 of $974,000 compared to $283,000 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 Companys 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 June 30, 2019 based on the Companys 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 June 30, 2019, non-performing loans totaled $1,355,000, or 0.15% of total loans compared to $1,140,000, or 0.13%, of total loans at December 31, 2018. At June 30, 2019, non-performing assets totaled $3,032,000, or 0.25%, of total assets compared to $2,255,000, or 0.19%, of total assets at December 31, 2018.
35
The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
(dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||
Loans accounted for on a non-accrual basis: |
||||||||
Real Estate |
||||||||
Residential |
$ | 574 | $ | 798 | ||||
Commercial |
752 | 342 | ||||||
Construction |
| | ||||||
Commercial, financial and agricultural |
29 | | ||||||
Consumer loans to individuals |
| | ||||||
|
|
|
|
|||||
Total non-accrual loans * |
1,355 | 1,140 | ||||||
Accruing loans which are contractually past due 90 days or more |
| | ||||||
|
|
|
|
|||||
Total non-performing loans |
1,355 | 1,140 | ||||||
Foreclosed real estate |
1,677 | 1,115 | ||||||
|
|
|
|
|||||
Total non-performing assets |
$ | 3,032 | $ | 2,255 | ||||
|
|
|
|
|||||
Allowance for loans losses |
$ | 8,228 | $ | 8,452 | ||||
Coverage of non-performing loans |
607.23 | % | 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 |
0.25 | % | 0.19 | % |
* | Includes non-accrual TDRs of $104,000 as of June 30, 2019 and $110,000 on December 31, 2018. There were no accruing TDRs on June 30, 2019 and $977,000 of accruing TDRs as of December 31, 2018. |
Deposits
During the six-month period ending June 30, 2019, total deposits increased $34.4 million due primarily to a $29.3 million increase in demand deposits which reflects seasonal activity in municipal account relationships. All other deposits decreased $5.1 million, net.
The following table sets forth deposit balances as of the dates indicated:
(dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||
Non-interest bearing demand |
$ | 221,764 | $ | 201,457 | ||||
Interest-bearing demand |
97,955 | 88,917 | ||||||
Money market deposit accounts |
135,948 | 137,636 | ||||||
Savings |
171,483 | 173,593 | ||||||
Time deposits <$100,000 |
148,370 | 145,343 | ||||||
Time deposits >$100,000 |
205,704 | 199,834 | ||||||
|
|
|
|
|||||
Total |
$ | 981,224 | $ | 946,780 | ||||
|
|
|
|
36
Borrowings
Other borrowings as of June 30, 2019 totaled $44.0 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 $5.0 million due to a $15.6 million reduction in overnight borrowings which was partially offset by a $10.6 million increase in repurchase agreements.
Other borrowings consisted of the following:
(dollars in thousands) | ||||||||
June 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 | 10,000 | ||||||
Amortizing fixed rate borrowing due June 2020 at 1.490% |
2,060 | 3,079 | ||||||
Amortizing fixed rate borrowing due July 2020 at 2.77% |
5,485 | 7,962 | ||||||
Amortizing fixed rate borrowing due December 2020 at 1.706% |
1,545 | 2,051 | ||||||
Amortizing fixed rate borrowing due December 2020 at 3.06% |
3,779 | 5,000 | ||||||
Amortizing fixed rate borrowing due March 2022 at 1.748% |
2,445 | 2,877 | ||||||
Amortizing fixed rate borrowing due October 2022 at 1.88% |
5,417 | 6,200 | ||||||
Amortizing fixed rate borrowing due October 2023 at 3.24% |
8,758 | 9,692 | ||||||
Amortizing fixed rate borrowing due December 2023 at 3.22% |
4,535 | 5,000 | ||||||
|
|
|
|
|||||
$ | 44,024 | $ | 52,284 | |||||
|
|
|
|
Stockholders Equity and Capital Ratios
As of June 30, 2019, stockholders equity totaled $131.5 million, compared to $122.3 million as of December 31, 2018. The net change in stockholders equity included $6.7 million of net income that was partially offset by $3.0 million of dividends declared. In addition, total equity increased $5.5 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 Companys accumulated other comprehensive income (loss) could materially fluctuate for each interim and year-end period.
A comparison of the Companys consolidated regulatory capital ratios is as follows:
June 30, 2019 | December 31, 2018 | |||||||
Tier 1 Capital |
||||||||
(To average assets) |
9.80 | % | 9.82 | % | ||||
Tier 1 Capital |
||||||||
(To risk-weighted assets) |
12.87 | % | 13.04 | % | ||||
Common Equity Tier 1 Capital |
||||||||
(To risk-weighted assets) |
12.87 | % | 13.04 | % | ||||
Total Capital |
||||||||
(To risk-weighted assets) |
13.76 | % | 14.00 | % |
37
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 a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organizations 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 June 30, 2019.
Liquidity
As of June 30, 2019, the Company had cash and cash equivalents of $18.5 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 $238.1 million which could be used for liquidity needs. This totals $256.6 million of liquidity and represents 21.0% 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 Companys policy guidelines as of June 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 June 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 June 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 June 30, 2019 and December 31, 2018.
The Banks maximum borrowing capacity with the Federal Home Loan Bank was approximately $412,989,000 as of June 30, 2019, of which $44,024,000 and $67,873,000 was outstanding at June 30, 2019 and December 31, 2018, respectively. Additionally, as of June 30, 2019, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $43.0 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.
38
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-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 and tax-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 these non-GAAP financial measures enhance investors understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.
39
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, | Three Months Ended June 30, | |||||||||||||||||||||||
dollars in thousands) | 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 |
$ | 8,495 | $ | 51 | 2.40 | % | $ | 9,488 | $ | 43 | 1.81 | % | ||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Taxable |
154,010 | 873 | 2.27 | 169,851 | 912 | 2.15 | ||||||||||||||||||
Tax-exempt (1) |
93,285 | 711 | 3.05 | 103,189 | 790 | 3.06 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities available for sale (1) |
247,295 | 1,584 | 2.56 | 273,040 | 1,702 | 2.49 | ||||||||||||||||||
Loans receivable (1) (4) (5) |
876,118 | 10,445 | 4.77 | 788,026 | 8,960 | 4.55 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
1,131,908 | 12,080 | 4.27 | 1,070,554 | 10,705 | 4.00 | ||||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
14,416 | 14,534 | ||||||||||||||||||||||
Allowance for loan losses |
(8,460 | ) | (8,287 | ) | ||||||||||||||||||||
Other assets |
80,751 | 67,442 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total non-interest earning assets |
86,707 | 73,689 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Assets |
$ | 1,218,615 | $ | 1,144,243 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand and money market |
$ | 233,460 | $ | 166 | 0.28 | $ | 242,552 | $ | 113 | 0.19 | ||||||||||||||
Savings |
174,650 | 27 | 0.06 | 185,039 | 23 | 0.05 | ||||||||||||||||||
Time |
360,722 | 1,646 | 1.83 | 317,294 | 916 | 1.15 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
768,832 | 1,839 | 0.96 | 744,885 | 1,052 | 0.56 | ||||||||||||||||||
Short-term borrowings |
45,218 | 85 | 0.75 | 33,772 | 38 | 0.45 | ||||||||||||||||||
Other borrowings |
46,006 | 278 | 2.42 | 31,541 | 131 | 1.66 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
860,056 | 2,202 | 1.02 | 810,198 | 1,221 | 0.60 | ||||||||||||||||||
Non-interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
213,329 | 209,743 | ||||||||||||||||||||||
Other liabilities |
16,015 | 9,260 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total non-interest bearing liabilities |
229,344 | 219,003 | ||||||||||||||||||||||
Stockholders equity |
129,215 | 115,042 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 1,218,615 | $ | 1,144,243 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income/spread (tax equivalent basis) |
9,878 | 3.24 | % | 9,484 | 3.40 | % | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Tax-equivalent basis adjustment |
(266 | ) | (269 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 9,612 | $ | 9,215 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (tax equivalent basis) |
3.49 | % | 3.54 | % | ||||||||||||||||||||
|
|
|
|
(1) | Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%. |
(2) | Average balances have been calculated based on daily balances. |
(3) | Annualized |
(4) | Loan balances include non-accrual loans and are net of unearned income. |
(5) | Loan yields include the effect of amortization of deferred fees, net of costs. |
40
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 June 30, 2019 Compared to Three months ended June 30, 2018 Variance due to |
||||||||||||
Volume | Rate | Net | ||||||||||
(dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Interest-bearing deposits with banks |
$ | (6 | ) | $ | 14 | $ | 8 | |||||
Securities available for sale: |
||||||||||||
Taxable |
(87 | ) | 48 | (39 | ) | |||||||
Tax-exempt securities |
(77 | ) | (2 | ) | (79 | ) | ||||||
|
|
|
|
|
|
|||||||
Total securities |
(164 | ) | 46 | (118 | ) | |||||||
Loans receivable |
1,018 | 467 | 1,485 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-earning assets |
848 | 527 | 1,375 | |||||||||
|
|
|
|
|
|
|||||||
Interest-bearing liabilities: |
||||||||||||
Interest-bearing demand and money market |
(5 | ) | 58 | 53 | ||||||||
Savings |
(1 | ) | 5 | 4 | ||||||||
Time |
178 | 552 | 730 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-bearing deposits |
172 | 615 | 787 | |||||||||
Short-term borrowings |
18 | 29 | 47 | |||||||||
Other borrowings |
73 | 74 | 147 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
263 | 718 | 981 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income (tax-equivalent basis) |
$ | 585 | $ | (191 | ) | $ | 394 | |||||
|
|
|
|
|
|
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.
41
Comparison of Operating Results for the Three Months Ended June 30, 2019 to June 30, 2018
General
For the three months ended June 30, 2019, net income totaled $3,522,000 compared to $3,513,000 earned in the similar period in 2018. The increase in net income for the three months ended June 30, 2019 was due primarily to a $397,000 improvement in net interest income. Earnings per share for the current period were $0.56 per share for basic shares and fully diluted shares compared to $0.57 per share for basic shares and $0.56 per share for fully diluted shares for the three months ended June 30, 2018. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2019 were 1.16% and 10.93%, respectively, compared to 1.23% and 12.25%, respectively, for the similar period in 2018.
The following table sets forth changes in net income:
(dollars in thousands) | Three months ended | |||
June 30, 2019 to June 30, 2018 | ||||
Net income three months ended June 30, 2018 |
$ | 3,513 | ||
Change due to: |
||||
Net interest income |
397 | |||
Provision for loan losses |
125 | |||
Net gains on sales |
73 | |||
Other income |
(206 | ) | ||
Salaries and employee benefits |
(193 | ) | ||
Occupancy, furniture and equipment |
(83 | ) | ||
Data processing and related operations |
(132 | ) | ||
Foreclosed real estate |
124 | |||
All other expenses |
(148 | ) | ||
Income tax expense |
52 | |||
|
|
|||
Net income three months ended June 30, 2019 |
$ | 3,522 | ||
|
|
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2019 totaled $9,878,000 which was $394,000 higher than the comparable period in 2018. The increase in net interest income was due primarily to a $1,485,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted by a $118,000 decrease in securities income. The fte net interest spread and net interest margin were 3.24% and 3.49%, respectively, for the three months ended June 30, 2019 compared to 3.40% and 3.54%, 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 $12,080,000 with a yield on average earning assets of 4.27% compared to $10,705,000 and 4.00% for the 2018 period. Average loans increased $88.1 million over the comparable period of last year, while average securities decreased $25.7 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.132 billion for the three months ended June 30, 2019, an increase of $61.4 million over the average for the similar period in 2018.
Interest expense for the three months ended June 30, 2019 totaled $2,202,000 at an average cost of 1.02% compared to $1,221,000 and 0.60% for the similar period in 2018. The increase in average cost reflects
42
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 1.83% from 1.15% for the similar period in the prior year.
Provision for Loan Losses
The Companys provision for loan losses for the three months ended June 30, 2019 was $300,000 compared to $425,000 for the three months ended June 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 $421,000 for the quarter ended June 30, 2019 compared to $198,000 for the similar period in 2018. The increase in charge-offs was due to one commercial credit which was written down by $336,000 in the current period. At June 30, 2019, the allowance for loan losses represented 0.93% of loans receivable and 607% of non-performing loans.
Other Income
Other income totaled $1,641,000 for the three months ended June 30, 2019 compared to $1,774,000 for the similar period in 2018. The decrease was due primarily to a $72,000 reduction in earnings and proceeds on bank-owned life insurance policies and a $61,000 reduction in loan related service fees included in service charges and fees. All other items included in other income were unchanged on a net basis.
Other Expense
Other expense for the three months ended June 30, 2019 totaled $6,785,000 which was $432,000 higher than the same period of 2018 due primarily to a $193,000 increase in salaries and benefits expenses and a $132,000 increase in data processing costs. All other operating expenses increased $107,000, net.
Income Tax Expense
Income tax expense totaled $646,000 for an effective tax rate of 15.5% for the period ending June 30, 2019 compared to $698,000 for an effective tax rate of 16.6% for the similar period in 2018.
43
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands) |
Six Months Ended June 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 |
$ | 5,459 | $ | 66 | 2.42 | % | $ | 6,984 | $ | 61 | 1.75 | % | ||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Taxable |
155,111 | 1,747 | 2.25 | 170,181 | 1,779 | 2.09 | ||||||||||||||||||
Tax-exempt (1) |
94,080 | 1,429 | 3.04 | 105,886 | 1,622 | 3.06 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities available for sale (1) |
249,191 | 3,176 | 2.55 | 276,067 | 3,401 | 2.46 | ||||||||||||||||||
Loans receivable (1) (4) (5) |
866,829 | 20,529 | 4.74 | 777,810 | 17,548 | 4.51 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
1,121,479 | 23,771 | 4.24 | 1,060,861 | 21,010 | 3.96 | ||||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
14,221 | 14,159 | ||||||||||||||||||||||
Allowance for loan losses |
(8,537 | ) | (8,083 | ) | ||||||||||||||||||||
Other assets |
77,847 | 68,204 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total non-interest earning assets |
83,531 | 74,280 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Assets |
$ | 1,205,010 | $ | 1,135,141 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand and money market |
$ | 229,658 | $ | 313 | 0.27 | $ | 239,011 | $ | 225 | 0.19 | ||||||||||||||
Savings |
173,762 | 51 | 0.06 | 179,281 | 44 | 0.05 | ||||||||||||||||||
Time |
359,949 | 3,204 | 1.78 | 321,132 | 1,813 | 1.13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
763,369 | 3,568 | 0.93 | 739,424 | 2,082 | 0.56 | ||||||||||||||||||
Short-term borrowings |
45,308 | 209 | 0.92 | 33,369 | 90 | 0.54 | ||||||||||||||||||
Other borrowings |
47,961 | 581 | 2.42 | 32,943 | 271 | 1.65 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
856,638 | 4,358 | 1.02 | 805,736 | 2,443 | 0.61 | ||||||||||||||||||
Non-interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
206,837 | 205,289 | ||||||||||||||||||||||
Other liabilities |
14,542 | 8,936 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total non-interest bearing liabilities |
221,379 | 214,225 | ||||||||||||||||||||||
Stockholders equity |
126,993 | 115,180 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 1,205,010 | $ | 1,135,141 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income/spread (tax equivalent basis) |
19,413 | 3.22 | % | 18,567 | 3.35 | % | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Tax-equivalent basis adjustment |
(531 | ) | (545 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 18,882 | $ | 18,022 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (tax equivalent basis) |
3.46 | % | 3.50 | % | ||||||||||||||||||||
|
|
|
|
(1) | Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%. |
(2) | Average balances have been calculated based on daily balances |
(3) | Annualized |
(4) | Loan balances include non-accrual loans and are net of unearned income. |
(5) | Loan yields include the effect of amortization of deferred fees, net of costs. |
44
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) Six months ended June 30, 2019 Compared to Six months ended June 30, 2018 Variance due to |
||||||||||||
Volume | Rate | Net | ||||||||||
(dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Interest-bearing deposits with banks |
$ | (16 | ) | $ | 21 | $ | 5 | |||||
Securities available for sale: |
||||||||||||
Taxable |
(162 | ) | 130 | (32 | ) | |||||||
Tax-exempt securities |
(184 | ) | (9 | ) | (193 | ) | ||||||
|
|
|
|
|
|
|||||||
Total securities |
(346 | ) | 121 | (225 | ) | |||||||
Loans receivable |
2,024 | 957 | 2,981 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-earning assets |
1,662 | 1,099 | 2,761 | |||||||||
|
|
|
|
|
|
|||||||
Interest-bearing liabilities: |
||||||||||||
Interest-bearing demand and money market |
(12 | ) | 100 | 88 | ||||||||
Savings |
(2 | ) | 9 | 7 | ||||||||
Time |
317 | 1,074 | 1,391 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-bearing deposits |
303 | 1,183 | 1,486 | |||||||||
Short-term borrowings |
46 | 73 | 119 | |||||||||
Other borrowings |
154 | 156 | 310 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
503 | 1,412 | 1,915 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income (tax-equivalent basis) |
$ | 1,159 | $ | (313 | ) | $ | 846 | |||||
|
|
|
|
|
|
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.
45
Comparison of Operating Results for the Six Months Ended June 30, 2019 to June 30, 2018
General
For the six months ended June 30, 2019, net income totaled $6,712,000 compared to $6,642,000 earned in the similar period in 2018. The increase in net income for the six months ended June 30, 2019 was due primarily to an $860,000 improvement in net interest income. Earnings per share for the current period were $1.07 per share for basic shares and $1.06 for fully diluted shares compared to $1.07 per share for basic shares and $1.06 per share for fully diluted shares for the six months ended June 30, 2018. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2019 were 1.12% and 10.66%, respectively, compared to 1.18% and 11.63%, respectively, for the similar period in 2018.
The following table sets forth changes in net income:
(dollars in thousands) | Six months ended | |||
June 30, 2019 to June 30, 2018 | ||||
Net income six months ended June 30, 2018 |
$ | 6,642 | ||
Change due to: |
||||
Net interest income |
860 | |||
Provision for loan losses |
225 | |||
Net gains on sales |
(26 | ) | ||
Other income |
(241 | ) | ||
Salaries and employee benefits |
(380 | ) | ||
Occupancy, furniture and equipment |
(115 | ) | ||
Data processing and related operations |
(262 | ) | ||
Foreclosed real estate |
82 | |||
All other expenses |
(158 | ) | ||
Income tax expense |
85 | |||
|
|
|||
Net income six months ended June 30, 2019 |
$ | 6,712 | ||
|
|
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2019 totaled $19,413,000 which was $846,000 higher than the comparable period in 2018. The increase in net interest income was due primarily to a $2,981,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted by a $225,000 decrease in securities income. The fte net interest spread and net interest margin were 3.22% and 3.46%, respectively, for the six months ended June 30, 2019 compared to 3.35% and 3.50%, 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 $23,771,000 with a yield on average earning assets of 4.24% compared to $21,010,000 and 3.96% for the 2018 period. Average loans increased $89.0 million over the comparable period of last year, while average securities decreased $26.9 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.121 billion for the six months ended June 30, 2019, an increase of $60.6 million over the average for the similar period in 2018.
46
Interest expense for the six months ended June 30, 2019 totaled $4,358,000 at an average cost of 1.02% compared to $2,443,000 and 0.61% 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 1.78% from 1.13% for the similar period in the prior year.
Provision for Loan Losses
The Companys provision for loan losses for the six months ended June 30, 2019 was $750,000 compared to $975,000 for the six months ended June 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 $974,000 for the six months ended June 30, 2019 compared to $283,000 for the similar period in 2018. The increase in charge-offs was due primarily to two commercial credits which were written down by $787,000 in the aggregate during the 2019 period. At June 30, 2019, the allowance for loan losses represented 0.93% of loans receivable and 607% of non-performing loans.
Other Income
Other income totaled $3,201,000 for the six months ended June 30, 2019 compared to $3,468,000 for the similar period in 2018. The decrease was due primarily to a $144,000 decrease in earnings and proceeds on bank-owned life insurance policies and a $135,000 decline in net gains realized on sales of securities. All other items included in other income increased $12,000, net.
Other Expense
Other expense for the six months ended June 30, 2019 totaled $13,433,000 which was $833,000 higher than the same period of 2018 due primarily to a $380,000 increase in salaries and benefits expenses and a $262,000 increase in data processing costs. All other operating expenses increased $191,000, net.
Income Tax Expense
Income tax expense totaled $1,188,000 for an effective tax rate of 15.0% for the period ending June 30, 2019 compared to $1,273,000 for an effective tax rate of 16.1% 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 Companys 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 June 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 Companys policy limits. The Companys policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.
47
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 June 30, 2019, the Company had a negative 90-day interest sensitivity gap of $19.0 million or (1.6)% 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 $11.7 million due primarily to a $5.2 million increase in loans and a $4.0 million increase in overnight liquidity. Rate-sensitive liabilities repricing within 90 days increased $12.0 million since year end due to a $14.7 million increase in time deposits repricing. A negative gap means that rate-sensitive liabilities are greater than rate-sensitive assets at the time interval. This would indicate that in a rising rate environment, the cost of interest-bearing liabilities could increase faster than the yield on interest-earning assets in the 90-day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.
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 prepared non-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 a ten-year period. The Company believes the study provides pertinent data to support the assumptions used in modeling non-maturity deposits.
June 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 |
$ | 4,265 | $ | | $ | | $ | | $ | 4,265 | ||||||||||
Securities |
9,411 | 29,699 | 68,427 | 130,546 | 238,083 | |||||||||||||||
Loans Receivable |
140,425 | 176,210 | 290,650 | 280,388 | 887,673 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total RSA |
$ | 154,101 | $ | 205,909 | $ | 359,077 | $ | 410,934 | $ | 1,130,021 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Non-maturity interest-bearing deposits |
$ | 60,264 | $ | 60,286 | $ | 158,551 | $ | 126,285 | $ | 405,386 | ||||||||||
Time Deposits |
88,336 | 132,492 | 96,976 | 36,270 | 354,074 | |||||||||||||||
Borrowings |
24,498 | 28,460 | 34,315 | 4,845 | 92,118 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total RSL |
$ | 173,098 | $ | 221,238 | $ | 289,842 | $ | 167,400 | $ | 851,578 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest Sensitivity Gap |
$ | (18,997 | ) | $ | (15,329 | ) | $ | 69,235 | $ | 243,534 | $ | 278,443 | ||||||||
Cumulative Gap |
(18,997 | ) | (34,326 | ) | 34,909 | 278,443 | ||||||||||||||
RSA/RSL-cumulative |
89.0 | % | 91.3 | % | 105.1 | % | 132.7 | % | ||||||||||||
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 | % |
48
Item 4. Controls and Procedures
The Companys management evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, the effectiveness of the Companys 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 Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.
There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys 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 1 of the Companys Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Sales and Use of Proceeds
(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 Companys stock repurchases during the quarter ended June 30, 2019.
Issuer Purchases of Equity Securities | ||||||||||||||||
Total Number of Shares (or Units) Purchased |
Average Price Paid Per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs * |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|||||||||||||
April 1 30, 2019 |
| $ | | | 129,500 | |||||||||||
May 1 31, 2019 |
| | | 129,500 | ||||||||||||
June 1 30, 2019 |
| | | 129,500 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
| $ | | | 129,500 | |||||||||||
|
|
|
|
|
|
* | On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. There is no expiration date for this plan. |
49
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
None
50
(1) | Incorporated by reference into this document from Exhibit 3(i) to the Registrants Form 10-Q filed with the Commission on May 9, 2019 |
(2) | Incorporated by reference into this document from the identically numbered exhibit to the Registrants Form 10-Q filed with the Commission on August 8, 2014 |
(3) | Incorporated herein by reference into this document from the identically numbered Exhibits to the Registrants Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364 |
(4) | Incorporated by reference into this document from the identically numbered exhibits to the Registrants Form 10-K filed with the Commission on March 15, 2010. |
(5) | Incorporated by reference into this document from Exhibit 10.4 to the Registrants Form 10-K filed with the Commission on March 14, 2013, File No. 0-28364. |
(6) | Incorporated by reference to Exhibit 10.6 to the Registrants Form 10-K filed with the Commission on March 23, 2000. |
(7) | Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017. |
(8) | Incorporated herein by reference to Exhibit 10.11 to the Registrants Form 10-K filed with the Commission on March 22, 2004. |
(9) | Incorporated by reference to this document from Exhibit 4.1 to Registrants Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006. |
(10) | Incorporated herein by reference from Exhibits 10.1 and 10.5 to the Registrants Current Report on Form 8-K filed on April 4, 2006. |
(11) | Incorporated by reference from Exhibit 10.13 to the Registrants Form 10-Q filed with the Commission on November 7, 2013. |
(12) | Incorporated by reference to Exhibit 10.1 to Post-Effective No. 1 to the Registrants Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 4, 2018. |
(13) | Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K filed on February 18, 2015. |
(14) | Incorporated by reference into this document from the exhibits to the Registrants Current Report on Form 8-K filed with the Commission on January 16, 2018 |
51
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORWOOD FINANCIAL CORP. | ||||
Date: August 8, 2019 | By: | /s/ Lewis J. Critelli | ||
Lewis J. Critelli | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: August 8, 2019 | By: | /s/ William S. Lance | ||
William S. Lance | ||||
Executive Vice President and | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) |
52