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| NWFL > SEC Filings for NWFL > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words believes, anticipates, contemplates, expects, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, demand for real estate and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
Note 2 to the Company's consolidated financial statements for the year ended
December 31, 2008 (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.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, potential impairment of restricted stock, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on securities. Please refer to the discussion of the allowance for loan losses calculation under "Non-performing Assets and Allowance for Loan Losses" in the "Financial Condition" section.
The Company adopted SFAS No. 123(R), "Share-Based Payment" as of January 1, 2006, using the modified prospective transition method. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period.
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.
Restricted stock which represents required investment in the common stock of correspondent banks is carried at cost and as of March 31, 2009 and December 31, 2008, consists of the common stock of Federal Home Loan Bank of Pittsburgh. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock.
Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Management's determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary decline in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and length of time this situation has persisted, (2) commitments by the
In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost 2) the financial condition of the issuer and 3) the intent and ability of the Company to hold the security to allow for a recovery to fair value. The Company believes that the unrealized losses in certain specific securities at March 31, 2009 and December 31, 2008 represent temporary impairment of the securities.
Changes in Financial Condition
General
Total assets as of March 31, 2009 were $511.4 million compared to $504.3 million as of December 31, 2008 an increase of $7.1 million. The increase reflects a $11.5 million increase in the cash and cash equivalents and a $2.0 million increase in loans receivable partially offset by a $5.9 million decrease in securities available for sale.
Securities
The fair value of securities available for sale as of March 31, 2009 was $124.2 million compared to $130.1 million as of December 31, 2008. The Company purchased $15.1 million of securities principally using the proceeds from $16.9 million of securities called, maturities and principal reductions.
The carrying value of the Company's securities portfolio (Available-for Sale and Held-to Maturity) consisted of the following:
March 31, 2009 December 31, 2008
(dollars in thousands) Amount % of portfolio Amount % of portfolio
US Government agencies $ 30,886 24.8 % $ 35,813 27.5 %
States and political subdivisions 26,831 21.4 25,916 19.8
Corporate securities 4,742 3.8 5,625 4.3
Mortgage-backed securities 61,689 49.4 62,318 47.5
Equity securities 781 0.6 1,155 0.9
Total $ 124,929 100.0 % $ 130,827 100.0 %
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The Company has securities in an unrealized loss position. In management's opinion, the unrealized losses in the mortgage-backed securities reflect changes in interest rates subsequent to the acquisition of specific securities. The unrealized losses in the State and Political Subdivisions and Corporate Obligations also reflect a widening of spreads due to liquidity and credit concerns in the financial markets. The Company holds a small amount of equity securities in other financial institutions, the value of which has been impacted by the weakening conditions of the financial markets. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.
Loans receivable totaled $351.4 million compared to $349.4 million as of December 31, 2008. Residential real estate loans decreased $4.2 million principally due to the sale of $9.7 million of residential mortgages. The loans were sold for interest rate risk management to shorten the average life of the mortgage loan portfolio. Commercial real estate loans increased $7.2 million during the period as a result of continued activity in the Monroe and Pike area.
Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:
Types of loans
(dollars in thousands) March 31, 2009 December 31, 2008
Real Estate-Residential $ 129,235 36.7 % $ 133,417 38.1 %
Commercial 166,668 47.4 159,476 45.7
Construction 13,230 3.8 14,856 4.2
Commercial, financial and agricultural 27,246 7.7 25,886 7.4
Consumer loans to individuals 15,438 4.4 16,087 4.6
Total loans 351,817 100.0 % 349,722 100.0 %
Deferred fees (net) (384 ) (318 )
351,433 349,404
Allowance for loan losses (4,413 ) (4,233 )
Net loans receivable $ 347,020 $ 345,171
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Allowance for Loan Losses and Non-performing Assets
Following is a summary of changes in the allowance for loan losses for the periods indicated:
(dollars in thousands) Three Months Ended March 31,
2009 2008
Balance, beginning $ 4,233 $ 4,081
Provision for loan losses 225 75
Charge-offs (62 ) (35 )
Recoveries 17 16
Net charge-offs (45 ) (19 )
Balance, ending $ 4,413 $ 4,137
Allowance to total loans 1.26 % 1.26 %
Net (charge-offs) recoveries to average loans
(annualized) .05 % .02 %
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The allowance for loan losses totaled $4,413,000 as of March 31, 2009 and represented 1.26% of total loans, compared to $4,233,000 at year end, and $4,137,000 as of March 31, 2008. The Company had net charge-offs for the three months ended March 31, 2009 of $45,000 compared to $19,000 in the comparable period in 2008 The Company's loan review process assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include: concentration of credit in specific industries; economic and industry conditions; trends in delinquencies and loan classifications, large dollar exposures and loan growth. Management considers the allowance adequate at March 31, 2009 based on the Company's criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.
As of March 31, 2009, non-performing loans totaled $1,692,000, which is .48% of total loans compared to $2,087,000, or 0.60% of total loans at December 31, 2008. The decrease was principally due to a pay down as a result of a third party refinance on a portion of a land development loan. The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
(dollars in thousands) March 31, 2009 December 31, 2008 Loans accounted for on a non-accrual basis: Commercial and all other $ - $ - Real Estate 1,641 2,087 Consumer - - Total 1,641 2,087 Accruing loans which are contractually past due 90 days or more 51 - Total non-performing loans 1,692 2,087 Foreclosed real estate 768 660 Total non-performing assets $ 2,460 $ 2,747 Allowance for loans losses $ 4,413 $ 4,233 Coverage of non-performing loans 2.61 x 2.03 x Non-performing loans to total loans .48 % .60 % Non-performing assets to total assets .48 % .54 % |
Deposits
Total deposits as of March 31, 2009 were $370.4 million compared to $359.6 million as of December 31, 2008, an increase of $10.8 million. This growth in deposits was after the sale of $3.6 million related to a branch closure as described in Note 9. Deposit growth was attributable to a $4.7 million increase in money market deposit accounts and $4.6 million increase in time deposits under $100,000. The increase in time deposits was due to a promotional 13 month product. The growth in deposits was used to reduce short-term borrowings with the remaining portion temporarily invested in Federal Funds sold.
The following table sets forth deposit balances as of the dates indicated:
(dollars in thousands) March 31, 2009 December 31, 2008 Non-interest bearing demand $ 57,270 $ 56,839 Interest bearing demand 35,757 35,322 Money market deposit accounts 65,274 60,623 Savings 44,714 44,577 Time deposits <$100,000 121,753 117,179 Time deposits >$100,000 45,648 45,095 Total $ 370,416 $ 359,635 |
Short-term borrowings as of March 31, 2009 totaled $29.4 million compared to $38.1 million as of December 31, 2008. Securities sold under agreements to repurchase declined $5.2 million principally due to the seasonality of municipal cash management accounts. Short-term borrowings consist of the following:
March 31, 2009 December 31, 2008
(dollars in thousands)
Securities sold under agreements to repurchase $ 18,214 $ 23,404
Federal Funds Purchased - 3,600
Short-term FHLB advances 11,000 11,000
U.S. Treasury demand notes 198 122
$ 29,412 $ 38,126
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Other borrowings consisted of the following:
(dollars in thousands)
March 31, 2009 December 31, 2008
Notes with the FHLB:
Fixed rate note due September 2010 at 3.53% $ 5,000 $ 5,000
Convertible note due January 2011 at 5.24% 3,000 3,000
Convertible note due August 2011 at 2.69% 10,000 10,000
Fixed rate note due September 2011 at 4.06% 5,000 5,000
Convertible note due October 2012 at 4.37% 5,000 5,000
Convertible note due May 2013 at 3.015% 5,000 5,000
Convertible note due January 2017 at 4.71% 10,000 10,000
$ 43,000 $ 43,000
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The convertible notes contain an option which allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three month LIBOR plus 11 to 19 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge.
Off-Balance Sheet Arrangements
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
March 31, 2009 December 31, 2008
(in thousands)
Commitments to grant loans $ 15,441 $ 19,254
Unfunded commitments under lines of credit 37,527 36,980
Standby letters of credit 1,695 1,897
$ 54,663 $ 58,131
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Stockholders' Equity and Capital Ratios
As of March 31, 2009, stockholders' equity totaled $60.2 million, compared to $58.7 million as of December 31, 2008. The net change in stockholders' equity included $1,737,000 in net income, that was partially offset by $741,000 of dividends declared. In addition, accumulated other comprehensive income increased $486,000 due to an increase in 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, which may impact the value of the securities. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim and year-end period.
A comparison of the Company's regulatory capital ratios is as follows:
March 31, 2009 December 31, 2008
Tier 1 Capital
(To average assets) 11.51% 11.45%
Tier 1 Capital
(To average-weighted assets) 16.47% 16.22%
Total Capital
(To risk-weighted assets) 17.77% 17.50%
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The minimum capital requirements imposed by the FDIC on the Bank for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank's capital ratios do not differ significantly from the Company's ratios. Although not adopted in regulation form, the PDB utilizes capital standards requiring a
Liquidity
As of March 31, 2009, the Company had cash and cash equivalents of $18.0 million in the form of cash, due from banks, Federal Funds sold and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $124.2 million which could be used for liquidity needs. This totals $142.2 million and represents 27.8% of total assets compared to $136.6 million and 27.1% of total assets as of December 31, 2008. The Company also monitors other liquidity measures, all of which were within the Company's policy guidelines as of March 31, 2009 and December 31, 2008. Based upon these measures, the Company believes its liquidity is adequate.
Capital Resources
The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires in December 2011. There were no borrowings under this line at March 31, 2009 and December 31, 2008.
The Company has a line of credit commitment from Atlantic Central Bankers Bank for $7,000,000 which expires in May 2009. There were no borrowings under these lines as of March 31, 2009 and December 31, 2008. The Company has a line of credit commitment available which has no stated expiration date from PNC for $12,000,000. Borrowings under this line were $-0- as of March 31, 2009 and $3,600,000 as of December 31, 2008.
The Bank's maximum borrowing capacity with the Federal Home Loan Bank was approximately $235,056,000 of which $54,000,000 was outstanding at March 31, 2009 and at December 31, 2008. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which 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 34%. 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 page 21. 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.
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
Three Months Ended March 31,
2009 2008
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Federal funds sold $ 3,024 $ 2 0.26 % $ 2,403 $ 18 3.00 %
Interest bearing deposits with
banks 5,725 4 0.28 82 1 4.88
Securities held-to-maturity 707 15 8.49 706 15 8.50
Securities available for sale:
Taxable 102,422 1,142 4.46 105,489 1,277 4.84
Tax-exempt 25,471 372 5.84 22,087 306 5.54
Total securities available for
sale (1) 127,893 1,514 4.74 127,576 1,583 4.96
Loans receivable (4) (5) 351,315 5,316 6.05 328,347 5,689 6.93
Total interest earning assets 488,664 6,851 5.61 459,114 7,306 6.37
Non-interest earning assets:
Cash and due from banks 6,599 7,103
Allowance for loan losses (4,317 ) (4,121 )
Other assets 17,657 16,861
Total non-interest earning
assets 19,939 19,843
Total Assets $ 508,603 $ 478,957
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Interest bearing demand and
money market $ 97,883 200 0.82 $ 95,512 432 1.81
Savings 44,707 41 0.37 42,555 49 0.46
Time 167,461 1,260 3.01 175,250 1,890 4.31
Total interest bearing deposits 310,051 1,501 1.94 313,317 2,371 3.03
Short-term borrowings 35,299 96 1.09 25,776 187 2.90
Other borrowings 43,000 412 3.83 23,000 267 4.64
Total interest bearing
liabilities 388,350 2,009 2.07 362,093 2,825 3.12
Non-interest bearing
liabilities:
Demand deposits 56,290 55,679
Other liabilities 4,284 4,911
Total non-interest bearing
liabilities 60,574 60,590
Stockholders' equity 59,679 56,274
Total Liabilities and
Stockholders' Equity $ 508,603 $ 478,957
Net interest income (tax
equivalent basis) 4,842 3.54 % 4,481 3.25 %
Tax-equivalent basis adjustment (161 ) (157 )
Net interest income $ 4,681 $ 4,324
Net interest margin (tax
equivalent basis) 3.96 % 3.90 %
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(1) Interest and yields are presented on a tax-equivalent basis using a
marginal tax rate of 34%.
(2) Average balances have been calculated based on daily balances.
(3) Annualized
(4) Loan balances include non-accrual loans and are net of unearned income.
(5) Loan yields include the effect of amortization of deferred fees, net of
costs.
Increase/(Decrease)
Three months ended March 31, 2009 Compared to
Three Months ended March 31, 2008
Variance due to
Volume Rate Net
(dollars in thousands)
Assets
Interest earning assets:
Federal funds sold...................................... $ 25 $ (41 ) $ (16 )
Interest bearing deposits with banks.............. 10 (7 ) 3
Securities held to maturity............................ - - -
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