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| NWFL > SEC Filings for NWFL > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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.
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 investments in 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 June 30, 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 excess 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 FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the restricted stock as of June 30, 2009 and December 31, 2008.
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 June 30, 2009 and December 31, 2008 represent temporary impairment of the securities, related to changes in interest rates.
Changes in Financial Condition
General
Total assets as of June 30, 2009 were $508.5 million compared to $504.3 million as of December 31, 2008, an increase of $4.2 million. The increase reflects a $11.2 million increase in loans funded by a $14.5 million increase in deposits.
Securities
The fair value of securities available for sale as of June 30, 2009 was $122.6 million compared to $130.1 million as of December 31, 2008. The Company purchased $28.4 million of securities using the proceeds from $25.3 million of securities called, maturities and principal reductions and from short-term borrowings.
Securities with a carrying value of $49,720,000 and $51,444,000 at June 30, 2009 and at December 31, 2008 respectively, were pledged to secure public deposits, U.S. Treasury demand notes, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
Loans Receivable
Loans receivable totaled $360.6 million compared to $349.7 million as of December 31, 2008. Commercial real estate loans increased $8.5 million during the period, reflecting new activity principally centered in the Monroe County, Pennsylvania market area. Commercial loans increased $4.4 million principally due to tax-exempt financing of a municipal sewer authority.
Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:
Types of loans June 30, 2009 December 31, 2008
(dollars in thousands)
Real Estate-Residential $ 133,237 36.9 % $ 133,417 38.1 %
Commercial 167,947 46.5 159,476 45.6
Construction 14,291 4.0 14,856 4.2
Commercial, financial and agricultural 30,242 8.4 25,886 7.4
Consumer loans to individuals 15,258 4.2 16,087 4.6
Total loans 360,975 100.0 % 349,722 100.0 %
Deferred fees (net) (382 ) (318 )
360,593 349,404
Allowance for loan losses (4,574 ) (4,233 )
Net loans receivable $ 356,019 $ 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:
Three Months Six Months
Ended June 30 Ended June 30
(dollars in thousands) 2009 2008 2009 2008
Balance, beginning $ 4,413 $ 4,137 $ 4,233 $ 4,081
Provision for loan losses 220 110 445 185
Charge-offs (80 ) (36 ) (142 ) (71 )
Recoveries 21 26 38 42
Net charge-offs (59 ) (10 ) (104 ) (29 )
Balance, ending $ 4,574 $ 4,237 $ 4,574 $ 4,237
Allowance to total loans 1.27 % 1.27 % 1.27 % 1.27 %
Net charge-offs to average loans (annualized) .07 % .01 % .06 % .02 %
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The allowance for loan losses totaled $4,574,000 as of June 30, 2009 and represented 1.27% of total loans compared to $4,233,000 at the prior year end, and $4,237,000 as of June 30, 2008. The Company had net charge-offs for the six months of $104,000 compared to $29,000 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 June 30, 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 June 30, 2009, non-performing loans totaled $1,800,000, which is .50% 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 recorded investment for impaired loans requiring a specific allowance for loan losses was $1,235,000 of which $50,000 was specifically reserved due to a shortfall in the collateral. Foreclosed real estate totals $798,000 as of June 30, 2009 compared to $660,000 as of year-end. The balance principally consists of undeveloped residential building lots in Monroe County, PA.
(dollars in thousands) June 30, 2009 December 31, 2008 Loans accounted for on a non-accrual basis: Commercial and all other $ - $ - Real Estate 1,781 2,087 Consumer - - Total 1,781 2,087 Accruing loans which are contractually past due 90 days or more 19 - Total non-performing loans 1,800 2,087 Foreclosed real estate 798 660 Total non-performing assets $ 2,598 $ 2,747 Allowance for loan losses $ 4,574 $ 4,233 Coverage of non-performing loans 2.54 x 2.03 x Non-performing loans to total loans .50 % .60 % Non-performing assets to total assets .51 % .54 % |
Deposits
Total deposits as of June 30, 2009 were $374.2 million increasing from $359.6 million as of December 31, 2008, an increase of $14.6 million. The growth in deposits is net of the sale of $3.6 million in deposits related to a branch closure as described in Note 9. Non-interest bearing demand deposits increased $3.6 million to $60.4 million reflecting seasonal growth in certain commercial and municipal accounts. Time deposits less than $100,000 totaled $123.2 million as of June 30, 2009, an increase of $6.0 million. The increase was principally due to the results of a 13 month CD product. The growth in deposits was used to fund loan growth and pay down short-term borrowings.
The following table sets forth deposit balances as of the dates indicated.
(dollars in thousands) June 30, 2009 December 31, 2008 Non-interest bearing demand $ 60,444 $ 56,839 Interest bearing demand 36,999 35,322 Money Market Deposit Accounts 62,699 60,623 Savings 44,565 44,577 Time deposits <$100,000 123,212 117,179 Time deposits >$100,000 46,234 45,095 Total $ 374,153 $ 359,635 |
Short-term borrowings as of June 30, 2009 totaled $24.6 million compared to $38.1 million as of December 31, 2008. Securities sold under agreements to repurchase declined $4.8 million principally due to the seasonality of school district cash management accounts. Short-term borrowings consist of the following:
(dollars in thousands)
June 30, December 31,
2009 2008
Securities sold under agreements
to repurchase $ 18,599 $ 23,404
Federal Funds Purchased - 3,600
Federal Reserve Discount Window 5,800 -
Short-term FHLB advances - 11,000
U.S. Treasury demand notes 197 122
$ 24,596 $ 38,126
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Other borrowings consisted of the following:
(dollars in thousands) June 30, 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 that allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three-month LIBOR plus 11 to 17 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 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 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.
June 30, December 31,
2009 2008
(in thousands)
Commitments to grant loans $ 15,991 $ 19,254
Unfunded commitments under lines of credit 41,482 36,980
Standby letters of credit 2,079 1,897
$ 59,522 $ 58,131
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Stockholders' Equity and Capital Ratios
At June 30, 2009, total stockholders' equity totaled $61.1 million, compared to $58.7 million as of December 31, 2008. The net change in stockholders' equity included $3,486,000 in net income, that was partially offset by $1,482,000 of dividends declared. In addition, accumulated other comprehensive income increased $128,000 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:
June 30, 2009 December 31, 2008
Tier 1 Capital
(To average assets) 11.89 % 11.45 %
Tier 1 Capital
(To risk-weighted assets) 16.41 % 16.22 %
Tier 1 Capital
(To risk-weighted assets) 17.72 % 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 minimum of 6.5% leverage capital and 10% total capital. The Company and the Bank were in compliance with the FRB, FDIC and PDB capital requirements as of June 30, 2009 and December 31, 2008.
As of June 30, 2009, the Company had cash and cash equivalents of $7.6 million in the form of cash and due from banks, and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $122.6 million which could be used for liquidity needs. This totals $130.2 million and represents 25.6% 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 June 30, 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 June 30, 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 2010. There were no borrowings under these lines as of June 30, 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 June 30, 2009 and $3,600,000 as of December 31, 2008. The Bank has access to the Federal Reserve Discount Window with total availability of $8,000,000 based upon qualifying collateral held by the Federal Reserve Bank. There was $5,800,000 outstanding as of June 30, 2009 and -0- as of December 31, 2008.
The Bank's maximum borrowing capacity with the Federal Home Loan Bank was approximately $235,056,000 of which $43,000,000 was outstanding at June 30, 2009 and $54,000,000 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 26 and page 30. 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 June 30,
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 $ 1,082 $ 1 0.37 % $ 1,146 $ 6 2.09 %
Interest bearing deposits with
banks 512 - - 97 1 4.12
Securities held-to-maturity(1) 707 16 9.05 706 15 8.50
Securities available for sale:
Taxable 99,290 1,032 4.16 110,352 1,318 4.78
Tax-exempt 28,589 398 5.57 22,570 318 5.64
Total securities available for
sale (1) 127,879 1,430 4.47 132,922 1,636 4.92
Loans receivable (4) (5) 354,284 5,466 6.17 331,509 5,458 6.59
Total interest earning assets 484,464 6,913 5.71 466,380 7,116 6.10
Non-interest earning assets:
Cash and due from banks 6,932 8,051
Allowance for loan losses (4,483 ) (4,184 )
Other assets 17,263 17,176
Total non-interest earning assets 19,712 21,043
Total Assets $ 504,176 $ 487,423
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Interest bearing demand and money
market $ 100,663 183 0.73 $ 105,965 371 1.40
Savings 45,053 42 0.37 43,715 52 0.48
Time 167,474 1,195 2.85 161,209 1,540 3.82
Total interest bearing deposits 313,190 1,420 1.81 310,889 1,963 2.53
Short-term borrowings 23,558 73 1.24 33,764 178 2.11
Other borrowings 43,000 415 3.86 20,912 238 4.55
Total interest bearing
liabilities 379,748 1,908 2.01 365,565 2,379 2.60
Non-interest bearing liabilities:
Demand deposits 58,710 60,431
Other liabilities 4,631 4,812
Total non-interest bearing
liabilities 63,341 65,243
Stockholders' equity 61,087 56,615
Total Liabilities and
Stockholders' Equity $ 504,176 $ 487,423
Net interest income (tax
equivalent basis) 5,005 3.70 % 4,737 3.50 %
Tax-equivalent basis adjustment (170 ) (163 )
Net interest income $ 4,835 $ 4,574
Net interest margin (tax
equivalent basis) 4.13 % 4.06 %
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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
(5) Loan balances include non-accrual loans and are net of unearned income.
(6) Loan yields include the effect of amortization of deferred fees, net of costs.
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
Increase/(Decrease)
Three Months Ended June 30, 2009 Compared to
Three Months Ended June 30, 2008
Variance due to
Volume Rate Net
(dollars in thousands)
Interest earning assets:
Federal funds sold $ - $ (5 ) $ (5 )
Interest bearing deposits with banks 6 (7 ) (1 )
Securities held to maturity - 1 1
Securities available for sale:
Taxable (125 ) (161 ) (286 )
Tax-exempt securities 106 (26 ) 80
Total securities (19 ) (187 ) (206 )
Loans receivable 1,438 (1,430 ) 8
Total interest earning assets 1,424 (1,627 ) (203 )
Interest bearing liabilities:
Interest-bearing demand and money market (18 ) (170 ) (188 )
Savings 10 (20 ) (10 )
Time 369 (714 ) (345 )
Total interest bearing deposits 361 (904 ) (543 )
Short-term borrowings (44 ) (61 ) (105 )
Other borrowings 408 (231 ) 177
Total interest bearing liabilities 725 (1,196 ) (471 )
Net interest income (tax-equivalent basis) $ 700 $ (432 ) $ 268
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