NORWOOD FINANCIAL CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk Market Risk Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates. Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of March 31, 2022, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates. Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals. As of March 31, 2022, the Company had a positive 90-day interest sensitivity gap of $137.1 million or 6.6% of total assets, compared to the $175.1 million interest sensitivity gap, or 8.5% of total assets, as of December 31, 2021. At March 31, 2022, rate-sensitive assets repricing within 90 days decreased $18.5 million due to a $42.0 million decrease in interest-bearing deposits. Rate-sensitive liabilities repricing within 90 days increased $19.5 since year end due primarily to a $19.0 million increase in deposits repricing. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, yield on interest-earning assets in the 90-day time frame could increase faster than the cost of interest-bearing liabilities. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages. Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for the 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. 38 March 31, 2022 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 $ 143,186 $ 446 $ — $ — $ 143,632 Securities 14,410 38,208 83,967 298,339 434,924 Loans Receivable 247,425 203,701 391,158 529,361 1,371,645 Total RSA $ 405,021 $ 242,355 $ 475,125 $ 827,700 $ 1,950,201 Non-maturity interest-bearing deposits $ 143,373 $ 129,938 $ 344,716 $ 238,785 $ 856,812 Time Deposits 107,942 261,944 93,841 22,259 485,986 Borrowings 16,621 28,798 45,047 — 90,466 Total RSL $ 267,936 $ 420,680 $ 483,604 $ 261,044 $ 1,433,264 Interest Sensitivity Gap $ 137,085 $ (178,325) $ (8,479) $ 566,656 $ 516,937 Cumulative Gap 137,085 (41,240) (49,719) 516,937 RSA/RSL-cumulative 151.16% 94.01% 95.76% 136.07% December 31, 2021 Interest Sensitivity Gap $ 175,100 $ (170,159) $ 11,040 $ 524,379 $ 540,360 Cumulative Gap 175,100 4,941 15,981 540,360 RSA/RSL-cumulative 170.5% 100.7% 101.4% 138.4% ‎ 39