Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s
30
operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.
In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.
Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 31, 2021 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2021) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Changes in Financial Condition - Loans” below.
The Company uses the modified prospective transition method to account for stock options. Under this method, companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock.
Deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.
The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.
Decreases 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
31
of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at September 30, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.
In connection with acquisitions, the Company recorded goodwill in the amount of $29.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Company or the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss.
Changes in Financial Condition
General
Total assets as of September 30, 2022 were $2.019 billion compared to $2.069 billion as of December 31, 2021. The decrease was due primarily to a $167.8 million decrease in interest-bearing deposits with banks. Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings. The decrease was partially offset by a $77.4 million increase in loans receivable, and a $20.5 million increase in securities available for sale.
Securities
The fair value of securities available for sale as of September 30, 2022 was $427.3 million compared to $406.8 million as of December 31, 2021. The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.
The Company has securities in an unrealized loss position. In management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.
Loans
Loans receivable totaled $1.432 billion at September 30, 2022 compared to $1.355 billion as of December 31, 2021. The $77.4 million increase in loans receivable during the nine months ended September 30, 2022, was due to a $15.9 million increase in commercial real estate loans, a $22.1 million increase in residential mortgage loans, and a $30.3 million increase in consumer loans.
The allowance for loan losses totaled $16,931,000 as of September 30, 2022, and represented 1.18% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021. The Company had net charge-offs for the nine months ended September 30, 2022 of $111,000, compared to $797,000 in the corresponding period in 2021. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. In addition, management has included qualitative factors during 2022 which are specifically related to the economic impact of the COVID-19 pandemic. Management considers the allowance for loan losses adequate at September 30, 2022 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, which might be incurred in the future.
As of September 30, 2022, non-performing loans totaled $618,000 or 0.04% of total loans compared to $734,000, or 0.05%, of total loans at December 31, 2021. At September 30, 2022, non-performing assets totaled $964,000, or 0.05%, of total assets, compared to $2,476,000, or 0.12%, of total assets at December 31, 2021. The decrease in non-performing assets during the nine month period ended September 30, 2022, was due to sales of properties included in foreclosed real estate.
32
The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
(dollars in thousands)
September 30, 2022
December 31, 2021
Loans accounted for on a non-accrual basis:
Real Estate
Residential
$
441
$
469
Commercial
—
103
Agricultural
—
—
Construction
—
—
Commercial and financial loans
12
16
Other agricultural loans
—
—
Consumer loans to individuals
165
55
Total non-accrual loans
618
643
Accruing loans which are contractually
past due 90 days or more
—
91
Total non-performing loans
618
734
Foreclosed real estate
346
1,742
Total non-performing assets
$
964
$
2,476
Purchased credit impaired loans (a)
$
6,614
$
8,304
Allowance for loans losses
$
16,931
$
16,442
Coverage of non-performing loans (a) (b)
2,740%
%
2,240%
%
Non-performing loans to total loans(a)
0.04
%
0.05
%
Non-performing loans to total assets(a)
0.03
%
0.03
%
Non-performing assets to total assets(a)
0.05
%
0.12
%
(a) Purchased impaired loans are loans obtained in acquisition transactions that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments. The Company estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount on the acquisition date relating to these impaired loans that is recognized in interest income.
(b) For loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.
Deposits
During the nine-months ended September 30, 2022, total deposits increased $12.0 million due primarily to growth in interest-bearing demand deposits.
The following table sets forth deposit balances as of the dates indicated:
(dollars in thousands)
September 30, 2022
December 31, 2021
Non-interest bearing demand
$
453,560
$
440,652
Interest-bearing demand
259,697
196,786
Money market deposit accounts
295,791
309,439
Savings
292,285
281,214
Time deposits <$250,000
276,000
271,464
Time deposits >$250,000
191,463
257,238
Total
$
1,768,796
$
1,756,793
33
Borrowings
Short-term borrowings increased $10.9 million to $71.7 million at September 30, 2022, compared to $60.8 million at December 31, 2021, due primarily to an increase in cash management account balances.
Other borrowings as of September 30, 2022, were $0 compared to $30.0 million as of December 31, 2021. The decrease reflects the early payoff of $25.5 million Federal Home Loan Bank term borrowings. A prepayment fee of $3,000 was recognized in other expense during the nine months ended September 30, 2022. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $10.9 million due to growth in repurchase agreements.
Other borrowings consisted of the following:
(dollars in thousands)
September 30, 2022
December 31, 2021
Notes with the FHLB:
Amortizing fixed rate borrowing due March 2022 at 1.75%
$
—
$
227
Amortizing fixed rate borrowing due August 2022 at 1.94%
—
1,364
Amortizing fixed rate borrowing due October 2022 at 1.88%
—
1,386
Amortizing fixed rate borrowing due October 2023 at 3.24%
—
3,856
Amortizing fixed rate borrowing due December 2023 at 3.22%
—
2,097
Fixed rate term borrowing due December 2023 at 1.95%
—
10,000
Amortizing fixed rate borrowing due December 2023 at 1.73%
—
5,190
Amortizing fixed rate borrowing due April 2024 at 0.91%
—
5,878
$
—
$
29,998
Stockholders’ Equity and Capital Ratios
As of September 30, 2022, total stockholders’ equity was $158.8 million, compared to $205.3 million as of December 31, 2021. Total stockholders’ equity decreased $60.3 million due to a decrease in the fair value of securities in the available-for-sale portfolio, net of tax, and $6.9 million of dividends declared. The decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. The decrease in total stockholders’ equity was partially offset by $22.1 million of net income. 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 consolidated regulatory capital ratios is as follows:
September 30, 2022
December 31, 2021
Tier 1 Capital
(To average assets)
9.13%
8.51%
Tier 1 Capital
(To risk-weighted assets)
12.47%
12.49%
Common Equity Tier 1 Capital
(To risk-weighted assets)
12.47%
12.49%
Total Capital
(To risk-weighted assets)
13.58%
13.66%
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 organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer
34
requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2022.
Liquidity
As of September 30, 2022, the Company had cash and cash equivalents of $40.9 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $427.3 million which could be used for liquidity needs. Total liquidity of $468.2 million as of September 30, 2022, represents 23.2% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2022 and December 31, 2021. 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, 2023. There were no borrowings under this line as of September 30, 2022 and December 31, 2021.
The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of September 30, 2022 and December 31, 2021.
The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of September 30, 2022 and December 31, 2021.
The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $642,371,000 as of September 30, 2022, of which $0 was outstanding in the form of borrowings as of September 30, 2022. As of December 31, 2021, the maximum borrowing capacity was $607,092,000, of which $29,998,000 of borrowings was outstanding as of December 31, 2021.
Additionally, as of September 30, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $101,400,000 as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As of December 31, 2021, there was $127,850,000 outstanding in the form of Letters of Credit. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which 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. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on page 36. Fully taxable equivalent interest income and net interest income is also reflected in the table on page 37. 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.
35
Results of Operations
NORWOOD FINANCIAL CORP
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis,
Three Months Ended September 30,
dollars in thousands)
2022
2021
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(3)
(2)
(1)
(3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks
$
47,114
$
245
2.08%
$
182,259
$
72
0.16%
Securities available for sale:
Taxable
426,861
2,016
1.89
286,413
1,096
1.53
Tax-exempt (1)
79,727
577
2.89
62,473
471
3.02
Total securities available for sale (1)
506,588
2,593
2.05
348,886
1,567
1.80
Loans receivable (1) (4) (5)
1,412,232
17,193
4.87
1,375,748
16,957
4.93
Total interest-earning assets
1,965,934
20,031
4.08
1,906,893
18,596
3.90
Non-interest earning assets:
Cash and due from banks
25,576
26,622
Allowance for loan losses
(16,996)
(15,714)
Other assets
74,583
115,229
Total non-interest earning assets
83,163
126,137
Total Assets
$
2,049,097
$
2,033,030
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market
$
555,596
$
351
0.25
$
492,464
$
237
0.19
Savings
294,512
52
0.07
270,172
45
0.07
Time
481,640
1,154
0.96
494,459
885
0.72
Total interest-bearing deposits
1,331,748
1,557
0.47
1,257,095
1,167
0.37
Short-term borrowings
68,510
88
0.51
77,799
71
0.37
Other borrowings
2,074
17
3.28
34,683
172
1.98
Total interest-bearing liabilities
1,402,332
1,662
0.47
1,369,577
1,410
0.41
Non-interest bearing liabilities:
Demand deposits
450,737
443,303
Other liabilities
16,630
14,966
Total non-interest bearing liabilities
467,367
458,269
Stockholders' equity
179,398
205,184
Total Liabilities and Stockholders' Equity
$
2,049,097
$
2,033,030
Net interest income/spread (tax equivalent basis)
18,369
3.61%
17,186
3.49%
Tax-equivalent basis adjustment
(199)
(197)
Net interest income
$
18,170
$
16,989
Net interest margin (tax equivalent basis)
3.74%
3.61%
(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.
36
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
Three months ended September 30, 2022 Compared to
Three months ended September 30, 2021
Variance due to
Volume
Rate
Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
(202)
$
375
$
173
Securities available for sale:
Taxable
583
337
920
Tax-exempt securities
131
(25)
106
Total securities
714
312
1,026
Loans receivable
447
(211)
236
Total interest-earning assets
959
476
1,435
Interest-bearing liabilities:
Interest-bearing demand and money market
37
77
114
Savings
7
—
7
Time
(30)
299
269
Total interest-bearing deposits
14
376
390
Short-term borrowings
(10)
27
17
Other borrowings
(165)
10
(155)
Total interest-bearing liabilities
(161)
413
252
Net interest income (tax-equivalent basis)
$
1,120
$
63
$
1,183
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.
37
Comparison of Operating Results for the Three Months Ended September 30, 2022 to September 30, 2021
General
For the three months ended September 30, 2022, net income totaled $8,109,000 compared to $6,981,000 earned in the same period in 2021. The increase in net income for the three months ended September 30, 2022 was due primarily to a $1,181,000 increase in net interest income and a $750,000 decrease in the provision for loan losses. Earnings per share for the three-months ended September 30, 2022 were $1.00 per share for basic shares and fully diluted shares, compared to $0.85 per share for basic shares and for fully diluted shares for the three months ended September 30, 2021. The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2022 were 1.57% and 17.93%, respectively, compared to 1.36% and 13.50%, respectively, for the same period in 2021.
The following table sets forth changes in net income:
(dollars in thousands)
Three months ended
September 30, 2022 to September 30, 2021
Net income three months ended September 30, 2021
$
6,981
Change due to:
Net interest income
1,181
Provision for loan losses
750
Net gains on sales of securities and loans
(73)
Service charges and fees
(139)
Earnings and proceeds on bank-owned life insurance
67
Other income
164
Salaries and employee benefits
(62)
Occupancy, furniture and equipment
(28)
All other expenses
(426)
Income tax expense
(306)
Net income three months ended September 30, 2022
$
8,109
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2022 totaled $18,369,000 which was $1,183,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to a $1,026,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.61% and 3.74%, respectively, for the three months ended September 30, 2022 compared to 3.49% and 3.61%, respectively, for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.
For the three-months ended September 30, 2022, interest income (fte) totaled $20,031,000 with a yield on average earning assets of 4.08% compared to $18,596,000 and 3.90% for the 2021 period. Average loans increased $36.5 million during the three-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $157.7 million. Average earning assets totaled $1.966 billion for the three months ended September 30, 2022, an increase of $59.0 million over the average for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.
Interest expense for the three months ended September 30, 2022 totaled $1,662,000 at an average cost of 0.47% compared to $1,410,000 and 0.41%, respectively, for the same period in 2021. The increase in interest expense during the three-months ended September 30, 2022 reflects the overall higher level of market interest rates. The average cost of time deposits, which is the most significant component of funding costs, increased 0.24% compared to the same three-month period of last year.
Provision for Loan Losses
The Company’s provision for loan losses for the three months ended September 30, 2022 was $0, compared to $750,000 for the three months ended September 30, 2021. The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. The Company recorded a net charge-off of $86,000 for the quarter ended September 30, 2022, compared to a net recovery of $13,000 for the similar period in 2021. At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable. Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.
38
Other Income
Other income totaled $2,178,000 for the three months ended September 30, 2022, compared to $2,159,000 for the same period in 2021. The increase was due primarily to a $67,000 increase in earnings and proceeds on bank-owned life insurance policies, and a $185,000 increase in other income. Gains on sales of assets decreased $104,000, while all other categories of other income decreased $129,000, net.
Other Expense
Other expense for the three months ended September 30, 2022 totaled $10,139,000 which was $516,000, or 5.4%, higher than the same period of 2021, due primarily to a $142,000 increase in data processing costs, and a $165,000 increase in professional fees. All other categories of other expense increased $209,000, net.
Income Tax Expense
Income tax expense totaled $2,100,000 for an effective tax rate of 20.6% for the three months ended September 30, 2022 compared to $1,794,000 for an effective tax rate of 20.5% for the three months ended September 30, 2021. The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.
39
Results of Operations
NORWOOD FINANCIAL CORP
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis,
Nine Months Ended September 30,
dollars in thousands)
2022
2021
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(3)
(2)
(1)
(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks
$
100,195
$
504
0.67%
$
158,600
$
174
0.15%
Securities available for sale:
Taxable
398,686
5,221
1.75
242,253
2,831
1.56
Tax-exempt (1)
78,287
1,700
2.90
60,126
1,399
3.10
Total securities available for sale (1)
476,973
6,921
1.93
302,379
4,230
1.87
Loans receivable (1) (4) (5)
1,384,586
48,416
4.66
1,398,563
49,425
4.71
Total interest-earning assets
1,961,754
55,841
3.80
1,859,542
53,829
3.86
Non-interest earning assets:
Cash and due from banks
24,532
23,357
Allowance for loan losses
(16,792)
(14,915)
Other assets
85,488
115,048
Total non-interest earning assets
93,228
123,490
Total Assets
$
2,054,982
$
1,983,032
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market
$
538,925
$
779
0.19
$
459,405
$
671
0.19
Savings
302,938
167
0.07
261,308
121
0.06
Time
487,898
2,753
0.75
520,057
2,835
0.73
Total interest-bearing deposits
1,329,761
3,699
0.37
1,240,770
3,627
0.39
Short-term borrowings
66,663
196
0.39
73,272
214
0.39
Other borrowings
13,009
212
2.17
37,764
559
1.97
Total interest-bearing liabilities
1,409,433
4,107
0.39
1,351,806
4,400
0.43
Non-interest bearing liabilities:
Demand deposits
441,914
415,935
Other liabilities
15,822
14,746
Total non-interest bearing liabilities
457,736
430,681
Stockholders' equity
187,813
200,545
Total Liabilities and Stockholders' Equity
$
2,054,982
$
1,983,032
Net interest income/spread (tax equivalent basis)
51,734
3.41%
49,429
3.43%
Tax-equivalent basis adjustment
(570)
(612)
Net interest income
$
51,164
$
48,817
Net interest margin (tax equivalent basis)
3.52%
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.
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Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
Nine months ended September 30, 2022 Compared to
Nine months ended September 30, 2021
Variance due to
Volume
Rate
Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
(197)
$
527
$
330
Securities available for sale:
Taxable
1,872
518
2,390
Tax-exempt securities
352
(51)
301
Total securities
2,224
467
2,691
Loans receivable
(489)
(520)
(1,009)
Total interest-earning assets
1,538
474
2,012
Interest-bearing liabilities:
Interest-bearing demand and money market
108
—
108
Savings
22
24
46
Time
(162)
80
(82)
Total interest-bearing deposits
(32)
104
72
Short-term borrowings
(18)
—
(18)
Other borrowings
(369)
22
(347)
Total interest-bearing liabilities
(419)
126
(293)
Net interest income (tax-equivalent basis)
$
1,957
$
348
$
2,305
41
Comparison of Operating Results for the Nine Months Ended September 30, 2022 to September 30, 2021
General
For the nine months ended September 30, 2022, net income totaled $22,093,000 compared to $18,277,000 earned in the similar period in 2021. The increase in net income for the nine months ended September 30, 2022 was due primarily to a $2,347,000 increase in net interest income, a $1,671,000 increase in other income, and a $3,150,000 decrease in the provision for loan losses. Earnings per share for the nine-months ended September 30, 2022 were $2.71 per share for basic shares and fully diluted shares, compared to $2.23 per share for basic shares and for fully diluted shares for the nine months ended September 30, 2021. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2022 were 1.44% and 15.73%, respectively, compared to 1.23% and 12.19%, respectively, for the same period in 2021.
The following table sets forth changes in net income:
(dollars in thousands)
Nine months ended
September 30, 2022 to September 30, 2021
Net income nine months ended September 30, 2021
$
18,277
Change due to:
Net interest income
2,347
Provision for loan losses
3,150
Service charges and fees
24
Net gains on sales of securities and loans
(232)
Net gains on sales of foreclosed real estate owned
396
Earnings and proceeds on bank-owned life insurance
125
Other income
1,358
Salaries and employee benefits
(1,208)
Occupancy, furniture and equipment
(136)
Data processing related
(271)
Professional fees
(264)
All other expenses
(322)
Income tax expense
(1,151)
Net income nine months ended September 30, 2022
$
22,093
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2022 totaled $51,734,000 which was $2,305,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to a $2,691,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.41% and 3.52%, respectively, for the nine months ended September 30, 2022 compared to 3.43% and 3.54%, respectively, for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.
For the nine-months ended September 30, 2022, interest income (fte) totaled $55,841,000 with a yield on average earning assets of 3.80% compared to $53,829,000 and 3.86% for the 2021 period. Average loans decreased $14.0 million during the nine-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $174.6 million. Average earning assets totaled $1.962 billion for the nine months ended September 30, 2022, an increase of $102.2 million over the average for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.
Interest expense for the nine months ended September 30, 2022 totaled $4,107,000 at an average cost of 0.39% compared to $4,400,000 and 0.43%, respectively, for the same period in 2021. The decrease in interest expense during the nine-months ended September 30, 2022 reflects a higher level of average demand deposits and lower costing non-maturity interest-bearing deposits. The average cost of time deposits, which is the most significant component of funding costs, increased .02% compared to the same nine-month period of last year.
Provision for Loan Losses
The Company’s provision for loan losses for the nine months ended September 30, 2022 was $600,000, compared to $3,750,000 for the nine months ended September 30, 2021. The decreased provision reflects a reduction in certain qualitative factors
42
related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. The Company recorded a net charge-off of $111,000 for the nine months ended September 30, 2022, compared to a net charge-off of $797,000 for the same period in 2021. At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable. Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.
Other Income
Other income totaled $8,006,000 for the nine months ended September 30, 2022, compared to $6,335,000 for the same period in 2021. The increase was due primarily to $1,104,000 of income recognized on previously acquired purchased impaired loans that were carried at a discount, and a $427,000 gain on the sale of a property carried in foreclosed real estate owned. All other categories of other income increased $171,000, net.
Other Expense
Other expense for the nine months ended September 30, 2022 totaled $30,768,000, which was $2,201,000, or 7.7%, higher than the same period of 2021, due primarily to a $1,208,000 increase in salaries and employee benefits costs.
Income Tax Expense
Income tax expense totaled $5,709,000 for an effective tax rate of 20.5% for the nine months ended September 30, 2022 compared to $4,558,000 for an effective tax rate of 20.0% for the nine months ended September 30, 2021. The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.
43
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.