Company Quick10K Filing
Quick10K
Norwood Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.66 6 $205
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-26 Earnings, Exhibits
8-K 2019-06-14 Other Events, Exhibits
8-K 2019-04-23 Shareholder Vote, Exhibits
8-K 2019-04-19 Earnings, Exhibits
8-K 2019-03-14 Other Events, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-12-14 Other Events, Exhibits
8-K 2018-10-22 Earnings, Exhibits
8-K 2018-09-14 Other Events, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-14 Other Events, Exhibits
8-K 2018-04-24 Shareholder Vote, Exhibits
8-K 2018-04-20 Earnings, Exhibits
8-K 2018-03-16 Other Events, Exhibits
8-K 2018-01-25 Earnings, Exhibits
8-K 2018-01-16 Officers, Exhibits
TOT Total 138,050
ARGX Argenx Se 4,560
FBP First Bancorp 2,400
HALO Halozyme Therapeutics 2,380
ENTA Enanta Pharmaceuticals 1,720
MESA Mesa Air Group 223
EPSN Epsilon Energy 108
ABIL Ability 11
SNBP Sun Biopharma 0
VASO Vaso 0
NWFL 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Sales and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 d789564dex311.htm
EX-31.2 d789564dex312.htm
EX-32 d789564dex32.htm

Norwood Financial Earnings 2019-06-30

NWFL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d789564d10q.htm 10-Q 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)

Registrant’s 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 issuer’s 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.

  Management’s 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  

Signatures

       52  

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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 Bank’s 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 Company’s 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 Company’s 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 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.

A summary of the Bank’s 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 customer’s 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 management’s 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 Company’s 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 Management’s 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 loan’s effective interest rate, the loan’s 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 Company’s 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 Company’s 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 region’s 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 company’s 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 Company’s 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, management’s best estimate is used. Management’s 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 loan’s 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 management’s 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 Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s 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.

 

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The estimated fair values of the Bank’s 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.

 

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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 Instruments—Credit 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 management’s 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 Company’s 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 plan’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s financial statements.

 

32


Item 2. Management’s 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 Company’s 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 Company’s 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 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.

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.

 

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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 Company’s 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 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 $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 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. Management considers the allowance adequate at June 30, 2019 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, 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 Company’s accumulated other comprehensive income (loss) could materially fluctuate for each interim and year-end period.

A comparison of the Company’s 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 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 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 Company’s 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 Bank’s 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 Company’s 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