Company Quick10K Filing
Quick10K
Norwood Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.66 6 $205
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 2019-06-14 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
NOK Nokia 27,710
BANF Bancfirst 1,840
KRG Kite Realty 1,360
KNSA Kiniksa Pharmaceuticals 274
GRNQ Greenpro Capital 109
MLSS Milestone Scientific 15
AMGP Antero Midstream Gp 0
VDH Vigilant Diversified Holdings 0
FFLO Free Flow 0
RGIN Regenicin 0
NWFL 2019-03-31
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-3 d742294dex3.htm
EX-31.1 d742294dex311.htm
EX-31.2 d742294dex312.htm
EX-32 d742294dex32.htm

Norwood Financial Earnings 2019-03-31

NWFL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d742294d10q.htm 10-Q 10-Q
Table of Contents

 

 

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 March 31, 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.

 

 

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

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 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 May 1, 2019

Common stock, par value $0.10 per share   6,288,955

 

 

 


Table of Contents

NORWOOD FINANCIAL CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 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      31  

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      42  

Item 4.

  Controls and Procedures      43  

PART II – OTHER INFORMATION

  

Item 1.

  Legal Proceedings      44  

Item 1A.

  Risk Factors      44  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44  

Item 3.

  Defaults Upon Senior Securities      44  

Item 4.

  Mine Safety Disclosures      44  

Item 5.

  Other Information      44  

Item 6.

  Exhibits      45  

Signatures

     47  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP.

Consolidated Balance Sheets (unaudited)

(dollars in thousands, except share and per share data)

 

     March 31,
2019
    December 31,
2018
 

ASSETS

    

Cash and due from banks

   $ 13,583     $ 18,039  

Interest-bearing deposits with banks

     6,291       309  
  

 

 

   

 

 

 

Cash and cash equivalents

     19,874       18,348  

Securities available for sale, at fair value

     240,621       243,277  

Loans receivable

     864,198       850,182  

Less: Allowance for loan losses

     8,349       8,452  
  

 

 

   

 

 

 

Net loans receivable

     855,849       841,730  

Regulatory stock, at cost

     3,132       3,926  

Bank premises and equipment, net

     14,165       13,846  

Bank owned life insurance

     38,134       37,932  

Accrued interest receivable

     4,089       3,776  

Foreclosed real estate owned

     1,792       1,115  

Goodwill

     11,331       11,331  

Other intangibles

     307       336  

Other assets

     14,301       8,942  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,203,595     $ 1,184,559  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Non-interest bearing demand

   $ 206,806     $ 201,457  

Interest-bearing

     767,609       745,323  
  

 

 

   

 

 

 

Total deposits

     974,415       946,780  

Short-term borrowings

     37,824       53,046  

Other borrowings

     47,955       52,284  

Accrued interest payable

     2,457       1,806  

Other liabilities

     14,172       8,358  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,076,823       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 10,000,000 shares; issued 2019: 6,301,263 shares, 2018: 6,295,113 shares

     630       630  

Surplus

     48,559       48,322  

Retained earnings

     80,115       78,434  

Treasury stock at cost: 2019: 13,807 shares,

                                      2018: 2,470 shares

     (455     (81

Accumulated other comprehensive loss

     (2,077     (5,020
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     126,772       122,285  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,203,595     $ 1,184,559  
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2019      2018  

INTEREST INCOME

     

Loans receivable, including fees

   $ 9,970      $ 8,487  

Securities

     1,441        1,524  

Other

     15        18  
  

 

 

    

 

 

 

Total interest income

     11,426        10,029  
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     1,729        1,029  

Short-term borrowings

     123        52  

Other borrowings

     303        141  
  

 

 

    

 

 

 

Total interest expense

     2,155        1,222  
  

 

 

    

 

 

 

NET INTEREST INCOME

     9,271        8,807  

PROVISION FOR LOAN LOSSES

     450        550  
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN LOSSES

     8,821        8,257  
  

 

 

    

 

 

 

OTHER INCOME

     

Service charges and fees

     1,031        980  

Income from fiduciary activities

     142        137  

Net realized gains on sales of securities

     —          142  

Gain on sale of loans, net

     42        —    

Earnings and proceeds on bank owned life insurance

     202        273  

Other

     143        162  
  

 

 

    

 

 

 

Total other income

     1,560        1,694  
  

 

 

    

 

 

 

OTHER EXPENSES

     

Salaries and employee benefits

     3,649        3,462  

Occupancy, furniture & equipment, net

     924        892  

Data processing and related operations

     448        319  

Taxes, other than income

     161        175  

Professional fees

     250        230  

Federal Deposit Insurance Corporation insurance

     71        92  

Foreclosed real estate

     23        (19

Amortization of intangibles

     29        34  

Other

     1,093        1,063  
  

 

 

    

 

 

 

Total other expenses

     6,648        6,248  
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     3,733        3,703  

INCOME TAX EXPENSE

     543        574  
  

 

 

    

 

 

 

NET INCOME

   $ 3,190      $ 3,129  
  

 

 

    

 

 

 

BASIC EARNINGS PER SHARE

   $ 0.51      $ 0.50  
  

 

 

    

 

 

 

DILUTED EARNINGS PER SHARE

   $ 0.51      $ 0.50  
  

 

 

    

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Net income

   $ 3,190     $ 3,129  
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Investment securities available for sale:

    

Unrealized holding gain (loss)

     3,725       (4,490

Tax effect

     (782     942  

Reclassification of investment securities gains recognized in net income

     —         (142

Tax effect

     —         30  
  

 

 

   

 

 

 

Other comprehensive income (loss)

     2,943       (3,660
  

 

 

   

 

 

 

Comprehensive Income (Loss)

   $ 6,133     $ (531
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended March 31, 2019 and 2018

(dollars in thousands, except share and per share data)

 

                   Surplus      Retained
Earnings
                Accumulated
Other
Comprehensive
Loss
    Total  
     Common Stock     Treasury Stock  
     Shares      Amount     Shares     Amount  

Balance, December 31, 2018

     6,295,113      $ 630    $ 48,322    $ 78,434     2,470     $ (81   $ (5,020   $ 122,285

Net Income

     —          —          —          3,190     —         —         —         3,190

Other comprehensive income

     —          —          —          —         —         —         2,943     2,943

Cash dividends declared ($0.24 per share)

     —          —          —          (1,509     —         —         —         (1,509

Compensation expense related to restricted stock

     —          —          72      —         —         —         —         72

Acquisition of treasury stock

     —          —          —          —         11,337     (374     —         (374

Stock options exercised

     6,150      —          113      —         —         —         —         113

Compensation expense related to stock options

     —          —          52      —         —         —         —         52
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

     6,301,263      $ 630      $ 48,559      $ 80,115       13,807     $ (455   $ (2,077   $ 126,772  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                   Surplus      Retained
Earnings
                Accumulated
Other
Comprehensive
Loss
    Total  
     Common Stock     Treasury Stock  
     Shares      Amount     Shares     Amount  

Balance, December 31, 2017

     6,256,063      $ 626    $ 47,431    $ 70,426     2,608     $ (77   $ (2,667   $ 115,739

Net Income

     —          —          —          3,129     —         —         —         3,129

Other comprehensive loss

     —          —          —          —         —         —         (3,660     (3,660

Cash dividends declared ($0.22 per share)

     —          —          —          (1,376     —         —         —         (1,376

Compensation expense related to restricted stock

     —          —          51      —         —         —         —         51

Acquisition of treasury stock

     —          —          —          —         5,446     (179     —         (179

Stock options exercised

     1,500      —          7      —         (2,325     68     —         75

Compensation expense related to stock options

     —          —          59      —         —         —         —         59
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018

     6,257,563      $ 626      $ 47,548      $ 72,179       5,729     $ (188   $ (6,327   $ 113,838  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 3,190     $ 3,129  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     450       550  

Depreciation

     241       216  

Amortization of intangible assets

     29       34  

Deferred income taxes

     (40     (127

Net amortization of securities premiums and discounts

     371       463  

Net realized gain on sales of securities

     —         (142

Earnings and proceeds on life insurance policies

     (202     (273

Gain on sales and write-downs of fixed assets and foreclosed real estate owned

     (8     (47

Net gain on sale of loans

     (42     —    

Mortgage loans originated for sale

     (732     —    

Proceeds from sale of loans originated for sale

     758       —    

Compensation expense related to stock options

     52       59  

Compensation expense related to restricted stock

     72       51  

(Increase) decrease in accrued interest receivable

     (313     29  

Increase in accrued interest payable

     651       22  

Other, net

     (201     (1,920
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,276       2,044  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities available for sale:

    

Proceeds from sales

     327       10,761  

Proceeds from maturities and principal reductions on mortgage-backed securities

     5,684       7,724  

Purchases

     —         (8,179

Purchase of regulatory stock

     (1,112     (765

Redemption of regulatory stock

     1,906       1,725  

Net increase in loans

     (15,352     (11,925

Purchase of premises and equipment

     (560     (160

Proceeds from sales of foreclosed real estate owned

     44       412  
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,063     (407
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     27,635       10,765  

Net decrease in short-term borrowings

     (15,222     (12,625

Repayments of other borrowings

     (4,329     (2,852

Stock options exercised

     113       75  

Purchase of treasury stock

     (374     (179

Cash dividends paid

     (1,510     (1,376
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,313       (6,192
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     1,526       (4,555

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     18,348       16,697  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 19,874     $ 12,142  
  

 

 

   

 

 

 

 

7


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2019      2018  

Supplemental Disclosures of Cash Flow Information

     

Cash payments for:

     

Interest on deposits and borrowings

   $ 1,504      $ 1,200  

Income taxes paid, net of refunds

   $ 46      $ 19  

Supplemental Schedule of Noncash Investing Activities:

     

Transfers of loans to foreclosed real estate and repossession of other assets

   $ 822      $ 203  

Cash dividends declared

   $ 1,509      $ 1,376  

Investment maturity receivable

   $ —        $ 2,009  

See accompanying notes to the unaudited consolidated financial statements.

 

8


Table of Contents

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 period ended March 31, 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 months ended March 31:

 

(dollars in thousands)              
Noninterest Income    2019      2018  

In-scope of Topic 606:

     

Service charges on deposit accounts

   $ 67      $ 65  

ATM fees

     90        96  

Overdraft fees

     351        384  

Safe deposit box rental

     26        30  

Loan related service fees

     129        80  

Debit card fees

     326        295  

Fiduciary activities

     142        137  

Commissions on mutual funds and annuities

     55        43  

Other income

     115        139  
  

 

 

    

 

 

 

Noninterest Income (in-scope of Topic 606)

     1,301        1,269  
  

 

 

    

 

 

 

Out-of-scope of Topic 606:

     

Net realized gains on sales of securities

     —          142  

Loan servicing fees

     15        10  

Gains on sales of loans

     42        —    

Earnings on and proceeds from bank-owned life insurance

     202        273  
  

 

 

    

 

 

 

Noninterest Income (out-of-scope of Topic 606)

     259        425  
  

 

 

    

 

 

 

Total Noninterest Income

   $ 1,560      $ 1,694  
  

 

 

    

 

 

 

 

9


Table of Contents

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 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
March 31,
 
     2019      2018  

Weighted average shares outstanding

     6,293        6,256  

Less: Unvested restricted shares

     (34      (31
  

 

 

    

 

 

 

Basic EPS weighted average shares outstanding

     6,259        6,225  
  

 

 

    

 

 

 

Basic EPS weighted average shares outstanding

     6,259        6,225  

Add: Dilutive effect of stock options and restricted shares

     50        54  
  

 

 

    

 

 

 

Diluted EPS weighted average shares outstanding

     6,309        6,279  
  

 

 

    

 

 

 

As of March 31, 2019, there were 60,650 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.84 per share on March 31, 2019.

As of March 31, 2018, there were 34,000 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.09 per share on March 31, 2018.

4.    Stock-Based Compensation

No awards were granted during the three-month period ending March 31, 2019. As of March 31, 2019, there was $156,000 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 $52,000 and $59,000 during the three-month periods ended March 31, 2019 and 2018, respectively.

 

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A summary of the Company’s stock option activity for the three-month period ended March 31, 2019 is as follows:

 

     Options      Weighted Average
Exercise Price Per
Share
     Weighted Average
Remaining
Contractual Term
     Aggregate
Intrinsic Value
($000)
 

Outstanding at January 1, 2019

     208,700      $ 22.54        5.9 Yrs.      $ 2,183  

Granted

     —          —          —          —    

Exercised

     (6,150      18.31        4.7 Yrs.        113  

Forfeited

     —          —          —          —    
  

 

 

          

Outstanding at March 31, 2019

     202,550      $ 22.67        5.7 Yrs.      $ 1,761  
  

 

 

          

Exercisable at March 31, 2019

     173,650      $ 21.06        5.0 Yrs.      $ 1,761  
  

 

 

          

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 stock price was $30.84 per share as of March 31, 2019 and $33.00 per share as of December 31, 2018.

A summary of the Company’s restricted stock activity for the three-month periods ended March 31, 2019 and 2018 is as follows:

 

     2019      2018  
     Number of
Restricted
Stock
     Weighted-Average
Grant Date Fair
Value
     Number of
Restricted
Stock
     Weighted-Average
Grant Date Fair
Value
 

Non-vested, January 1,

     34,615      $ 27.82        30,415      $ 24.46  

Granted

     —          —          —          —    

Vested

     —          —          —          —    

Forfeited

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-vested, March 31,

     34,615      $ 27.82        30,415      $ 24.46  
  

 

 

    

 

 

    

 

 

    

 

 

 

The expected future compensation expense relating to the 34,615 shares of non-vested restricted stock outstanding as of March 31, 2019 is $891,000. This cost will be recognized over the remaining vesting period of 4.75 years. Compensation costs related to restricted stock amounted to $72,000 and $51,000 during the three-month periods ended March 31, 2019 and 2018, respectively.

 

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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 ended March 31, 2019 and 2018:

 

     Unrealized gains (losses)
on available for sale
securities (a)
 

Balance as of December 31, 2018

   $ (5,020

Other comprehensive income before reclassification

     2,943  

Amount reclassified from accumulated other comprehensive loss

     —    
  

 

 

 

Total other comprehensive income

     2,943  
  

 

 

 

Balance as of March 31, 2019

   $ (2,077
  

 

 

 
     Unrealized gains (losses)
on available for sale
securities (a)
 

Balance as of December 31, 2017

   $ (2,667

Other comprehensive loss before reclassification

     (3,548

Amount reclassified from accumulated other comprehensive loss

     (112
  

 

 

 

Total other comprehensive loss

     (3,660
  

 

 

 

Balance as of March 31, 2018

   $ (6,327
  

 

 

 

 

(a)

All amounts are net of tax. Amounts in parentheses indicate debits.

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss (in thousands) for the three months ended March 31, 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
March 31,
      
     2019      2018       

Unrealized gains on available for sale securities

   $ —        $ 142      Net realized gains on sales of securities
     —          (30    Income tax expense
  

 

 

    

 

 

    
   $ —        $ 112     
  

 

 

    

 

 

    

 

(a)

Amounts in parentheses indicate debits to net income

 

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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)    March 31,  
     2019      2018  

Commitments to grant loans

   $ 40,322      $ 46,792  

Unfunded commitments under lines of credit

     77,573        63,135  

Standby letters of credit

     4,183        5,919  
  

 

 

    

 

 

 
   $ 122,078      $ 115,846  
  

 

 

    

 

 

 

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 March 31, 2019 for guarantees under standby letters of credit issued is not material.

 

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Table of Contents

7.    Securities

The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale were as follows:

 

     March 31, 2019  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (In Thousands)  

Available for Sale:

           

States and political subdivisions

   $ 97,955      $ 726      $ (488    $ 98,193  

Corporate obligations

     8,854        —          (107      8,747  

Mortgage-backed securities-government sponsored entities

     137,121        52        (3,492      133,681  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 243,930      $ 778      $ (4,087    $ 240,621  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair 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  
  

 

 

    

 

 

    

 

 

    

 

 

 

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):

 

     March 31, 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

   $ 773      $ (11   $ 52,523      $ (477   $ 53,296      $ (488

Corporate obligations

     —          —         8,747        (107     8,747        (107

Mortgage-backed securities-government sponsored entities

     1,747        (2     120,061        (3,490     121,808        (3,492
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 2,520      $ (13   $ 181,331      $ (4,074   $ 183,851      $ (4,087
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     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 March 31, 2019, the Company had two debt securities in an unrealized loss position in the less than twelve months category and 183 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 March 31, 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

   $ 2,689      $ 2,689  

Due after one year through five years

     21,030        20,874  

Due after five years through ten years

     45,176        44,948  

Due after ten years

     37,914        38,429  
  

 

 

    

 

 

 
     106,809        106,940  

Mortgage-backed securities-government sponsored entities

     137,121        133,681  
  

 

 

    

 

 

 
   $ 243,930      $ 240,621  
  

 

 

    

 

 

 

Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Gross realized gains

   $ —        $ 142  

Gross realized losses

     —          —    
  

 

 

    

 

 

 

Net realized gain

   $ —        $ 142  
  

 

 

    

 

 

 

Proceeds from sales of securities

   $ 327      $ 10,761  
  

 

 

    

 

 

 

Securities with a carrying value of $196,137,000 and $216,435,000 at March 31, 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.

 

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Table of Contents

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):

 

     March 31, 2019     December 31, 2018  

Real Estate Loans:

          

Residential

   $ 231,954        26.8   $ 235,523        27.7

Commercial

     373,276        43.2       374,790        44.1  

Construction

     18,604        2.2       17,445        2.0  

Commercial, financial and agricultural

     118,535        13.7       110,542        13.0  

Consumer loans to individuals

     121,945        14.1       112,002        13.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     864,314        100.0     850,302        100.0
     

 

 

      

 

 

 

Deferred fees, net

     (116        (120   
  

 

 

      

 

 

    

Total loans receivable

     864,198          850,182     

Allowance for loan losses

     (8,349        (8,452   
  

 

 

      

 

 

    

Net loans receivable

   $ 855,849        $ 841,730     
  

 

 

      

 

 

    

The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

 

     March 31, 2019      December 31, 2018  

Outstanding Balance

   $ 985      $ 1,055  

Carrying Amount

   $ 829      $ 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 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.

 

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Table of Contents

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 March 31, 2019 and December 31, 2018, foreclosed real estate owned totaled $1,792,000 and $1,115,000 respectively. During the three months ended March 31, 2019, the Company acquired three properties via deed-in-lieu transactions with an aggregate carrying value of $680,000 and foreclosed on one commercial property with a carrying value of $32,000, and disposed of one property with a carrying value of $36,000 through the sale of the property. As of March 31, 2019, the Company has initiated formal foreclosure proceedings on two properties classified as consumer residential mortgages with an aggregate carrying value of $221,000.

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                       
     Residential      Commercial      Construction      Commercial
Loans
     Consumer
Loans
     Total  
March 31, 2019    (In thousands)  

Individually evaluated for impairment

   $ —        $ 451      $ —        $ —        $ —        $ 451  

Loans acquired with deteriorated credit quality

     581        248        —          —          —          829  

Collectively evaluated for impairment

     231,373        372,577        18,604        118,535        121,945        863,034  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 231,954      $ 373,276      $ 18,604      $ 118,535      $ 121,945      $ 864,314  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real Estate Loans                       
     Residential      Commercial      Construction      Commercial
Loans
     Consumer
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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 
March 31, 2019    (in thousands)  

With no related allowance recorded:

        

Real Estate Loans:

        

Commercial

   $ 451      $ 702      $ —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     451        702        —    
  

 

 

    

 

 

    

 

 

 

Total:

        

Real Estate Loans:

        

Commercial

     451        702        —    
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 451      $ 702      $ —    
  

 

 

    

 

 

    

 

 

 
     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 
December 31, 2018    (in thousands)  

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      $ —    
  

 

 

    

 

 

    

 

 

 

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 March 31, 2019 and 2018, respectively (in thousands):

 

     Average Recorded
Investment
     Interest Income
Recognized
 
     2019      2018      2019      2018  

Real Estate Loans:

           

Residential

   $ —        $ 23      $ —        $ —    

Commercial

     885        1,219        —          14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 885      $ 1,242      $ —        $ 14  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 March 31, 2019 and December 31, 2018, troubled debt restructured loans totaled $107,000 and $1.1 million, respectively, with no specific reserve. For the three-month period ended March 31, 2019, there were no new loans identified as troubled debt restructurings. During 2019, the Company recognized a loss 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 three-month period ended March 31, 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.

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 March 31, 2019 and December 31, 2018 (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful
or Loss
     Total  

March 31, 2019

              

Commercial real estate loans

   $ 359,791      $ 8,118      $ 5,367      $ —        $ 373,276  

Commercial loans

     118,294        —          241        —          118,535  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 478,085      $ 8,118      $ 5,608      $ —        $ 491,811  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Pass      Special
Mention
     Substandard      Doubtful
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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 March 31, 2019 and December 31, 2018 (in thousands):

 

     Performing      Nonperforming      Total  

March 31, 2019

        

Residential real estate loans

   $ 231,358      $ 596      $ 231,954  

Construction

     18,604        —          18,604  

Consumer loans

     121,927        18        121,945  
  

 

 

    

 

 

    

 

 

 

Total

   $ 371,889      $ 614      $ 372,503  
  

 

 

    

 

 

    

 

 

 
     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  
  

 

 

    

 

 

    

 

 

 

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 March 31, 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
 

March 31, 2019

                    

Real Estate loans

                    

Residential

   $ 230,696      $ 598      $ 64      $ —        $ 596      $ 1,258      $ 231,954  

Commercial

     370,808        445        1,572        —          451        2,468        373,276  

Construction

     18,604        —          —          —          —          —          18,604  

Commercial loans

     118,242        1        260        —          32        293        118,535  

Consumer loans

     121,736        185        6        —          18        209        121,945  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 860,086      $ 1,229      $ 1,902      $ —        $ 1,097      $ 4,228      $ 864,314  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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
 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 March 31, 2019, the allocation of the allowance pertaining to commercial real estate loans is slightly lower than the allocation as of December 31, 2018. This decrease is due to a reduction in the quantitative factor for historical losses which decreased from 0.42% as of December 31, 2018 to 0.22% at March 31, 2019.

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

     (65     (469     —          (1     (63     (598

Recoveries

     11       10       —          10       14       45  

Provision for loan losses

     181       (49     15        90       213       450  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2019

   $ 1,455     $ 4,947     $ 108      $ 811     $ 1,028     $ 8,349  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ —       $ —       $ —        $ —       $ —       $ —    

Ending balance collectively evaluated for impairment

   $ 1,455     $ 4,947     $ 108      $ 811     $ 1,028     $ 8,349  

 

(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

     (51     —         —          —          (48     (99

Recoveries

     1       6       —          —          7       14  

Provision for loan losses

     303       (142     30        175        184       550  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance, March 31, 2018

   $ 1,525     $ 5,129     $ 120      $ 638      $ 687     $ 8,099  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ —       $ —       $ —        $ —        $ —       $ —    

Ending balance collectively evaluated for impairment

   $ 1,525     $ 5,129     $ 120      $ 638      $ 687     $ 8,099  

The Company’s primary business activity as of March 31, 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 March 31, 2019, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $73.4 million of loans outstanding, or 8.5% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $59.1 million, or 6.8% of loans outstanding. During 2019, the Company did not recognize any charge offs in the named concentrations.

 

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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 March 31, 2019 and December 31, 2018 are as follows:

 

     Fair Value Measurement Using Reporting Date  

Description

   Total      Level 1      Level 2      Level 3  
     (In thousands)  

March 31, 2019

           

Available for Sale:

           

States and political subdivisions

   $ 98,193      $ —        $ 98,193      $ —    

Corporate obligations

     8,747        —          8,747        —    

Mortgage-backed securities-government sponsored entities

     133,681        —          133,681        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 240,621      $ —        $ 240,621      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Description

   Total      Level 1      Level 2      Level 3  
     (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 March 31, 2019 and December 31, 2018 are as follows:

 

     Fair Value Measurement Using Reporting Date  

(In thousands)

 

Description

   Total      Level 1      Level 2      Level 3  

March 31, 2019

           

Impaired Loans

   $ 451      $ —        $ —        $ 451  

Foreclosed Real Estate Owned

     1,792        —          —          1,792  

December 31, 2018

           

Impaired Loans

   $ 1,319      $ —        $ —        $ 1,319  

Foreclosed Real Estate Owned

     1,115        —          —          1,115  

 

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Table of Contents

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 March 31, 2019, the fair value investment in impaired loans totaled $451,000 which included four 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 March 31, 2019, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $251,000 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 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)  

March 31, 2019

           

Impaired loans

   $ 344      Appraisal of collateral(1)    Appraisal adjustments(2)      10.00-57.58% (18.93%)  

Impaired loans

   $ 107      Present value of future cash flows    Loan discount rate      4.00% (4.00%)  

Foreclosed real estate owned

   $ 1,792      Appraisal of collateral(1)    Liquidation Expenses(2)      7.00-68.75% (9.25%)  

 

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Table of Contents
     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 March 31, 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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Table of Contents

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at March 31, 2019 and December 31, 2018. (In thousands)

 

     Fair Value Measurements at March 31, 2019  
     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents (1)

   $ 19,874      $ 19,874      $ 19,874      $ —        $ —    

Loans receivable, net

     855,849        861,129        —          —          861,129  

Mortgage servicing rights

     176        220        —          —          220  

Regulatory stock (1)

     3,132        3,132        3,132        —          —    

Bank owned life insurance (1)

     38,134        38,134        38,134        —          —    

Accrued interest receivable (1)

     4,089        4,089        4,089        —          —    

Financial liabilities:

              

Deposits

     974,415        973,011        611,162        —          361,849  

Short-term borrowings (1)

     37,824        37,824        37,824        —          —    

Other borrowings

     47,955        47,977        —          —          47,977  

Accrued interest payable (1)

     2,457        2,457        2,457        —          —    

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

 

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Table of Contents

(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, 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 March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update did not have a significant impact on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update did not have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update did not have a significant impact on the Company’s financial statements.

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

 

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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.

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 2018-17, 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.

 

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In November, 2018, the FASB issued ASU 018-18, 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 November, 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which amended the effective date of ASU 2016-13 for entities other than public business entities (PBEs), by requiring non-PBEs to adopt the standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Therefore, the revised effective dates of ASU 2016-13 for PBEs that are SEC filers will be fiscal years beginning after December 15, 2019, including interim periods within those years, PBEs other than SEC filers will be for fiscal years beginning after December 15, 2020, including interim periods within those years, and all other entities (non-PBEs) will be for fiscal years beginning after December 15, 2021, including interim periods within those years. The ASU also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Rather, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13, as amended by ASU 2018-19. 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. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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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 associate 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.

 

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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 March 31, 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 March 31, 2019 were $1.204 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 March 31, 2019 was $240.6 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 carrying value of the Company’s securities portfolio (Available-for Sale) consisted of the following:

 

     March 31, 2019     December 31, 2018  
(dollars in thousands)    Amount      % of portfolio     Amount      % of portfolio  

States and political subdivisions

   $ 98,193        40.8   $ 97,613        40.1

Corporate obligations

     8,747        3.6       8,640        3.6  

Mortgage-backed securities-government sponsored entities

     133,681        55.6       137,024        56.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 240,621        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 $864.2 million at March 31, 2019 compared to $850.2 million as of December 31, 2018. The increase in loans receivable includes a $7.5 million increase in retail loans and a $6.5 million increase in commercial loans.

The allowance for loan losses totaled $8,349,000 as of March 31, 2019 and represented 0.97% 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 three months ended March 31, 2019 of $553,000 compared to $85,000 in the corresponding period in 2018. The increase in charge-offs was due to one commercial credit which was written down by $451,000 and subsequently transferred to foreclosed real estate. 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 March 31, 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 March 31, 2019, non-performing loans totaled $1.1 million, or 0.13% of total loans compared to $1.1 million, or 0.13%, of total loans at December 31, 2018. At March 31, 2019, non-performing assets totaled $2.9 million, or 0.24%, of total assets compared to $2.3 million, or 0.19%, of total assets at December 31, 2018.

 

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The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

 

(dollars in thousands)    March 31, 2019     December 31, 2018  

Loans accounted for on a non-accrual basis:

    

Real Estate

    

Residential

   $ 596     $ 798  

Commercial

     451       342  

Construction

     —         —    

Commercial, financial and agricultural

     32       —    

Consumer loans to individuals

     18       —    
  

 

 

   

 

 

 

Total non-accrual loans *

     1,097       1,140  

Accruing loans which are contractually past due 90 days or more

     —         —    
  

 

 

   

 

 

 

Total non-performing loans

     1,097       1,140  

Foreclosed real estate

     1,792       1,115  
  

 

 

   

 

 

 

Total non-performing assets

   $ 2,889     $ 2,255  
  

 

 

   

 

 

 

Allowance for loans losses

   $ 8,349     $ 8,452  

Coverage of non-performing loans

     761.08     741.40

Non-performing loans to total loans

     0.13     0.13

Non-performing loans to total assets

     0.09     0.10

Non-performing assets to total assets

     0.24     0.19

 

*

Includes non-accrual TDRs of $107,000 as of March 31, 2019 and $110,000 on December 31, 2018. There were no accruing TDRs on March 31, 2019 and $977,000 of accruing TDRs as of December 31, 2018.

Deposits

During the three-month period ending March 31, 2019, total deposits increased $27.6 million due primarily to an $18.1 million increase in time deposits which reflects seasonal activity in municipal account relationships. All other deposits decreased $9.5 million, net.

The following table sets forth deposit balances as of the dates indicated:

 

(dollars in thousands)    March 31, 2019      December 31, 2018  

Non-interest bearing demand

   $ 206,806      $ 201,457  

Interest-bearing demand

     92,067        88,917  

Money market deposit accounts

     135,293        137,636  

Savings

     176,996        173,593  

Time deposits <$100,000

     145,767        145,343  

Time deposits >$100,000

     217,486        199,834  
  

 

 

    

 

 

 

Total

   $ 974,415      $ 946,780  
  

 

 

    

 

 

 

 

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Borrowings

Other borrowings as of March 31, 2019 totaled $48.0 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 $15.2 million due to a $15.6 million reduction in overnight borrowings.

Other borrowings consisted of the following:

 

(dollars in thousands)              
     March 31, 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%

     2,570        3,079  

Amortizing fixed rate borrowing due July 2020 at 2.77%

     6,728        7,962  

Amortizing fixed rate borrowing due December 2020 at 1.706%

     1,799        2,051  

Amortizing fixed rate borrowing due December 2020 at 3.06%

     4,392        5,000  

Amortizing fixed rate borrowing due March 2022 at 1.748%

     2,661        2,877  

Amortizing fixed rate borrowing due October 2022 at 1.88%

     5,809        6,200  

Amortizing fixed rate borrowing due October 2023 at 3.24%

     9,227        9,692  

Amortizing fixed rate borrowing due December 2023 at 3.22%

     4,769        5,000  
  

 

 

    

 

 

 
   $ 47,955      $ 52,284  
  

 

 

    

 

 

 

Stockholders’ Equity and Capital Ratios

As of March 31, 2019, stockholders’ equity totaled $126.8 million, compared to $122.3 million as of December 31, 2018. The net change in stockholders’ equity included $3.2 million of net income that was partially offset by $1.5 million of dividends declared. In addition, total equity increased $2.9 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:

 

     March 31, 2019     December 31, 2018  

Tier 1 Capital

    

(To average assets)

     9.81     9.82

Tier 1 Capital

    

(To risk-weighted assets)

     12.92     13.04

Common Equity Tier 1 Capital

    

(To risk-weighted assets)

     12.92     13.04

Total Capital

    

(To risk-weighted assets)

     13.85     14.00

 

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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 March 31, 2019.

Liquidity

As of March 31, 2019, the Company had cash and cash equivalents of $19.9 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $240.6 million which could be used for liquidity needs. This totals $260.5 million of liquidity and represents 21.6% 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 March 31, 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, 2019. There were no borrowings under this line as of March 31, 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 March 31, 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 March 31, 2019 and December 31, 2018.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $411,912,000 as of March 31, 2019, of which $47,955,000 and $67,873,000 was outstanding at March 31, 2019 and December 31, 2018, respectively. Additionally, as of March 31, 2019, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $45.0 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $45,000,000 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.

 

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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 page 38. 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.

 

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Results of Operations

NORWOOD FINANCIAL CORP.

Consolidated Average Balance Sheets with Resultant Interest and Rates

 

(Tax-Equivalent Basis, dollars in thousands)    Three Months Ended March 31,  
     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

   $ 2,389     $ 15       2.51   $ 4,452     $ 18       1.62

Securities available for sale:

            

Taxable

     156,224       874       2.24       170,513       867       2.03  

Tax-exempt (1)

     94,883       718       3.03       108,613       832       3.06  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total securities available for sale (1)

     251,107       1,592       2.54       279,126       1,699       2.43  

Loans receivable (1) (4) (5)

     857,438       10,084       4.70       767,481       8,588       4.48  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

     1,110,934       11,691       4.21       1,051,059       10,305       3.92  

Non-interest earning assets:

            

Cash and due from banks

     14,024           13,779      

Allowance for loan losses

     (8,614         (7,877    

Other assets

     74,910           68,977      
  

 

 

       

 

 

     

Total non-interest earning assets

     80,320           74,879      
  

 

 

       

 

 

     

Total Assets

   $ 1,191,254         $ 1,125,938      
  

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

            

Interest-bearing liabilities:

            

Interest-bearing demand and money market

   $ 225,813     $ 147       0.26     $ 235,431     $ 112       0.19  

Savings

     172,863       24       0.06       173,460       21       0.05  

Time

     359,168       1,558       1.74       325,012       896       1.10  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

     757,844       1,729       0.91       733,903       1,029       0.56  

Short-term borrowings

     45,400       123       1.08       32,962       52       0.63  

Other borrowings

     49,939       303       2.43       34,360       141       1.64  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

     853,183       2,155       1.01       801,225       1,222       0.61  

Non-interest bearing liabilities:

            

Demand deposits

     200,273           200,786      

Other liabilities

     13,052           8,607      
  

 

 

       

 

 

     

Total non-interest bearing liabilities

     213,325           209,393      

Stockholders’ equity

     124,746           115,320      
  

 

 

       

 

 

     

Total Liabilities and Stockholders’ Equity

   $ 1,191,254         $ 1,125,938      
  

 

 

       

 

 

     

Net interest income/spread (tax equivalent basis)

       9,536       3.20       9,083       3.31
      

 

 

       

 

 

 

Tax-equivalent basis adjustment

       (265         (276  
    

 

 

       

 

 

   

Net interest income

     $ 9,271         $ 8,807    
    

 

 

       

 

 

   

Net interest margin (tax equivalent basis)

         3.43         3.46
      

 

 

       

 

 

 

 

(1)

Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2)

Average balances have been calculated based on daily balances.

(3)

Annualized

(4)

Loan balances include non-accrual loans and are net of unearned income.

(5)

Loan yields include the effect of amortization of deferred fees, net of costs.

 

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Table of Contents

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 March 31, 2019 Compared to
Three months ended March 31, 2018
Variance due to
 
     Volume      Rate      Net  
     (dollars in thousands)  

Interest-earning assets:

        

Interest-bearing deposits with banks

   $ (9    $ 6      $ (3

Securities available for sale:

        

Taxable

     (78      85        7  

Tax-exempt securities

     (107      (7      (114
  

 

 

    

 

 

    

 

 

 

Total securities

     (185      78        (107

Loans receivable

     1,034        462        1,496  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     840        546        1,386  
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Interest-bearing demand and money market

     (6      41        35  

Savings

     —          3        3  

Time

     136        526        662  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     130        570        700  

Short-term borrowings

     29        42        71  

Other borrowings

     79        83        162  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     238        695        933  
  

 

 

    

 

 

    

 

 

 

Net interest income (tax-equivalent basis)

   $ 602      $ (149    $ 453  
  

 

 

    

 

 

    

 

 

 

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.

 

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Comparison of Operating Results for the Three Months Ended March 31, 2019 to March 31, 2018

General

For the three months ended March 31, 2019, net income totaled $3,190,000 compared to $3,129,000 earned in the similar period in 2018. The increase in net income for the three months ended March 31, 2019 was due primarily to a $464,000 improvement in net interest income. Earnings per share for the current period were $0.51 per share for basic shares and fully diluted shares compared to $0.50 per share for basic and fully diluted shares for the three months ended March 31, 2018. The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2019 were 1.09% and 10.37%, respectively, compared to 1.13% and 11.00%, respectively, for the similar period in 2018.

The following table sets forth changes in net income:

 

(dollars in thousands)    Three months ended  
     March 31, 2019 to
March 31, 2018
 

Net income three months ended March 31, 2018

   $ 3,129  

Change due to:

  

Net interest income

     464  

Provision for loan losses

     100  

Net gains on sales

     (100

Other income

     (34

Salaries and employee benefits

     (187

Occupancy, furniture and equipment

     (32

Foreclosed real estate

     (42

All other expenses

     (139

Income tax expense

     31  
  

 

 

 

Net income three months ended March 31, 2019

   $ 3,190  
  

 

 

 

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2019 totaled $9,536,000 which was $453,000 higher than the comparable period in 2018. The increase in net interest income was due primarily to a $1,496,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted by a $107,000 decrease in securities income. The fte net interest spread and net interest margin were 3.20% and 3.43%, respectively, for the three months ended March 31, 2019 compared to 3.31% and 3.46%, 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 $11,691,000 with a yield on average earning assets of 4.21% compared to $10,305,000 and 3.92% for the 2018 period. Average loans increased $90.0 million over the comparable period of last year, while average securities decreased $28.0 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.111 billion for the three months ended March 31, 2019, an increase of $59.9 million over the average for the similar period in 2018.

Interest expense for the three months ended March 31, 2019 totaled $2,155,000 at an average cost of 1.01% compared to $1,222,000 and 0.61% for the similar period in 2018. The increase in average cost reflects 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 1.74% from 1.10% for the similar period in the prior year.

 

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Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2019 was $450,000 compared to $550,000 for the three months ended March 31, 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 $553,000 for the quarter ended March 31, 2019 compared to $85,000 for the similar period in 2018. The increase in charge-offs was due to one commercial credit which was written down by $451,000 in the current period.

Other Income

Other income totaled $1,560,000 for the three months ended March 31, 2019 compared to $1,694,000 for the similar period in 2018. The decrease was due primarily to a $100,000 decrease in net gains from sales of loans and securities reflecting to reduced opportunities. All other items included in other income declined $34,000, net.

Other Expense

Other expense for the three months ended March 31, 2019 totaled $6,648,000 which was $400,000 higher than the same period of 2018 due primarily to a $187,000 increase in salaries and benefits expenses and a $129,000 increase in data processing costs. All other operating expenses increased $84,000, net.

Income Tax Expense

Income tax expense totaled $543,000 for an effective tax rate of 14.6% for the period ending March 31, 2019 compared to $574,000 for an effective tax rate of 15.5% for the similar period in 2018. The decrease in tax expense and the effective tax rate reflects an increase in the level of tax-exempt income.

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.

Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of March 31, 2019, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals.

As of March 31, 2019, the Company had a positive 90-day interest sensitivity gap of $19.8 million or 1.6% of total assets, compared to the $18.7 million negative gap, or (1.6)% of total assets, as of December 31, 2018. Rate-sensitive assets repricing within 90 days increased $5.6 million due primarily to a $6.0 million increase in overnight liquidity. Rate-sensitive liabilities repricing within 90 days decreased $32.8 million since year end due to a $17.4 million decrease in time deposits repricing and a $16.1 million decrease in borrowings. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, the yield on interest-earning assets could increase faster than the cost of interest-bearing liabilities in the 90-day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for Wayne Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over a ten-year period. The Company believes the study provides pertinent data to support the assumptions used in modeling non-maturity deposits.

 

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March 31, 2019

Rate Sensitivity Table

(dollars in thousands)

 

     3 Months     3-12 Months     1 to 3 Years     Over 3 Years     Total  

Federal funds sold and interest-bearing deposits

   $ 6,291     $ —       $ —       $ —       $ 6,291  

Securities

     6,326       22,658       55,897       155,740       240,621  

Loans Receivable

     135,399       161,234       281,276       286,289       864,198  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total RSA

   $ 148,016     $ 183,892     $ 337,173     $ 442,029     $ 1,111,110  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-maturity interest-bearing deposits

   $ 60,251     $ 59,672     $ 157,749     $ 126,684     $ 404,356  

Time Deposits

     56,233       171,053       100,748       35,219       363,253  

Borrowings

     11,781       35,577       32,382       6,039       85,779  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total RSL

   $ 128,265     $ 266,302     $ 290,879     $ 167,942     $ 853,388  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Sensitivity Gap

   $ 19,751     $ (82,410   $ 46,294     $ 274,087     $ 257,722  

Cumulative Gap

     19,751       (62,659     (16,365     257,722    

RSA/RSL-cumulative

     115.4     84.1     97.6     130.2  

December 31, 2018

          

Interest Sensitivity Gap

   $ (18,749   $ (60,791   $ 18,852     $ 303,804     $ 243,116  

Cumulative Gap

     (18,749     (79,540     (60,688     243,116    

RSA/RSL-cumulative

     88.4     79.8     91.1     128.6  

Item 4. Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

There have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part 1 of the Company’s Form 10-K for the year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Sales and Use of Proceeds

(a)    Unregistered Sales of Equity Securities. Not Applicable.

(b)    Use of Proceeds. Not Applicable

(c)    Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended March 31, 2019.

 

     Issuer Purchases of Equity Securities  
     Total
Number
of Shares
(or Units)
Purchased
     Average
Price Paid
Per Share
(or Unit)
     Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs *
     Maximum Number
(or Approximate
Dollar Value) of Shares
(or Units)
that May Yet Be
Purchased Under the
Plans or Programs
 

January 1 – 31, 2019

     —        $ —          —          129,500  

February 1 – 28, 2019

     —          —          —          129,500  

March 1 – 31, 2019

     —          —          —          129,500  
  

 

 

       

 

 

    

 

 

 

Total

     —        $ —          —          129,500  
  

 

 

       

 

 

    

 

 

 

 

*

On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. There is no expiration date for this plan.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

 

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Table of Contents

Item 6. Exhibits

 

No.  

Description

    3(i)   Amended and Restated Articles of Incorporation of Norwood Financial Corp.
    3(ii)   Bylaws of Norwood Financial Corp. (2)
    4.0   Specimen Stock Certificate of Norwood Financial Corp. (1)
  10.1   Employment Agreement with Lewis J. Critelli (3)
  10.2   Change in Control Severance Agreement with William S. Lance(3)
  10.3   Change in Control Severance Agreement with Robert J. Mancuso(4)
  10.4   Salary Continuation Agreement between the Bank and William W. Davis, Jr. (5)
  10.5   Amended and Restated Salary Continuation Agreement, dated September 1, 2017, between the Bank and Lewis J. Critelli (6)
  10.6   Salary Continuation Agreement between the Bank and John H. Sanders (7)
  10.7   2006 Stock Option Plan (8)
  10.8   First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr. (9)
  10.9   First and Second Amendments to Salary Continuation Agreement with John H. Sanders (9)
  10.10   Change In Control Severance Agreement with James F. Burke(10)
  10.11   2014 Equity Incentive Plan, as amended(11)
  10.12   Addendum to Change in Control Severance Agreement with William S. Lance (12)
  10.13   Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and William S. Lance (6)
  10.14   Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and Robert J. Mancuso (6)
  10.15   Salary Continuation Agreement, dated September  1, 2017, between Wayne Bank and James F. Burke (6)
  10.16   Change-In-Control Severance Agreement, dated January  16, 2018, by and among Norwood Financial Corp., Wayne Bank, and John F. Carmody(13)
  10.17   Addendum, dated January  16, 2018, to Change-In-Control Severance Agreement, dated March 2, 2010, by and among Norwood Financial Corp., Wayne Bank and William S. Lance(13)
  10.18   Addendum, dated January  16, 2018, to Change-In-Control Severance Agreement, dated January 3, 2013, by and among Norwood Financial Corp., Wayne Bank and Robert J. Mancuso(13)
  31.1   Rule 13a-14(a)/15d-14(a) Certification of CEO
  31.2   Rule 13a-14(a)/15d-14(a) Certification of CFO
  32   Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
101   Interactive Data Files consisting of the following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

(footnotes on next page)

 

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Table of Contents
(1)

Incorporated herein by reference into this document from the identically numbered Exhibits to the Registrant’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364

(2) 

Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form 10-Q filed with the Commission on August 8, 2014.

(3)

Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 15, 2010.

(4)

Incorporated by reference into this document from Exhibit 10.4 to the Registrant’s Form 10-K filed with the Commission on March 14, 2013, File No. 0-28364.

(5)

Incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-K filed with the Commission on March 23, 2000.

(6)

Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017.

(7)

Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-K filed with the Commission on March 22, 2004.

(8)

Incorporated by reference to this document from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006.

(9)

Incorporated herein by reference from Exhibits 10.1 and 10.5 to the Registrant’s Current Report on Form 8-K filed on April 4, 2006.

(10)

Incorporated by reference from Exhibit 10.13 to the Registrant’s Form 10-Q filed with the Commission on November 7, 2013.

(11)

Incorporated by reference to Exhibit 10.1 to Post-Effective No. 1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 4, 2018.

(12)

Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on February 18, 2015.

(13)

Incorporated by reference into this document from the exhibits to the Registrant’s Current Report on Form 8-K filed with the Commission on January 16, 2018

 

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Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

NORWOOD FINANCIAL CORP.

Date: May 9, 2019     By:       /s/ Lewis J. Critelli
      Lewis J. Critelli
     

President and Chief Executive Officer

(Principal Executive Officer)

 

Date: May 9, 2019     By:       /s/ William S. Lance
      William S. Lance
     

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

47